You probably know that saving and investing are essential to retirement planning. Equally important to the equation: social security planning.
It is impossible to overestimate the importance of social security for retirees. The truth is that Americans are not saving or investing enough to retire. Without social security, around 4 in 10 people aged 65 and over would have an income below the poverty line. The same group is on average dependent on social security for around a third of their income.
However, social security is very confusing.
As you approach retirement, do the math: should you take your benefits the second you turn 62 or wait as long as possible?
And if you’re in your twenties or thirties, you may be concerned about whether Social Security will lose its way out of life long before you even get a dime.
Here’s a guide to how social security works – and why, no matter how old you are, you don’t have to worry about whether it will be available to you.
How does social security work? 12 questions answered
Social security is not just a retirement program. It also provides for people with disabilities, survivors of deceased workers and relatives of beneficiaries.
Since retirees are by far the largest group of people who receive benefits, we will focus on social security retirement benefits in this article.
1. How are social security benefits calculated?
Your social security benefits depend on three main factors: your work experience, your 35 years of highest income, and your age when you start receiving benefits. Cost of living adjustments, or COLAs, are another factor, but their impact is relatively small.
Your work history: You’ll get Social Security credit for every $ 1,410 you earn in 2020. However, you cannot earn more than four credits per year. Once you have earned 40 credits, you will be entitled to benefits from retirement age. This means that after 10 years of full-time work you are considered “fully insured” for retirement benefits.
Your 35 Best Earning Years: Social Security calculates your benefits based on the 35 years you have made the most money, but only up to a maximum of $ 137,700 by 2020. If you make $ 1 million, even $ 1 billion in 2020? For social security purposes, this equates to earning $ 137,700. This is because any money you make over $ 137,700 will not be subject to Social Security taxes, which we will receive shortly.
If you’ve worked less than 35 years, your benefits are still based on 35 years of earnings, but they use $ 0 towards your years of non-work.
So if you started at 20 and retired at 50, your 30 year wages plus five years will be used at $ 0. Those zeros could seriously affect your monthly benefits if you did retire early or have been unemployed for a long distance.
It then adjusts your wages for inflation to calculate what Social Security calls your Average Indexed Monthly Income (AIME).
If you use services: Your AIME is used to calculate your monthly benefit when you reach full retirement age. This is the age at which you are entitled to full benefit. It’s 67 for anyone born in 1960 or later, and 66 years and changes for most people born earlier.
You can take advantage of benefits from the age of 62 – but you will receive a reduced amount. Or, you can delay until you are 70 years old to get bigger monthly checks.
- If you take advantage of the benefits early on: Your social security checks are reduced by five ninths of 1% for each month that you are receiving benefits before you reach full retirement age. This corresponds to a lifelong reduction in monthly benefits of 6.66% for each year of earlier benefits.
- If you are waiting until you are past full retirement age to apply for: Once you reach full retirement age, Social Security will thank you with an additional 8% for each year that you withhold until you reach the age of 70 when the benefits have expired.
The reward for waiting until 70: a monthly benefit 76% higher than if you were 62, according to the Social Security Agency.
Pro tip: Use one of the Social Security Agency’s performance calculators at SSA.gov to estimate how much you can get in retirement.
COLAs: Social security recipients receive cost of living adjustments due to inflation. COLAs will be announced in October for the following year.
Usually these are adjustments are pretty minimal: In the last 10 years they were between 0% and 3.6%. In 2020, the beneficiaries received an additional 1.6%. A similar COLA is expected in 2021.
2. Can you get benefits based on your spouse’s records?
Yes. You can collect benefits based on your current spouse’s work record, a deceased spouse, and in some cases even an ex-spouse. However, you cannot claim yourself and a current or former spouse. You have to decide whether you will get more based on their work record or your own.
You can collect the following in your current spouse’s file:
- You have been married for at least a year.
- Your spouse is already using their services.
- You are at least 62 years old or are looking after a child under the age of 16 or with a disability.
Benefit amount: 32.5% to 50% of your spouse’s benefit.
You can collect the following in a deceased spouse’s file:
- You are at least 60 years old or 50 years old and disabled. You can also qualify in caring for the child of the deceased spouse.
- They were married for at least nine months, unless the death was accidental or occurred as part of military service.
- You did not remarry before the age of 60 or before the age of 50 if you are disabled. If you get married again later, you can still collect money in your deceased spouse’s file.
Benefit amount: 71.5% to 100% of your deceased spouse’s benefit.
You can collect in your ex-spouse’s file if:
- They have been married for at least 10 years and have not remarried.
- You have been divorced for at least two years.
- You are at least 62 years old.
- Your ex-spouse is entitled to benefits. However, you can still make claims based on his documents, even if he has not yet used any services.
Benefit amount: 50% of your ex-spouse’s benefit.
Note that if you are making a claim on the record of a divorced spouse, this will not reduce their monthly benefits. If they have been married multiple times, the other exes do not need to be driven to the Social Security Office. You can make any claims based on their record if you wish.
3. What is the average monthly social security benefit?
The average monthly benefit for retirees as of June 2020 was $ 1,514 maximum benefit For someone who retires at the age of 62 in 2020, it’s $ 2,265. An employee who has waited until the age of 70 to retire can receive up to $ 3,790 per month.
Of course, remember that only the highest income workers are entitled to maximum benefits.
4. Is social security enough to retire?
Social security replaces about 40% of early retirement income for an average earner – and financial planners typically recommend replacing about 70% to 80% of early retirement income. That means it is important except for retirement by contributing to a 401 (k) plan or financing a Roth IRA or traditional IRA.
While Social Security is not meant to be the only source of income in retirement, it is the reality for many older Americans. About half of seniors are dependent on social security for at least 50% of their income and about a quarter are dependent on social security for 90% or more Center for budget and political priorities.
5. Who pays for social security?
You do, taxpayers. Your employer too.
Social security is over-funded income tax, sometimes referred to as FICA taxes.
For most employees, 7.65% of their paychecks are automatically deducted for FICA taxes. Your income will be taxed at 6.2% for the first $ 137,700 of income as of 2020. Anything above that you earn will not be taxed for social security. For this reason, a maximum of USD 137,700 will be considered for the calculation of your benefits.
The remaining 1.45% goes to Medicare, but there is no salary cap. In fact, individuals earning more than $ 200,000 and married couples earning more than $ 250,000 will be charged an additional 0.9% Medicare tax.
Your employer matches your 7.65% contribution to Social Security and Medicare. That means Self-employed pay 15.3% because they have to pay both employee and employer contributions.
6. Is it true that social security is breaking down?
What is really going on is that social security is at a tipping point. As of 2021, less money will be used than paid out, largely thanks to longer life expectancy and the fact that children have fewer children – which means fewer workers are paying into the system.
While Social Security has a $ 2.9 trillion trust fund to dive into, the funds are expected to be depleted by 2035. However, this does not mean that the program is doomed to fail. Social security is financed according to the pay-as-you-go system.
Even if the trust fund is depleted, wage taxes will continue to be collected from employees and employers. If confidence dried up in 2035, wage taxes would still be enough to pay about 79% of the program’s commitments if Congress did nothing.
However, there are a number of things that Congress can do to avoid social security cuts. For example, it could raise the tax rate, remove the wage ceiling, or raise the full retirement age, as it did in 1983.
It’s pretty unlikely that Congress habit Take action. ONE 2019 Pew Research Center survey found that 74% of Americans disapprove of austerity benefits. Legislators on both sides of the aisle are keenly aware of the popularity of the program with voters.
But what about President Trump’s 2020 payroll tax vacation? With Congress not approving the tax cut, workers seeing an additional 6.2% in their paychecks should plan Owe wage taxes This means that the impact on social security funds would be minimal.
Even if Congress retrospectively approved the tax break, it is almost certain that they would replenish Social Security hairstyles with generic funds, as it did in 2011 and 2012 when President Obama cut payroll taxes.
7. Can you work and get social security benefits?
If you have already reached full retirement age, you can work as you please. No matter how much you earn, your performance will not be affected.
However, getting Social Security early will cut your benefits by $ 1 for every $ 2 you make over $ 18,240 in 2020. More wiggle room is given during the year you reach full retirement age: for every $ 3 you earn above, $ 1 will be withheld and $ 48,600 will be withheld once you reach that age yours will be Benefits no longer reduced.
8. Are social security benefits taxed?
If you have extra income, be it from a job or from investments, there is a good chance that at least some of your social security will be taxed. Here’s how it breaks down.
If you are a single filer:
- 0% of your benefit is taxable if your income is less than $ 25,000.
- Up to 50% of your benefit is taxable if your income is between $ 25,000 and $ 34,000.
- Up to 85% of your benefit is taxable if your income is over $ 34,000.
If you are married and submit together:
- 0% of your benefit is taxable if your combined income is less than $ 32,000.
- 50% of your benefit is taxable if your combined income is between $ 32,000 and $ 44,000.
- 85% of your benefit is taxable if your combined income is over $ 44,000.
Note that “taxable” does not mean that you pay it as a tax. For example, let’s say you are a single applicant with an income of $ 30,000: $ 20,000 from Social Security benefits and $ 10,000 from 401 (k) withdrawals.
That simply means that your income in the eyes of the IRS is $ 20,000: $ 10,000 from the 401 (k) plus 50% of the $ 20,000 from your Social Security benefits. Uncle Sam can’t touch the remaining 50%.
If you’re still working and saving for your retirement, we will greet you here Roth IRAs and Roth 401 (k) s. If you forego tax breaks during your working years, you will receive tax-free income in your retirement years – income that is not offset against you for social security reasons.
In the example above, if the $ 10,000 of 401 (k) income came from a Roth IRA instead, your income would be $ 0 in the eyes of the IRS. The $ 10,000 wouldn’t count against you, which means you would be below the $ 25,000 income threshold. This means that 0% of your social security benefit is taxable.
If Social Security is your only source of income, you probably won’t be taxed considering the average benefit is only $ 18,168 per year.
9. What is the best age to get social security?
There is no such thing as a perfect age for social security. And unfortunately, many people do not have the option to delay performance because they are forced to retire early due to health concerns, job loss, or need to care for a spouse or parent.
Of course, if you want larger monthly checks you will have to wait as long as possible. If over the course of your life you want more checks and you want them to be smaller, you would claim this sooner.
If you have medical problems or your parents died relatively young, you should consider getting the benefits sooner. You would wait as long as possible if you are in good health, especially if you are worried about surviving your money.
Sometimes spouses try to maximize their performance by making the higher earner wait as long as possible while the lower earner claims 62. Once the higher earning spouse starts collecting, the lower earner will switch from their benefit and start collecting half the higher earner benefit.
10. Can you get social security if you haven’t been working?
You can continue to receive social security benefits based on a current, past, or deceased spouse record even if you have never worked. Otherwise, you will have to pay into the system to receive benefits.
Children of a deceased employee are entitled to survivor benefits until they are 18 or 19 years old if they are still enrolled full-time in high school. If the child is over 18 years old but has a disability that started before the age of 22, they may also be entitled to survivor benefits.
11. How do you apply for social security?
You can easily Apply for social security online in about 15 minutes. The local social security offices have been closed since March due to COVID-19. However, if you have a question, you can call 800-772-1213 between 8:00 PM and 7:00 PM. Monday to Friday.
12. Can you reverse your decision to receive benefits?
Yes, but your options for Reversing your social security decision are extremely limited: if you received benefits less than a year ago, you can withdraw your application and repay all of your benefits, including Medicare rewards, taxes you wish to withhold, and benefits your family receives on your behalf Has.
When you reach full retirement age, you can take your benefits on hold to take advantage of the additional 8% of Social Security for each year that you delay past full retirement age. Once you reach 70, your benefits will automatically restart.
Robin Hartill is a certified financial planner and senior editor at The Penny Hoarder. She writes the Dear Penny personal financial advisory column. Send your tricky money questions to [email protected]
This article originally appeared on www.thepennyhoarder.com