Your Social Security benefits Social Security is the retirement-income security program run by the Social Security Administration (SSA), an agency of the federal government. An estimated 54.5 million Americans were receiving Social Security benefits as of October 2007.
Social Security is considered a "safety net" program. As a result, Social Security pays a benefit that is often inadequate by itself to maintain a standard of living in retirement that matches what you enjoy in your working years.
Financial planners and advisers encourage you to save with tax-deferred accounts such as IRAs and 401(k) plans to supplement your retirement income. This website has explained many of the features of these plans, and various savings and investment vehicles.
In order to qualify for Social Security benefits, you must have earned these benefits. You must have paid Social Security taxes during your working years. To qualify for Social Security benefits, you must earn 40 credits during your working years. You can earn as many as four credits a year. For example, to earn one credit in 2008, you need to earn $1,050. It is important to note that Social Security benefits are reported as taxable income at higher incomes, and therefore, some financial products may have tax-efficient advantages, while other products may not. Social Security taxes are also referred to as payroll taxes, since your employer withholds these taxes from your income or paycheck, and pays an equal share to the IRS. The combined rate for payroll taxes, as of 2008, is 7.65%, and these Social Security taxes are referred to as FICA taxes. FICA is an acronym for the Federal Insurance Contributions Act, otherwise known as Social Security. Social Security taxes consist of two main components: 1) taxes for the Old Age Survivors and Disability Insurance (OASDI) fund and 2) Medicare taxes. For 2008, you pay 6.2% of the first $102,000 in income for OASDI, and your employer contributes the same percentage. If you are self-employed, you pay both parts (as you are both the employee and the employer), you pay the total sum, 12.4% of the first $102,000 in taxes.
In addition, you pay 1.45% of your income in Medicare taxes. Understand that there is no limit, or ceiling, on the amount of taxable income that is taxed for Medicare, and your employer contributes the same percentage. If you are self-employed, you again pay both parts; you pay the total sum of 2.9% of your income in Medicare taxes. Together, the FICA tax is equal to 7.65% for the first $102,000 of income. Your employer makes a matching contribution. Together, the 12.4 and the 2.9, equals a combined rate of 15.3%.
In regard to paying tax on your Social Security benefits, if your income is between $25,000 and $34,000, and you are a single filer or head of household, you pay tax on 50% of your Social Security Benefits. At higher incomes, 85% of your benefits are taxable. For married persons filing a joint return, 50% of your benefits are taxable if your combined income is between $32,000 and $44,000. At higher incomes, 85% of your benefits are taxable.
According to the Social Security Administration, the average retired worker will receive estimated monthly benefits of $1,079 in 2008. These amounts include a cost-of-living adjustment (COLA) of 2.3% for benefits in 2008.
Supplemental Security Income (SSI) provides an additional income benefit for persons who are disabled or lose a spouse. The maximum SSI payment to individuals in 2008 is $637. For couples, the maximum SSI benefit in 2008 is $956.
There are limits to how much you can earn in a year or in a month, without having your benefits reduced. The following table shows the income limits for 2008 and the rate for calculating how benefits are reduced at higher incomes.
Income limits for 2008 to maintain full Social Security benefits: | Age Group | Maximum income with no reduction | Benefit reduction rate | | Under full retirement age | $13,560 ($1,130 a month) | For every $2 earned above maximum, benefit reduced by $1. | | Year you reach full retirement age | $36,120 ($3,010 a month) | For every $3 earned above maximum, benefit reduced by $1. | | Full retirement age or over | No limit | None | | Source: Social Security Administration. You can request a Social Security Statement at the SSA's Web site. If you prefer, you can also download a request form and mail it to the address on the form.
You are eligible to receive partial Social Security benefits when you turn age 62. The trade-off in receiving partial benefits is that the amount of your monthly Social Security benefit will be reduced. You should carefully evaluate whether it is better to postpone benefits until you reach the minimum age to be eligible to receive full benefits (see table below). The Social Security Administration calculates a lower monthly payment that makes the net present value of either option worth the same. However, if you don't yet need the income, it may be a better idea to postpone applying for benefits, as they will be larger.
The following table shows the minimum age, in years and months, to be eligible to receive full Social Security benefits.
Birth year and age for receiving full Social Security benefits: | Birth year | Minimum age to receive full benefits | | 1937 or earlier | Age 65 | | 1938 | Age 65 and 2 months | | 1939 | Age 65 and 4 months | | 1940 | Age 65 and 6 months | | 1941 | Age 65 and 8 months | | 1942 | Age 65 and 10 months | | 1943-1954 | Age 66 | | 1955 | Age 66 and 2 months | | 1956 | Age 66 and 4 months | | 1957 | Age 66 and 6 months | | 1958 | Age 66 and 8 months | | 1959 | Age 66 and 10 months | | 1960 or later | Age 67 | | When To Start Social Security Benefits According to many financial planners, conventional wisdom dictates that you should begin taking Social Security benefits as soon as you are eligible. The truth is, it depends on how much you have saved and how long you think you are going to live. Ask yourself a few questions, and the answers will guide you in making the best decision to fit your personal situation. The best decision will be based upon accurate information. Perhaps, you should start by asking yourself if you have put enough money aside for retirement. Can you delay taking Social Security Benefits or several years, and receive those benefit payments at a later age? If you have saved enough, and you live long enough, mathematically, you would be better off waiting to receive payments at a later date. Even if it means spending down your principal to postpone the date you start receiving your Social Security benefits, you may be substantially ahead in the long run. On the other hand, if you aren't able to meet your monthly expenses or live comfortably in retirement based on what you've been able to set aside in your retirement nest egg, then taking benefits earlier may be the better choice for you. If an advisor suggests taking Social Security at age 62, one would like to think such guidance came about after the advisor discovered that you did not have ample savings that would allow you to defer Social Security benefits to a later age. Likewise, if an advisor suggests taking Social Security at age 65 or 70, one would think such guidance came about after the advisor discovered that you did have ample savings available. Conventional wisdom may indicate that you should take benefits as early as age 62, because you can invest that money and earn a better return on your money, than it would earn with the Social Security Administration. The average return your money earns with the Social Security Trust Fund is rumored to be very low. This is not true, in terms of comparing the size of your benefit check at age 62, to the size of your benefit check at a later age. Did you know that taking benefits at age 62 results in receiving only 75% of the amount you would get if you were to wait until you turn age 66? If you wait one, two, three years or more, the amount you receive increases. Did you know that by waiting until age 66, the annual increase averages approximately 8.25% per year? An annual increase of 8.25% is very substantial. Understand that this increase in payments has nothing to do with the performance of the stock market, and it doesn't matter what direction interest rates take. The average annual returns you receive by waiting until age 70 is approximately 10% per year. In fact, because benefits increase 8% every year past age 66, waiting from the time you are age 62 until age 70 will result in monthly payments that are approximately 81% higher. If you or your spouse expect to live beyond age 79, then you may be better off delaying benefits. Average life expectancies are growing, and indicate that roughly 50% of those age 62 today will live beyond the age of 80. Medical advances and healthier lifestyles will only increase that gap over time, making the decision to delay taking benefit payments even smarter. However, if your health is a concern, you may want to consider taking benefits earlier. The actual risk of delaying benefits until a later age is that the primary person bringing in household income may die prior to the mathematical breakeven age. If this were to happen, it would still result in higher monthly payments to the surviving spouse who may live much longer. The reality is that many people retiring today have either not saved enough, or their investments did not do as well as they had hoped. Regardless, many have not set aside enough money to last them the rest of their lives. Even those who choose to use up more of their savings in the short-term, delaying their Social Security benefit start date until a much later age, may improve their monetary position in retirement.. Since no one has a crystal ball they can pull out when it comes time to make such retirement planning decisions, we have no way of knowing our actual life expectancy. Perhaps your family has great longevity. Taking into account your present health, along with the fact that relatives of yours routinely live well into their 90’s, you too may expect to live well into your 90’s. If you have saved enough, and/or you have been very lucky in regard to your investments, you may want to delay receiving Social Security benefits until age 70. Below is a table that may help you in your decision making process. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser. |
