Social Security Basics
Below is a basic guide to how Social Security works. While I have many years of experience in the Financial Services industry, I have not needed to know how this system works given my particular job responsibilities. Still, curiosity got the best of me so hopefully you can enjoy this very simple guide.
It is by no means all-inclusive as there are many nuances to how Social Security works that are not covered here. I will link to Resources at the end of this post should you wish to explore further.
Step #1: Get a Job.
In order to qualify for Social Security you need to get a job, and not just any job. One that will legally pay you a wage that you in turn pay tax on.
When it comes to Social Security benefits, you are likely not doing yourself any favors by operating "off-the-grid" and being paid cash for everything that you do. While taxes are painful, they get us into the system, help us avoid possible fines and/or jail time, and make us eligible for Social Security Retirement Benefits someday in the future.
We pay a number of different taxes from our paycheck but the one that matters for this discussion is FICA tax. FICA stands for Federal Insurance Contributions Act and it is simply the (mandatory) taxes withheld from many Americans' paychecks to fund social programs like Social Security and Medicare.
Think wealth distribution. At least (if you live long enough) you will get some of this money back.
Ok, so now you have gotten a job and begun working. Now's the time to start accumulating credits.
Step #2: Earn Credits.
To be eligible for Social Security you have to accumulate at least 40 credits. You can get a maximum of 4 credits in a year...think about there being 4 quarters in a year as a way to remember it.
Each credit is awarded after you have earned $1,260 in income (as of 2016). So once you earn $5,040 ($1,260 x 4) you have earned your 4 credits for the year, even if for someone reason you get laid off later in the year.
You do not have to work the entire year in order to get the 4 credits.
Step #3: Maximize Your Income.
The more income you earn in your life over the most number of years, the better.
While more money may not buy your happiness, it will buy you a higher Social Security benefit in retirement. And who wants to be impoverished later in life?
Ultimately your benefit will be based on your highest average earnings for 35 years prior to the time that you file for benefits.
So what if you don't work for 35 years?
In this case the system will take the years you did work (say only 20 years) and then give you zeros for the other years...even if you are rusty with math you should know that zeros averaging in with any other numbers help to drag down the other figures. Not good news for your monthly benefit amount.
Step #4: Determine When to File for Benefits.
We will introduce 2 new concepts here. Full Retirement Age and Primary Insurance Amount (PIA).
Your Primary Insurance Amount (PIA) is the monthly benefit you will receive from Social Security based on your earnings record, etc.
Full Retirement Age is just the age at which you will receive your full Primary Insurance Amount.
If you are reading this and were born after 1960 then your full retirement age will be age 67. If you were born before then click here to see when full retirement age is for you.
You can begin taking social security as early as age 62 or delay to as late as age 70.
If you take the benefit early (prior to full retirement age), your payment will be less than the Primary Insurance Amount at Full Retirement. If you wait until after age 67, then you are credited 8% per year for each year you delay.
Example: So let's say that your full retirement age is 67 and you choose to wait until 70 to take benefits. You would generate a credit on your PIA of 24% (8% x 3 year delay)...while that sounds really cool, keep in mind that you also sacrificed 36 months of payments to take advantage of the credits!
Whether to take the benefit early or late is beyond the scope of this article and will depend on your income needs and other savings you may have accumulated in your lifetime, and most of all how long you expect to live.
If you are in a situation of needing to know your options and which may be best for you, do yourself a favor and speak with a financial advisor well versed in Social Security Planning.
Get help from our team by clicking here.
Step #5: Collect the Benefit.
So once you have determined the age at which you want to begin collecting, then file for the benefits and begin collecting.
Keep in mind, if you are looking to take social security early while continuing to work, your benefit will be reduced. You can learn more about these reductions here.
Step #6: Enjoy Your Golden Years!
Obsessing over money is never much fun. Despite being retired and potentially not working (or working full-time) anymore, build the structure into your life to remain engaged and excited about whatever it is you do!
Cool stuff you may not have known about Social Security
Social Security is a true benefit. While we certainly do not like to be taxed, many of us lack the discipline to otherwise save the money being taken from our paychecks to provide a similarly meaningful level of income later in life.
The benefit is adjusted for inflation, although not every single year. We all know and have likely experienced that over long periods of time costs of things go UP (not DOWN). If your benefit under social security is $1,500 per month and inflation is rising year over year, so will your benefit. These adjustments are based on Cost of Living Adjustments (COLA) released each year by the government.
Resources to Learn More
If you are someone who is nearing retirement and/or just want to know more about the system and how it works, here are some great resources that can jump start that process.
If you want to check out your own Social Security benefits statement, they have moved everything online. You can easily set up your online account by visiting https://secure.ssa.gov/RIL/SiView.do
Figure out your Full Retirement Age based on when you were born
Learn how spousal benefits work
Learn how benefits work in the case of divorce
What happens to the benefit when death occurs
Learn more about the taxes you may pay on your benefit