Planning for Social Security
Course Section
By the National Endowment for Financial Education
Social Security is the largest source of income for older Americans. It will replace about 40 percent of your paycheck. How can you best plan for when you start to receive your Social Security benefits? Here are some factors to consider.
Benefit Amount
Before you can qualify as a retired worker, you must have worked for at least 10 years and earned at least 40 Social Security credits. You can earn up to 4 of these credits per year by paying Social Security taxes (also known as FICA). If you don't have enough credits, you may still qualify based on your spouse's earnings. This applies even if you are widowed or divorced.
The amount you will receive as your Social Security benefit is based on three factors: your age at retirement, the number of years you were in the workforce, and your overall Social Security tax contribution. Your benefits are calculated based on your highest 35 years of earnings. If you did not work, you can receive 50% of your spouse's benefit.
Each year you receive a Social Security statement. Use this statement to estimate how much you will receive when you retire.
Timing
How old you need to be to receive the full retirement benefit is gradually increasing from age 65 to 67. The exact age you need to reach before being eligible for full retirement benefits depends on when you were born. Those born before 1938 have full retirement at 65. Those born after 1959 have full retirement at 67. If you were born between 1938 and 1959, your full retirement age will be between 65 and 67.
You can start getting a reduced Social Security benefit as early as age 62. The amount of reduction depends on your age when you start receiving Social Security. For example, if you were born in 1954, your full retirement age is 66. If you start receiving benefits at 62, you'll receive 75% of your full benefit. If your full benefit would have been $1000, you will only receive $750 each month.
On the other hand, you can delay your benefits until after full retirement age. Then you may receive a benefit credit. This will make your monthly payment larger. The amount of the increase depends on how long you delay benefits. The increase gets larger until you reach age 70.
Working
You can continue to work and still get Social Security benefits. If you are younger than your full retirement age, there are limits on how much you can earn without reducing your benefit amount. Once you reach retirement age, the earnings limit is dropped.
How to Apply
To apply for benefits, contact the Social Security Administration. Start the process about three months before you want your benefits to begin. You can visit a local Social Security office in person. You can also apply by phone (1-800-772-1213) or at Social Security Administration online.
You Decide
With so many choices, it's important to consider your situation carefully. The advantage of early retirement is that you can start collecting benefits sooner. But the benefits will be less than if you wait. However, this reduction in benefits is permanent. The amount you will receive will not go up when you reach full retirement age. Working longer is another option, and your benefits are not reduced once you are at full retirement age. Only you can make the choice that's right for you.
Take Action
Retirement Age
Go to find out what your full retirement age is.
Benefit Amount
Put your information into a benefits calculator and learn how much your estimated benefit will be if you retire early or wait until full retirement age.
Working
Use the Social Security Administration's Earnings Benefit Calculator to find out how working would affect your retirement benefit.
AARP Resources
FAQs about the Social Security Earnings Limit
Can you draw Social Security if you work? Perhaps.
AARP's Social Security Center
The AARP Web site contains a guide to Social Security benefits.
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Additional Resources
Social Security Administration
The Social Security Administration Web site provides information regarding Social Security and retirement.
Social Security Planning Guide
This guide takes you step by step through the process of planning your Social Security income during retirement.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.
The National Endowment for Financial Eduction® (NEFE®) is a non-profit 501 (c) (3) foundation dedicated to helping all Americans acquire the information and gain the skills neccesssary to take control of their personal finances.
©2005 National Endowment for Financial Education. All rights reserved.
