Planning for Social Security

Source: National Endowment for Financial Education | November 1, 2006

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

Find out what your full retirement age is.

Use the Social Security benefits calculator to learn how much your estimated benefit will be if you retire early or wait until full retirement age.

Use the Social Security Administration's Earnings Benefit Calculator to find out how working would affect your retirement benefit.

Get your questions answered about the Social Security earnings limit.

AARP's Social Security Center has more information about Social Security benefits.

AARP's Money Matters Tip Sheets on Timing Your Retirement and Financial Security Issues for Women has more information and action steps.