Social Security benefits are important. The amount you may collect from Social Security could be $15-30,000+ annually and lifetime benefits for a couple may be more than $1 million. That is significant.
How are Social Security benefits determined?
Benefits are determined by a formula, based on your highest 35 years of earnings. To be eligible for Social Security retirement benefits, you must be at least 62 and have earned at least 40 work credits during your lifetime.
If you have worked full time during your working life, you will have no problem meeting the work credit minimum. Work credits are earned at a maximum of 4 credits per year. Currently, you would earn the 4 credits with earned income of at least $4,800 in a year. Thus, you would need to earn at least $4,800 per year for 10 years, under current standards, to be eligible to collect retirement benefits.
As an example, if you always earned the maximum social security earnings amount (which for 2014 was $117,000) and retired in 2014 at age 65, you would receive $2,431 per month, or $29,172 for the year.
Planning tip: If you have not been in the workplace for a while, you may want to consider working part time for a number of years and earn at least $5,000 or more, to become eligible for benefits.
If you are married and your spouse is a consultant or owns his or her own business, and you provide services to the business, it would make sense to pay some wages/earnings to the second spouse, to gain Social Security credits.
When are you eligible to receive Social Security benefits?
Social Security benefits are based on “Full Retirement Age,” or FRA. This is the age when you can receive 100% of your Social Security retirement benefits. Historically, this was age 65, but it is gradually increasing to age 67. For those born before 1943, FRA is before age 66. For those born between 1943-1954, Full Retirement Age is age 66. For those born between 1955-1959, FRA is 66 plus additional months. If you were born in 1960 or later, your Full Retirement Age will be 67.
If you file for early retirement payments at age 62, your monthly benefits will be permanently reduced to approximately 75% of the FRA benefit amount. If you wait to receive benefits until after FRA, your benefits will increase by 8% per year, for each year after your FYA year, until age 70. If you were born between 1943-54, delaying your benefits until age 70 will increase your monthly benefit to 132% of your FRA benefit amount.
However, if you work while you are under your Full Retirement Age, any earnings between $15,480 and $51,480 will cause your benefits to be gradually reduced. For example, if you are 64 (under the FRA of age 66) and receiving Social Security, you can earn up to $15,480 and your benefits will not be reduced. You would need to earn more than $51,480 for all of your benefits to be stopped.
Once you reach your FRA, you can work and your Social Security benefits will not be reduced or affected at all, no matter how much you earn.
Annual Changes to Social Security benefits and paying into SS
Each year, Social Security benefits are revised, based on the rate of inflation. For 2015, monthly benefits will increase 1.7%. Due to very low inflation, annual increases have averaged 1.4% a year since 2010, which is half the 3% average annual increases during the preceding decade.
The maximum amount of earnings subject to the Social Security tax will be $118,500 in 2015, an increase from $117,000 in 2014. As an employee, you would pay in 6.2% of your wages, up to the wage limit. If you are a consultant or self-employed, the self-employment tax rate is 12.4%, up to the wage limit.
What should you be doing now?
If you have not yet started collecting Social Security, you should be reviewing your Social Security information and future benefit projections. You should verify that the earnings data on record is accurate. You should review this information with your financial advisor.
Social Security stopped sending everyone annual paper statements a few years ago. To review your data online, go to: www.ssa.gov/myaccount to establish your own Social Security account. Each individual needs to do this, it cannot be done as a couple. You will need to create a user name and password. Their password requirements are very strong, which is good. Be sure to save it, and they require you to establish a new password every 6 months.
Social Security may resume sending paper statements every five years, when you turn 40, 45, 50, for example. Statements are sent annually to those over 60, until you file for Social Security benefits. However, we recommend you establish and review your account online, at least annually.
If you have not worked for a long time, you should consider the long term financial benefit of working part time, or the potential impact additional earnings could have on your Social Security benefits. As life expectancies increase significantly, the amount of your Social Security benefits should not be underestimated.
This post has covered many details of Social Security, but there are many exceptions. We hope this post is helpful, but please consider this as general information. We encourage you to consult with us, based on your specific situation, prior to making any decisions related to Social Security.