Social Security is a vital program in the United States that helps retirees and their families financially. So, it’s important to know how Social Security works, as well as how it can help you plan for your retirement and provide an income in your retirement years.
Social Security is a government-run program that provides benefits to retirees, disabled people and to their spouses, children and survivors. To be eligible for Social Security benefits, you must have worked in the United States for at least 10 years. Retirees can receive Social Security benefits as early as age 62, although the amount of the benefit will be reduced if taken before full retirement age.
So what does this all mean? Social Security can have a major impact on your retirement years. And knowing how much you could get allows you to plan for retirement. For example, did you know the average monthly Social Security benefit for retired workers was $1,437.55 in 2021?
It’s important to understand the basics of Social Security so you know how it can help you.
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A brief history of Social Security
The U.S. Social Security Administration was established by an act of Congress in 1935. It is responsible for administering the Social Security program. The purpose of this Act was to provide monetary assistance to people who are retired, have a disability or are acting as the surviving family member of somebody who has died. Since its inception, it has become one of the largest social programs in the United States.
The Social Security Act initially applied to only about half of the workers in the country, but it has gradually expanded to all working citizens. The original age limit for receiving benefits was 65, but that was extended to 67 by law in order to keep up with increasing life expectancies.
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How do I decide when to claim Social Security benefits?
It’s important that you understand how claiming your Social Security benefit impacts the amount of money you will receive. If you begin receiving benefits before your full retirement age, your monthly payment will be reduced. Conversely, if you wait until after your full retirement age to begin receiving benefits, your benefit amount will increase each year until it maxes out at age 70.
Your full retirement age is determined by your birth year and can be found by visiting the SSA directly. Once you reach your full retirement age, it won’t matter what month in that year you begin receiving benefits because they will not change from that point forward. If you begin receiving benefits after your full retirement age, however, the benefit amount will increase, annually, until age 70.
What is the full retirement age (FRA)?
Full retirement age is the age at which you are eligible to receive your full Social Security benefit. This age is determined by your birth year and can be found by contacting the SSA directly. Full retirement age varies depending on when you were born, but it’s typically between 66 and 67 years old. If you begin receiving benefits before your full retirement age, your monthly payment will be reduced. Conversely, if you wait until after your full retirement age to begin receiving benefits, it is likely that your benefit amount will increase each year until it maxes out at age 70.
How do I calculate Social Security benefits?
Social Security benefits are calculated based on your highest 35 years of earnings during your eligible employment periods. Your ‘benefit computation’ is determined by averaging your monthly income over your 35 highest-earning years to arrive at a figure referred to as an average indexed monthly earnings (AIME) amount. This AIME amount is then used to calculate your Social Security benefit.
The indexed amount depends on a number of factors, including year of birth, year worked and the amount of income that was collected.
Read more: Social Security quick calculator
Taxes on your benefits
Social Security taxation usually only affects individuals who earn additional income in retirement. For example, income from dividends, a side-hustle or rental income can render a portion of your Social Security benefits as taxable income. However, it’s important to note that the (combined) income threshold was increased to $25,000 for those filing as individuals. This number increases to $32,000 for those filing jointly, however, the amount must be the combined income.
Can you work and still receive Social Security benefits?
Yes, you can still receive benefits if you work; however, it’s important to remember that some of your Social Security benefits may be taxed. If your combined income is below the maximum taxable amount, any Social Security benefit that you earn will not be subject to taxation. If you earn more than the combined maximum, part of your Social Security benefits may be taxed.
Social Security is an important source of income for millions of Americans. And Social Security is something that you will likely be eligible for sooner or later. It’s important to know about the benefit, even if you don’t think that it applies to your life right now. That way, when the time comes to apply for Social Security, you have a better idea of what to expect. No one wants a surprise when it comes to retirement benefits.
Rick Orford is a Wall Street Journal, USA Today, and Amazon best-selling author, investor, and mentor. He’s appeared on Good Morning America and has been featured in the Washington Post, Yahoo Finance, MSN, Insider, and more. His passion is personal finance, and he works tirelessly to deliver content in an easy-to-understand manner.
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