How Your Social Security Benefits Are Earned
To be eligible for Social Security benefits in retirement, you must earn at least 40 “credits” throughout your career. You can earn as many as four credits a year, so it takes 10 years of work to qualify for Social Security.
In 2021, you must earn $1,470 to get one Social Security work credit and $5,880 to get the maximum four credits for the year.
You Can Undo A Social Security Claiming Decision
There aren’t many times in life you can take a mulligan. But Social Security offers you the chance for a do-over. Say you claimed your benefit, but soon thereafter wish you had waited to take it. Within the first 12 months of claiming Social Security benefits, you can withdraw the application. You will need to pay back all the benefits you received, including any spousal benefits based on your record. But you can later restart your Social Security benefits at the higher amount youll earn by waiting.
Early claimers have another opportunity for a do-over: They can choose to suspend their Social Security benefit at full retirement age. Say you took your benefit at age 62. Once you turn full retirement age, you can suspend your benefit. You don’t have to pay back what you have received, and your benefit will earn delayed retirement credits of 8% a year. Wait to restart your benefit at age 70, and your monthly payment will get up to a 32% boost — which could erase much of the reduction from claiming early.
Who Can Use The Retirement Estimator
You can use the Retirement Estimator if you have enough Social Security credits to qualify for benefits and you are not:
- Currently receiving benefits on your own Social Security record.
- Waiting for a decision about your application for benefits or Medicare.
- Age 62 or older and receiving benefits on another Social Security record.
- Eligible for a Pension Based on Work Not Covered By Social Security.
If you are currently receiving only Medicare benefits, you can still get an estimate. For more information, read our publication Retirement Information for Medicare Beneficiaries.
If you cannot use the Retirement Estimator or you want a survivors or disability benefit estimate, please use one of our other benefit calculators.
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The Impact Of Delaying Social Security On Its Lump Sum Value
While Social Securitys lump sum value can be calculated based on the full retirement benefit, the reality is that Social Security doesnt have to be taken at that full retirement age. It can be started early at a reduced value, or delayed later for a greater payment.
The opportunity to delay is often characterized as a return for delaying; after all, for each year that benefits are delayed past full retirement age, there is an 8% delayed retirement credit applied to increase benefits that are started later. For someone whose full retirement age was 66, waiting until age 70 results in a 4 x 8% = 32% benefit increase.
However, the caveat of delaying benefits is that while the payments will be higher, fewer are expected to be received, since the waiting retiree will be 4 years older by then and have a shorter life expectancy from that point forward. Thus, while the average benefit of $1,294/month would grow to $1,708/month by waiting until age 70 , the payments would only be expected to last for about 14 years for a male and 16 years for a female at that point. When the value of Social Security is adjusted for the higher payments but shorter time period, and the time value of money for waiting four years, the lump sum value is only about $312,000 for males and $360,000 for females, a relatively modest increase of about 11% and 8%, respectively, from the benefits at full retirement age.
How Is Social Security Calculated
To determine your monthly benefits, the Social Security Administration uses a series of somewhat complicated calculations. At their heart is an inflation-adjusted average of your monthly income from your highest earning years.
This monthly average is run through an income replacement formula that determines your base monthly Social Security payment rate in retirement. This base rate will then be adjusted upward or downward depending on a few factors, like your age when you start claiming Social Security benefits, your employment status in retirement, your tax bracket and your Medicare premiums.
If that sounds overly complex, dont fret. Heres how each part of the Social Security calculation breaks down.
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Up Until Now Social Security Has Been A Windfall For Many Retirees: They Collected Far More In Benefits Than They Shelled Out In Taxes
That’s changing. Many of those retiring will have paid more into the coveted entitlement program than they will get back.
Here are the numbers:
A couple who each earned the average wage during their careers and retired in 1990 would have paid $316,000 in Social Security taxes, but collected $436,000 in benefits, according to data crunched by Eugene Steuerle, an economist at the Urban Institute.
Had that couple turned 65 in 2010, however, they would have paid $600,000 in taxes, but could expect to collect just $579,000. This is the first time in the program’s history that taxes outweighed benefits for this group, a couple with average earnings.
The imbalance will get more pronounced for future generations of retirees. Couples now in their early 40s will have forked over $808,000 in Social Security taxes by the time they retire, but get back only $703,000 in benefits.
The Urban Institute included payroll taxes paid by both the employee and employer, but did not include the portion used for Social Security’s disability insurance program. Since 2000, taxes for just the retirement program have totaled 10.6% — 5.3% from the employee and the same from the employer. The levy is paid on income up to a certain threshold — $113,700 for 2013. The institute said it adjusted its calculations for inflation plus 2%, about what a person could have traditionally realized in savings had they put the money in the bank.
Where Does Money Collected For Social Security Go
The quick answer is into the governments massive retirement fund for American workers. How massive is it?
Since its inception, FICA has collected more than $20 trillion for Social Security and Medicare.
Congress enacted FICA in 1935. There were various state and local retirement funds at the time, but lawmakers decided workers needed a national safety net to keep them from spending their retirement and stuck eating cold beans every night for dinner.
That fund would also cover people who were disabled before reaching retirement.
The Social Security Board of Trustees 2020 annual report said that $1.062 billion was collected. The Social Security Administration paid $1.059 billion in benefits. The costs are projected to exceed the income by 2021 and in the years to come, sounding the alarms for future generations.
That $3 billion surplus was put into trust funds to cover future payments. The Trustees reported the total asset reserves in the trust funds were $2.85 trillion, which seems like a lot of money, and it is, but with people living longer, more benefits are going out and there are questions about whether there will be enough for your descendants.
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How Does Work Affect Your Social Security Payments
Many people continue to work beyond retirement age, either by choice or out of necessity. But if you are receiving Social Security benefits, you need to be aware of how working can affect your benefit payments. Earning income above Social Security thresholds can cause a reduction in benefits and mean your benefits will be taxed.
Whether it makes sense to work and collect Social Security at the same time is a complicated assessment that depends on how much you earn and when you begin taking Social Security benefits.
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If you work and are full retirement age;or older, you can earn as much as you want and your benefits will not be reduced. However, individuals may begin taking Social Security retirement benefits early beginning at age 62. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full benefits. If you earn more than $18,960;, Social Security will deduct $1 from your benefits for each $2 you earn over the threshold. In the year you reach full retirement age, you can earn up to $50,520 without having a reduction in benefits. However, if you exceed $50.520 in earnings, Social Security will deduct $1 from your benefits for each $3 you earn until the month you reach full retirement age. Once you reach full retirement age, your benefits will no longer be reduced.
For more information on Social Security, .
Myth #: You’ll Never Get Back All The Money You Put Into The Program
Everyone’s situation is different, but if you live a long time, you may collect more than you contributed to the system.
Due to the complexity of claiming strategies and number of variables involved, the SSA no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. The contributions you and your employers make during your working years provide:
While the government does not have a specific account set aside just for you with your FICA contributions , one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you’ll outlive your savings. Even if you live to 100 or more, you’ll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.
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Credit Earning Threshold Goes Up
If you were born in 1929 or later, then you must earn at least 40 credits over your working life to qualify for Social Security benefits. The amount it takes to earn a single credit goes up slightly each year. For 2021, it will take $1,470 in earnings per credit, up $60 from 2020. The number of credits needed for disability depends on your age when you become disabled.
How To Estimate Your Social Security Income
Two facts are knownSocial Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. While these facts add uncertainty, its also true that the quality of your retirement depends on your planningand you must start planning somewhere.
A good starting point is to figure out the amount of retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:
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Should All Of My Social Security Retirement Income Be Deposited Into A Miller Trust
Variations of this questions include:
- How much of my SSI or Social Security Retirement Income should go into the Miller Trust / Income Trust?
- If I have multiple sources of income , which should I choose to go into the Miller Trust?
Medicaid applicants donât have to choose an entire category of income and place the entire amount into the Miller Trust. Medicaid is simply looking at total numbers. Iâll explain using an example:
If my client receives $1,250.00/month from Social Security + $750.00/month from a VA Pension + $1,750 per month from a 401 that is $3,750.00 per month in total monthly income. Your elder law attorney would then deduct the income cap from your total gross monthly income to see if there is an excessive amount of income for Medicaid purposes. In our example:
$3,750.00 – $2,349.00 = 1,401.00 in excess income that must go into a QIT / Miller Trust every month in order to pass the Medicaid income eligibility test.
It doesnât matter where that $1,401 comes from .
So, if all the income are deposited into one account – you would just set up an automatic transfer of at least $1,401 to go from that account into the Miller Trust account every month.
Properly managing and funding a qualified income trust account is very important for maintaining Florida Medicaid ICP or Medicaid waiver eligibility.
Children Can Collect Social Security Benefits Too
Minor children of Social Security beneficiaries can be eligible for benefits. Children up to age 18 and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit. The disability must have occurred before the age of 22. As long as the disability prevents the person from working, the adult child can continue collecting the benefit even after the parent has died.
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Workers Who Die Before Age 62
The minimum age to start claiming Social Security retirement benefits is 62. If someone dies young, then dependent children and spouses may be entitled to survivor benefits. At age 60, for example, widows and widowers can begin receiving Social Security benefits based on their deceased spouses earnings record . Terminally ill patients can apply for Social Security Disability Insurance , which means they will still receive some benefit from their contributions to the system.
What if you are terminally ill and have reached the minimum retirement age? If you are single, claiming right away may be the most sensible strategy. However, if you have a spouse, postponing may provide your spouse with greater benefits. The spousal benefit can be as much as 50% of the worker’s benefit, depending on the spouse’s age at retirement and if the spouse is eligible for retirement benefits based on their own earnings record. The Social Security Administration has an online calculator that helps determine benefits for spouses.
If you do not qualify for Social Security payments, then you will need to ensure that you have sufficient income to support your lifestyle in retirement.
What Are My Contributory Periods And How Are They Used
Your contributory period for the base CPP begins when you reach age 18 .
Your two contributory periods for the CPP enhancement also begin when you reach age 18 or January 1 of the appropriate year , whichever is later.
Each of your contributory periods end when you either start receiving your CPP retirement pension, turn 70 or die .
We use the contributory periods to calculate the amount of CPP benefits that you may become eligible to receive.
The amount you get considers periods where you had zero or low earnings.
A certain number of your lowest earnings years may be automatically dropped from the calculation of the base portion of a CPP benefit. This falls under the “general drop-out provision”.
The CPPs “child-rearing provisions” take into account periods of zero or low earnings because you were the primary caregiver for your children.
Periods of disability are also taken into account in the calculation of your contributory period.
Beneficiaries Received A 13% Increase
For 2021, nearly 70 million Social Security recipients are seeing a 1.3% cost-of-living adjustment to their monthly benefits. The adjustment helps benefits keep pace with inflation and is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers as calculated by the U.S. Bureau of Labor Statistics . If the CPI-W increases more than 0.1% year over year between the third quarter of the previous year and the third quarter of the current year, then Social Security will raise benefits by the same amount.
The 1.3% bump for 2021 compares with the 1.6% COLA for the previous year . In 2019, the COLA was 2.8%, the largest increase since 2012. For the average Social Security recipient, the 1.3% raise amounts to just $20 per month on an average monthly payout of $1,543 vs. $1,523 in 2020.
Both Offer Benefits But What You Pay Inand Get Outdiffers
The Canada Pension Plan and the U.S. Social Security system are publicly provided, mandatory old-age pension systems. They both provide retirement, disability, and survivor benefits. But the amount you pay in and the benefits you receive differ between the two.
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