Determine Whether You Qualify For A Retirement Benefit
Social Security benefits are based on credits, and you start earning credits the first day you fill out a piece of employment paperwork. Your employer submits a portion of each paycheck to the federal government on your behalf, and part of this tax payment goes toward your future Social Security benefits, attached to your SSN.
But you dont have to work for a business to earn credits toward retirement. If you work as an independent contractor or earn any other type of taxable income, you report that to the IRS. Contractors pay self-employment tax, which funds both their Social Security and Medicare.
To qualify for Social Security, you need at least 40 credits, which equals about 10 years of work. Those years dont have to be consecutive. They accumulate throughout your life, counting toward benefits regardless of when they were earned.
You wont be able to start collecting your Social Security payout until youre at least 62 years of age, but that will be a reduced amount. You can collect 100% of your benefits at your full retirement age, which is determined by your birth year. If you wait until after your full retirement age to collect benefits, you can earn delayed retirement credits which boost your monthly income.
Your Age When You Start Claiming Benefits
After your AIME is calculated, Social Security applies a special formula to it in order to determine how much your monthly benefits will be. Your benefits equal 90% of your AIME up to a certain income level, called a “bend point.” Then, you get 32% of AIME up to the next “bend point,” and 15% for all additional income. Bend points change each year based on changes to the Average Wage Index.
This formula determines what your primary insurance amount is. But, you only collect your primary insurance amount if you claim benefits at full retirement age. If you claim benefits before your FRA, your benefits are reduced. If you claim after your FRA, your benefits are increased because you earn delayed retirement credits up until age 70.
If you decide to retire at a different age than FRA, you need to understand the impact this can have on your Social Security income. Claiming early reduces benefits by 5/9 of 1% per month for the first 36 months you retire before your FRA. If you retire more than 36 months early, you lose an additional 5/12 of 1% for each prior month. If you retire at 62 when FRA is 67, benefits will be reduced by 30%.
But, if you retire late, benefits increase by 2/3 of 1% per month up until age 70, when the bonus for delaying maxes out. This chart shows you how retiring at different ages could impact total monthly Social Security income.
Average The Highest 35 Years
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.
Total the highest 35 years of indexed earnings, and divide this total by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.
|How to Calculate Your AIME for Social Security Benefits|
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Maximum Social Security Benefits You Can Get
The maximum monthly Social Security benefit available to someone retiring in 2021 is $3,895, which assumes that:
- They worked 35 years or more
- In their 35 top-earning years, their income met or exceeded the SSA’s maximum taxable amount, so that they paid the largest Social Security tax amount possible for each of those years
- They are retiring at age 70, which entitles them to the maximum delayed retirement credit
For comparison, the table below lists the monthly benefits for workers who plan to retire in 2021 whose earnings met or exceeded the SSA maximum-taxable limit every year of their working lives, from age 22. This situation is far from typical, but it shows the impact of retirement age on Social Security benefits, isolated from other factors.
|Maximum Social Security Benefit for Workers Retiring in 2021|
List Each Year’s Earnings
Your earnings history is shown on your Social Security statement, which you can now obtain online.
In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the “Contribution and Benefit Base” and is shown as Max Earnings in Column H in the table.
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Are Social Security Benefits Taxable
If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.
If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.
That covers federal income taxes. What about state income taxes? That depends. In 13 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.
I Have Some Savings Should I Live On That Rather Than Claim Social Security Now
This is a very personal decision that depends greatly on your circumstances. Maintaining an emergency fund is always important, and never more so than during times of economic volatility. But people with very substantial savings can draw down safely to cover living expenses while delaying their claim.
The loss of earned income means you will be in a lower tax bracket, and rates are at historically low levels under the Tax Cuts and Jobs Act of 2017.
Theres no better time to take money out of a 401 or I.R.A. than when your income is relatively low and you have a lower marginal tax rate, Mr. Finke said.
A delay of just a few years can be very beneficial. A 62-year-old with a full retirement age benefit of $1,500 would increase her likely lifetime benefits by more than $100,000 by waiting until that point to file, according to a projection by William Meyer, a co-founder of Social Security Solutions, which offers software aimed at helping retirees make optimal claiming decisions. Mr. Meyers calculation assumes that our retiree lives to 90 and that Social Securitys cost-of-living adjustment is 2 percent each year.
But the pandemic has added a new dimension to claiming decisions for most retirees, the retirement researcher Dirk Cotton said. Since most Americans have modest savings, if any, many of them will need to hang on to what they have.
Persistent bear market conditions also present an argument in favor of an early claim, Mr. Cotton added.
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What If I Dont Know My Expected Salary Increase
Generally, our salaries increase steadily as we progress through our working lives, adapting to ever-changing needs. Typically, many people can expect a 2% increase averaged out over their career. If you believe that this does not apply to you, or you would just not like to count on it, you can just type 0% for this box, or a smaller amount such as 1%. The intention of the Social Security Benefits Calculator is simply to provide an estimate, so you can afford to be slightly incorrect.
How To Determine Your Social Security Benefits
While Social Security benefits are not guaranteed, the quality of your retirement is down to the way in which you have planned ahead.
It is worth figuring out the amount in financial sum of your retirement benefits in order to determine what your years of Social Security contributions entitle you to.
You can do this in a variety of ways, but some of the most common methods is to:
- Visit a local Social Security office to obtain a record of your taxed Social Security earnings and an estimate of retirement benefits
- Visit the Social Security website and use one of their online benefit calculators to work out your retirement estimate based on your earnings record
- Wait until you decide to start receiving benefits and allow the SSA to calculate the amount for you
Many people, rather than visit a Social Security office, now try to transact their business either online, over the phone or via mail, as many offices have been affected by the ongoing COVID-19 pandemic.
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Find The 35 Highest Inflation
If you worked more than 35 years, your benefits will be based on your highest 35 years of earnings. This amount will be indexed to adjust for inflation. If you didnt work for a full 35 years, a 0 will be used for years you didnt work, which will reduce your overall payout.
Using this Social Security retirement calculator, you can see how working a few more years can help boost your Social Security earnings. For those who worked 32 years, another three years of strong annual wages can make a big difference in your monthly payout once you retire. For many people, wages increase with age, which means your highest earning years will occur in your fifties and sixties.
Even if you have 35 years worth of earnings on the books, you can still potentially increase your benefit by continuing to work a few extra years. Your higher earning years later in life will replace years from when you were younger and earned less.
Adjust All Of Your Annual Earnings For Inflation
Unless youre retiring this year, your future payouts will need to factor in inflation in the years between now and retirement age. The Social Security Administration uses the national average wage indexing series to calculate benefits for retirees, adjusting earnings to account for inflation in the years prior to retirement.
Your Social Security retirement earnings will be adjusted to the average wage two years prior to retirement, attached to taxes taken out with your SSN throughout your lifetime. In 2019, that average wage was $54,099.99, so someone retiring in 2021 will be indexed on that. The IRS will take $54,099.99 and multiply it by the wage ratio for each year prior to that to come up with a wage for every year worked. The Social Security Administration maintains this wage ratio, which is based on the National Average Wage Indexing Series, available here. You can perform this calculation yourself or go to the Social Security website and input the year you plan to retire at the bottom. That will give you the estimated indexing factors for each year going back to your year of birth.
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Using Your Benefit Estimates
As your statement will show, your Social Security retirement benefits will vary depending on when you claim them before or after your full retirement age . The longer you wait to start receiving payments, the higher your benefit amount will be.
However, it’s not always better to wait until your full retirement age to claim your Social Security benefits. If you need your Social Security benefits for living expenses, or you have a health condition that makes it unlikely that you will live past age 75 or so, you may be better off collecting your benefits sooner rather than later. You can use a calculator at the Social Security website to see which retirement age makes the most financial sense for you .
For comprehensive practical information about how and when to claim Social Security benefits, see Social Security, Medicare & Government Pensions, by Joseph Matthews with Dorothy Matthews Berman .
How To Get A Copy Of Your Social Security Statement
The SSA mails out Social Security Statements to follks age 25 and over before their birthdays during their 25, 30, 35, 40, 45, 50, 55, and 60 years. For those age 60 until retirement, the SSA will send out statements every year. You can also go online to get a copy of your statement or view it online. Go to www.ssa.gov/mystatement/ and open an account with Social Security to view your statement.
Are Social Security Payments Taxed
Yes and No. First, we are attorneys and not CPAs. Any tax question should be directed at your CPA or your tax preparer.
Generally, the IRS will tax your SSDI benefits when half of your benefits, plus other income, exceeds an income threshold on your tax filing status.
If youre filing single, head of household, married filing separately, or qualifying widower, the threshold is $25,000.
If youre filing married and jointing, that threshold is $32,000. And if youre filing separately but lived with your spouse during the tax year, the threshold is $0
Supplemental Security Income Benefits are not taxable.
Note: Visit irs.gov to learn additional information on paying taxes social security benefits.
When Should I Start Collecting Social Security
Ultimately, the decision of when to begin collecting Social Security is one you have to make. It depends on your age, your health status, how much you spend and how much you have saved. Its generally best to start collecting as late as you can, because you get a larger monthly payment, which is adjusted for inflation each year.
Consider a retiree who was born in 1950 and averaged $50,000 a year in salary. If she has $3,000 a month in expenses, her Social Security check would cover 48 percent of her expenses if she started Social Security at age 62. If she waited till age 70, her check would cover 84 percent of her expenses. Every year she delays retirement, her Social Security payout which is adjusted annually for inflation rises by about $1,635.
Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, savings and pensions. Social Security was never intended to be the sole source of income for retirement. Increasingly, however, employers have been moving away from their employer-sponsored pension plans in favor of tax-deferred retirement savings accounts, such as 401 plans.
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Create A My Social Security Account
What if there were a much easier way to estimate your benefits than performing all those complicated calculations mentioned above? Thankfully, there is! Simply create a My Social Security account to access all your information on the SSA.gov website. This account will allow you access to many Social Security services online.
This account will allow you to estimate your monthly payment with the click of a few buttons. Your earnings history will already be loaded in your account, and the software will perform all the necessary calculations like your average wage, bend points, and adjustments. Simply tell the calculator when you plan to retire, and it will automatically perform your benefit calculation. It couldnt be easier!
In addition to calculating benefits, this account will give you access to many other useful services. You can use this account to request a replacement Social Security card should you lose your or have it stolen. Another great feature is checking eligibility or the status of an application. If you have applied for retirement benefits, disability insurance benefits, or SSI benefits, you can check on the status of your application right there on the website.
Find Out Your Estimated Social Security Benefits
Periodically checking your estimated Social Security benefits serves several purposes: It helps you plan for retirement and allows you to check for and correct errors.
The Social Security Administration keeps a database of your earnings record and work credits, tracking both through your Social Security number. You can see this information on your Social Security Statement, which is available to everyone age 25 and over. The Social Security Statement also gives you an estimate of the benefits you’ll receive at retirement age, which can play an important role in your financial planning.
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Are You Getting A Raise On Your Social Security
Each October, the U.S. Social Security Administration determines if a cost-of-living adjustmenta raisewill apply for the following calendar years payments based on changes in the Consumer Price Index a way to measure inflation. Theres no guarantee that a change will occur, but if there is, itll apply to all 12 payments in the following calendar year. For example, the SSA recently announced a 5.9% increase to all 2022 payments, the largest increase since 1982.7
Make Necessary Adjustments To Pia
Adjustments to your PIA are done to account for cost of living adjustments and retirement age. If you wait to receive benefits until your full retirement age , then you will receive 100% of your benefits. However, if you choose to start your benefits early, then you will see a reduction in your benefits. In fact, waiting past full retirement age can allow you to see an increase in your PIA. Starting your benefits just a small number of months early can permanently reduce the benefits you will receive. So, it is always wise to wait until full retirement age if possible to start your benefits.
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