Easy Guide to Social Security
Social Security is one of the most important institutions in our country when it comes to retirement. However, it is also an unfortunately complicated system that frustrates and confuses many users.
Updated on Mar 18 2020
Social Security is one of the most important institutions in our country when it comes to retirement. However, it is also an unfortunately complicated system that frustrates and confuses many users. Social Security benefits are calculated with a relatively complex formula. And, this formula is changing nearly every year. Because of this, it can be difficult to get a clear picture of what your benefits will look like. Use this easy guide to Social Security to help you determine your benefits and eligibility:
Eligibility for Social Security
Your eligibility for Social Security is determined by several factors. Your work history is one of the most important factors. The most basic qualification to begin receiving Social Security benefits is having 40 Social Security credits. These credits are earned each year that you work and are based off of your earnings. You can earn a maximum of four credits per year. Because of this, credits are sometimes referred to as “quarters of coverage.”
You earn a credit when you hit a certain threshold of earnings. However, this threshold changes each year to account for inflation. This year, you earn a credit per $1,410 in earnings, up to four for the year. This number changes each year, but to give context, someone would need to earn $5,640 in 2020 to receive the maximum possible credits. So, to qualify for Social Security benefits, you need to have worked for at least 10 full years, though not necessarily consecutively. Benefits are calculated based on 35 years of earnings, so while 10 years would qualify you for a benefit, it would not be a significant amount.
When to claim Social Security benefits?
The decision as to when you claim your Social Security benefit will be determined by a range of personal factors. However, there is a designated retirement age range of 62-70. Claiming your benefit at each of these ages will result in differing benefits. For example, claiming at age 62 will result in a smaller benefit than if you had claimed at age 65. These benefits will be lesser still than those claimed at age 70.
While you can claim your benefit within the age range of 62-70, you do also have a “full” retirement age where you become eligible for full Social Security benefits. This age varies from person to person and is determined by your birth year.
- Those born from 1943 to 1954 have a full retirement age of 66 years
- Those born in 1955 have a full retirement age of 66 years and two months
- Those born in 1956 have a full retirement age of 66 years and four months
- Those born in 1957 have a full retirement age of 66 years and six months
- Those born in 1958 have a full retirement age of 66 years and eight months
- Those born in 1959 have a full retirement age of 66 years and ten months
- Those born in 1960 or later have a full retirement age of 67 years
However, you can claim your benefit before your full retirement age, so long as you’re at least 62 years old. Claiming early, but less than three full years early, will result in a loss of 6.67% of your benefit. Claiming more than three years early will cause your benefit to be reduced by 20%, and an additional 5% for each early year. Because of this, withdrawing more than three years before your full retirement age will give you a significantly reduced benefit.
By the same token, you can hold off on claiming Social Security for an increased benefit. Your benefit grows by 8% for each year past your full retirement you wait to claim Social Security, up to age 70. So, if your full retirement age is 67 and you claim Social Security at age 70, your benefit will have increased by 24%. However, waiting any longer will not increase your benefit.
How are my Social Security benefits calculated?
The Social Security benefit is calculated using several factors, some of which are formulas set by the Social Security Administration that change yearly. Your base benefit, or “primary insurance amount,” is determined by averaging your 35 highest-earning years of work together, adjusting for inflation. However, there is a Social Security Administration set maximum per year. For example, the maximum for 2020 is $137,700. So, even if you were to earn more than this, your earnings for 2020 would be considered $137,700 for benefit calculation. If you haven’t worked for 35 years, zero values will be added in place of missing years.
So, to get the maximum benefit possible, you’ll want to have worked at least 35 years. Additionally, you should wait as long as possible to claim Social Security to maximize your benefit.
How do I apply for Social Security?
You have some options when it comes to applying for Social Security. First, you can visit your local Social Security Administration office to apply for benefits in-person. Or, you can call your local office and apply over the phone. However, both of these options can be quite time-consuming. Alternatively, you can use the Social Security Administration’s website to apply for benefits in about 15 minutes. While this option may be the most convenient, use the one that you feel most comfortable with.
Can my spouse receive my benefits?
Social Security also provides a spousal benefit. This means, under certain conditions, a spouse can claim a Social Security benefit based upon that of their spouse’s. Some conditions must first be met:
- You must be eligible for benefits as described above (at least age 62)
- Your spouse must have already claimed their benefit
- If ex-spouse, marriage must have lasted 10+ years without remarriage prior to age 60
If you’ve worked for at least 10 years, you have the option to claim your own benefit. However, under these circumstances a spousal benefit will entitle you to a benefit that equates to 50% of your spouse’s primary insurance amount. The Social Security Administration will calculate these figures and pay you the larger amount.
Can I transfer my Social Security benefit?
You cannot transfer your Social Security benefit while alive, but, it can be transferred to a surviving spouse. If your surviving spouse is full retirement age, they are entitled to 100% of your benefit. If they are age 60 but not yet full retirement age, they will receive between 71 and 99% of your benefit. A surviving spouse age 50-59 who is also living with a disability will receive 71.5% of your benefit. If they meet none of these criteria but are caring for a child under age 16, they will receive 75%.
However, spouses aren’t the only ones qualified for the Social Security survivor benefit. Your child, if qualified, can receive 75% of your benefit. Additionally, one of your parents can receive 82.5% of your benefit, or both parents can receive 75% each.
Can I live on my benefit alone?
Unfortunately, Social Security was not designed to replace the entirety of your income. The Social Security Administration estimates that benefits should replace about 40% of a retiree’s income. This means that the remaining 60% of income is expected to come from alternate sources like a 401(k) or pension. This isn’t to say that it’s impossible to survive on Social Security benefits alone, it may prove very difficult and require extremely frugal living.
Do benefits change over time?
Your Social Security benefit can be adjusted over time. The first reason it may be adjusted is referred to as COLA, or cost-of-living adjustments. These are adjustments that increase your benefit to adjust for inflation. Don’t worry, however, your benefit will never be reduced to compensate for any deflation.
Your benefit can also change in relation to Medicare premiums. Social Security beneficiaries begin paying a monthly Medicare premium upon reaching Medicare eligible age. This premium is deducted from your benefit. So, a rise in Medicare premiums would result in a lower take-home benefit.
Social Security is an integral aspect of your retirement plan. However, it should never be the only piece of your puzzle. If you’re unsure how else to begin planning for retirement, a financial advisor can provide you with options that fit your situation. Find an expert who you feel comfortable with and can work with.
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