Social Security Net Benefits

Retirement planning will often have you thinking, "How much will I receive in Social Security benefits?" The answer to this question depends on a few factors, including your age and work history.

How does Social Security Work?

If you're like most people, you probably don't have a clear understanding of how Social Security works. In fact, nearly 60% of Americans say they don't know enough about Social Security to make informed decisions about their retirement planning, according to a recent poll by the National Council on Aging. This lack of knowledge can have serious consequences down the road. For example, if you start taking benefits at 62 (the earliest age possible), you'll receive less each month than if you wait until your full retirement age (FRA). And if you delay benefits past your FRA, you'll get even more each month.

What do I need to know about Social Security?

The best way to make sure you're getting the most out of your Social Security benefits is to learn as much as you can about how the program works. Here are five things everyone should know:

1. There's More Than One Way to Claim Benefits

You can claim Social Security benefits as early as age 62, but you'll receive a permanently reduced benefit if you do. Your benefit will be 75% of what it would have been had you waited until your FRA, which is currently 66. If you wait even longer to claim benefits, up to age 70, your benefit will increase each year.

2. You May Pay Taxes on Your Benefits

Depending on your income and filing status, up to 85% of your Social Security benefits may be taxable.

3. There Are Two Types of Benefits

Social Security retirement benefits are based on your work history and earnings. If you become disabled, you may be eligible for Social Security disability benefits. And if you die, your survivors may be eligible for Social Security survivor benefits.

4. You Can Estimate Your Benefits

Directly from the Social Security Account government site:

If you have a personal my Social Security account, you can get an estimate of your personal retirement benefits and see the effects of different retirement age scenarios.

If you don’t have a personal my Social Security account, you can create one at www.ssa.gov/myaccount. A personal my Social Security account also gives access to the online Social Security Statement. In the Statement, a bar graph shows your retirement benefit estimates for up to nine ages when you may want to start benefits.

Many people wonder how we figure their Social Security retirement benefit. We:

• Base Social Security benefits on your lifetime earnings.
• Adjust or “index” your actual earnings to account for changes in average wages since the year the earnings were received.
• Calculate your average indexed monthly earnings during the 35 years in which you earned the most.
• Apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount.” This is how much you would receive at your full retirement age — 65 or older, depending on your date of birth.

5. You Still Need to Plan for Retirement

Social Security will replace about 40% of the average worker's pre-retirement earnings. Most people will need other sources of income in retirement to make ends meet. Here are some options:

401(k) plans, 403(b) plans, most 457 plans, and the federal government's Thrift Savings Plan offer tax-deferred savings opportunities. Employers often match a portion of employee contributions, making these plans even more attractive.

IRA's come in two types: traditional and Roth. Both have income limits that may restrict your ability to contribute if you participate in a 401(k) or similar workplace retirement plan. With a traditional IRA, you make contributions with pretax dollars, reducing your current taxable income. With a Roth IRA, you pay taxes on the money you contribute now, but all subsequent withdrawals are tax-free. There is no right or wrong answer when deciding between a traditional and Roth IRA. It depends on your personal circumstances, such as your tax bracket now versus what you expect it to be in retirement.