Social Security is a safety net established for the elderly and disabled Americans in 1935 under the Social Security Act. The program is funded from contributions by American workers with the security of having benefits when working is no longer an option. The benefits that the retired or disabled workers initially receive are based on their personal earning history.
How Social Security Works
There are 3 things that are important to understand about social security
How to become eligible – you need 40 credits or about 10 years of work.
How to calculate the amount of money that you will receive – your benefit is based on your earnings. If you are a low income earner, you will receive a much higher percentage of your income than a higher wage earner.
When you can start drawing on the money – The full retirement age varies (see figure below). If you have a retirement age of 66 then you would be able to start drawing on your social security with a 25% penalty at age 62. In addition, if you choose to delay collecting each year, up to age 70, your benefits are increased by 8%.
How to become eligible for Social Security benefits
To qualify for retirement benefits you must have paid into Social Security tax while you were working and earned “credits” toward benefits. The number of credits you need to be eligible for social security benefits depends on the year that you are born. If your birth year is 1929 or later, you must have 40 credits, the equivalent of 10 years of work. Social security benefits can not be paid until the required amount of credits is obtained.
Determining how much Social Security you will receive
The Social Security payment that you will receive is based on the amount you earned during your working career. The more money you earned the higher your benefit. Other factors such as the age at which you start pulling from your Social Security also affect the payment amount.
When you are eligible for Social Security Benefits
The full retirement age varies (see figure below). If you have a retirement age of 66 then you would be able to start drawing on your social security with a 25% penalty at age 62. In addition, if you choose to delay collecting each year, up to age 70, your benefits are increased by 8%.
If you were born in …
Your full retirement age is …
1937 or earlier
65 and 2 months
65 and 4 months
65 and 6 months
65 and 8 months
65 and 10 months
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 or later
Factors to consider
When deciding if you want to take money from your Social Security, there are many factors to consider. Taking money out too soon could mean settling for lower monthly payments.
1. Your instant cash needs. If you are financially sound without the help of social security then it is better to leave your social security and gain 8% interest per year until you have to start taking it. If you are just making ends meet with the help of a social security check, postponing retirement till you meet your full requirement age, is a better option.
2. Your life expectancy and break even age. If you take your social security before your full time retirement age, you will be receiving a lower payment each month for a longer period of time. The alternative is taking social security later and receiving fewer larger checks.
Calculate your break even age to plan when the best time to apply for your benefits in order to optimize your benefits.
Monthly Social Security benefits
62 vs. 66
Between 77 and 78
62 vs. 70
Between 80 and 81
66 vs. 70
Between 83 and 84
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