Understanding Social Security

Social Security can be a critical part of your retirement income. It’s important to know how it works and what you need to consider when it’s time to claim your benefits.

Funding Social Security

You contribute 6.2% of your pay to fund Social Security, and your employer contributes the same amount on your behalf. You’ll see this contribution on your pay stub as FICA, which is the acronym for the Federal Insurance Contributions Act.

Social Security benefit criteria

Your benefit is based on how much you earn and when you retire. For each $1,300 in earnings in 2017, you earn one credit. You can earn a maximum of four credits each year, and you need 40 credits to qualify for retirement benefits. The calculation is based on your highest-earning 35 years. Your spouse or dependents also may be able to claim based on your work history.

Full retirement age (FRA) varies, depending on the year you were born. It can range from 65 for people born in 1937 or earlier to 67 for those born in 1960 or later.

Timing your claim

You can start claiming benefits at age 62, but consider the pros and cons. If you claim prior to your full retirement age, your monthly benefit will be permanently decreased. The exact amount will depend on how early you claim, but the maximum reduction is 25%.

If you delay past your FRA, your annual benefit will increase by 7% to 8% each year, up to a maximum of 32%. For example, if your FRA is 66 and you wait until age 70, you’ll receive 132% of your annual benefit for the rest of your life, in addition to annual cost of living increases.

Once you make your initial claim, you can revise your claiming strategy only once, and it must be done within 12 months.

Average benefit doesn’t cover expenses

The average monthly Social Security benefit is about $1,360 before taxes.1 Is that enough to fund your future? To increase the likelihood that you’ll enjoy the retirement you envision, it’s important to have additional sources of income, such as savings in your workplace retirement plan.

Social Security and taxes

Up to 85% of your Social Security benefit may be subject to taxes. The rules of some retirement plans require you to start drawing down your savings once you reach age 70½. Carefully consider your withdrawal strategy, as this income may bump you into a higher tax bracket or expose more of your Social Security benefit to taxes.

Talk with a professional

Given the importance of these decisions, you may want to talk with financial and tax professionals before you file your claim. Find more details at SocialSecurity.gov.
 

1SSA Fact Sheet, www.ssa.gov/news/press/factsheets/colafacts2017.pdf.