About to take Social Security? Read this first

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You can decide to start your Social Security retirement benefit at any time after age 62, but there are a few things you should know first. In order to make the best decision for yourself and your family, you need to know how much money you can expect at different ages, whether it might be smarter to delay benefits, and what you can do if you change your mind about your decision to claim Social Security.

How much will your Social Security retirement benefit be?

One of the most important things to know before you claim Social Security is how big you can expect your retirement benefit to be.

The Social Security Administration calculates your retirement benefits by examining your earnings from every year you worked up to the maximum taxable amount for Social Security, indexing the amounts for inflation, and then taking an average of the 35 highest-earning years. For example, say you earned $40,000 in 1994. The inflation multiplier for this year is 1.94, so a total income of $77,600 would be used for this year when computing your 35-year average.

The average is then divided by 12 to arrive at your average monthly Social Security earnings. Then your monthly retirement benefit is found by adding up the following:

  • 90% of the first $856 of your average monthly Social Security earnings
  • 32% of earnings from $856 to $5,157
  • 15% of earnings beyond $5,157

For example, if your average indexed monthly earnings are $3,000, then you would calculate your retirement benefit as follows:

(90% of $856) + (32% of $2,144) = $770.40 + $686.08 = $1,456.48

The Social Security Administration publishes a worksheet that can help you calculate your benefit, and you can find out how much you earned each year by creating an account on the SSA's website and viewing your earnings history.

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25 Social Security facts & figures you need to see
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25 Social Security facts & figures you need to see

1. 60.66 million

As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.

(Caroline Purser via Getty Images)

2. 5.44 million

Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015. 

(ImagesBazaar via Getty Images)

3. $1,300

It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.

4. 96%

Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.

5. 90%

To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.

6. 55%

An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.

7. 32%

According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing. 

8. 81%

Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.

9. 61%

Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.

10. $920.2 billion

The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.

11. 12.4%

Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.

12. $127,200

There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.

13. $1,351.70

The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W. 

14. 0.3%

Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.

15. 33 out of 35 years

One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.

16. $2,687

Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.

17. 60%

Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.

19. 2.8-to-1

As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...

20. The year 2020

Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.

21. The year 2034

Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.

22. 2.66%

Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.

23. 56%

It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.

24. 51%

According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.

25. 28%

Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.

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Early or late retirement

The method I just discussed calculates your Social Security benefit if you retire at full retirement age. Depending on the year you were born, your full retirement age will be somewhere between 66 and 67:

Year You Were Born

Your Full Retirement Age

1954 or earlier

66 years

1955

66 years, 2 months

1956

66 years, 4 months

1957

66 years, 6 months

1958

66 years, 8 months

1959

66 years, 10 months

1960 or later

67 years

Source: Social Security Administration.

Regardless of your full retirement age, you can choose to claim your benefit as early as age 62 or as late as age 70. Keep in mind that your benefit will be permanently reduced if you retire before your full retirement age, and it will be permanently increased if you retire later.

Here's how much your benefit will change based on how early or late you claim Social Security:

If you retire...

Change in Benefit per Year

Change in Benefit per Month

Early, up to 36 months

(6.67%)

(5/9 of 1%)

Early, beyond 36 months

(5%)

(5/12 of 1%)

Late, up to age 70

(8%)

(2/3 of 1%)

Source: Social Security Administration.

As an example, let's say that your full retirement age is 67 and you decide to take your benefit at 63. Because this is four years early, your benefit would be permanently reduced by 6.67% for the first three years and an additional 5% for the fourth -- a total permanent reduction of 25%. Think about this before you decide to claim early.

What if you change your mind later?

If you claim Social Security and later regret doing so, then you may be able to reverse your decision. The Social Security Administration gives early filers the ability to withdraw their application within one year of claiming a benefit.

This do-over can only be used once, and to use it, you'll need to pay back any money you've received from Social Security. If anyone else (such as a spouse or dependent) also draws a benefit on your work record, then he or she will need to agree to the withdrawal, as it will eliminate their ability to collect a benefit as well.

If you want more information about what to do if you change your mind, here's a great discussion by my colleague Todd Campbell.

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5 Social Security rules you should know by heart
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5 Social Security rules you should know by heart

1. It takes 10 years of work to earn the right to Social Security retirement benefits. 

Eligibility for retirement benefits requires that you earn 40 work credits under the Social Security system. You can earn up to four credits per year, and for 2016, you'll get one credit for every $1,260 in earnings.

The rules for Social Security disability benefits are different and are based on the age at which you become disabled. In general, the earlier in your career you become disabled, the fewer work credits it takes to get disability benefits. However, it never takes more than the 40 credits needed for retirement benefits.

(Thomas Barwick via Getty Images)

2. Most spouses and some ex-spouses can file for spousal Social Security benefits. 

In general, spouses of eligible workers are entitled to spousal Social Security benefits. If you've been married for a year or more, then you can qualify for spousal benefits. In addition, parents of minor children can claim spousal benefits on each other's work histories regardless of length of marriage.

For ex-spouses, the rules are different. Only if your marriage lasted 10 years or longer can you claim benefits on an ex-spouse's work history. In addition, if you've remarried, then you forfeit the right to claim spousal benefits.

(Jose Luis Pelaez via Getty Images)

3. Most people can apply for benefits at age 62. 

The general rule for retirees is that the earliest age you can file for benefits is 62. But some people can apply earlier. Spouses can get spousal benefits regardless of age if they are caring for a child who receives benefits either because the child is under age 18, in high school and 19 or younger, or disabled. Widows and widowers can claim survivor benefits at age 60, with an option to claim as early as age 50 if the surviving spouse is disabled.

In general, you can only apply a few months in advance for benefits. The Social Security Administration won't accept applications more than four months before the date when you want benefits to start.

(ViewStock via Getty Images)

4. Social Security considers your best 35 years of work history.
In calculating benefits, Social Security looks at the entirety of your career, choosing the 35 highest-earning years after adjusting for inflation over the course of your work history. That means that in contrast to the way some public pensions work, earlier low-paying years can play an equally important role in determining your benefit as recent high-paying years.

For those who haven't worked a 35-year career, staying in a job longer can have a measurable impact on benefits. Even if you already have 35 years of work, staying in a high-paying job an extra year can replace an earlier low-earning year -- again depending on how inflation has behaved in the interim.

(Jupiterimages via Getty Images)

5. Social Security rules can change at a moment's notice.
Understanding Social Security is hard, but even worse is the fact that once you think you have a rule down cold, it can change. Americans found that out late last year, when new changes eliminated the file-and-suspend option and restricted application strategy for most future participants.

Because your benefits aren't written in stone, you need to stay aware of potential program changes. That way, you can weigh in with your representatives to ensure that any concerns you might have are heard.

Social Security rules can be hard to follow, but they're important to understand. By knowing these five rules, you can do a better job of managing your retirement finances.

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What's the future of Social Security?

You may have heard that Social Security isn't in the best financial shape, and that's true. While Social Security has nearly $3 trillion in cash reserves right now, the system is expected to start running at a deficit in a few years, and its spare cash is projected to run out in 2034. After this time, there will be enough money flowing in from tax revenue to cover about three-quarters of promised benefits.

The point is that something will need to change to fix the system, and it will likely take one of two forms: benefit cuts or tax increases. Benefit cuts are widely unpopular, and the majority of Americans of all income levels, age groups, and political affiliations are in favor or preserving Social Security benefits, even if it means increasing taxes. So don't be surprised if the payroll tax or Social Security tax wage limit increases in the coming years.

You can read more about the potential ways to fix Social Security here, but the bottom line is that something is likely to change within the next several years.

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