Ultimate Overview of Social Security
When it comes to retirement, calculating what you need to live out the rest of your years comfortably can be confusing. However, with approximately 65 percent of Americans ill-prepared for their golden years, it's become more than clear that advance planning is a must. Knowing how Social Security works and how it benefits you come retirement age can help you determine how much you need to save.
Social Security is not just for retirement, though. There are other circumstances — such as disability and being a surviving spouse or minor child — where people can collect benefit checks.
What Is Social Security?
Originally established in 1935 as a means of providing a financial safety net for lower-income citizens in the Depression era, Social Security is a government program designed to help retirees, disabled people and surviving dependents. The benefits are available to those who have paid into them, as long as they meet certain criteria as outlined on the Social Security website.
How Are Social Security Payments Collected?
Social Security payments are deducted from your paycheck each pay period and listed as FICA on your stubs. However, the amount you pay into FICA is limited each year. If you earn more than $132,900 in 2019, you will only pay FICA up to this amount. Subsequent paychecks will not have this deduction.
Who Is Eligible to Receive Social Security Payments?
Most US citizens, at some point in time, will be eligible to receive Social Security benefit payments. They typically fall into one of three categories, though over their lifespan, they may come to qualify for more than one. These three categories include:
- People who become disabled and are no longer able to work
- Spouses and eligible family members of a deceased person
Each of the criteria for these groups is different. For example, retirees have to meet a specific age requirement. Those who become disabled must meet stringent criteria and provide proof of disability, while spouses and eligible family members of a deceased person have to notify Social Security of the death and meet qualifying situations to receive benefits. Each of these situations is explained in further detail below.
How Are Your Social Security Benefits Calculated?
There are several factors that go into calculating your benefit check, but the determinant factor is how much you earn over your lifetime. They take the highest paid 35 years of your career and average it out. This number, as well as your age, get put into a formula that calculates the amount of your monthly benefit.
If you do not have 35 years of income, they will offset the missing years with $0 for each year and thus, bring down your overall average. The more years you're missing, the lower your benefit check will be. If you worked more than 35 years, only the 35 highest paid years are counted to give you the best average.
Social Security for Retirement
Making the decision to stop working is one that requires a lot of advance planning. You'll need to make financial decisions such as whether or not to sell your home and move to another state, and you'll need to know what's available in your retirement plans and through Social Security.
To qualify for these benefits in retirement, you have to earn at least 40 points spread across your career. To earn a point in 2019, you have to earn at least $1,360 in that calendar year. You can earn up to a maximum of 4 points in a single year. In 2019, you can earn these 4 credits if you make at least $5,440 by the end of the year.
What Is the Retirement Age for Social Security?
The retirement age for Social Security depends on the year you were born. For example, those born in or before 1937 met the retirement age when they turned 65. For anyone born between 1938 and 1942, the retirement age was 65 and a specific number of months depending on their birth year. People born between 1943 and 1954 were able to retire at some point during their 66th year. Finally, those born in 1960 or later have to wait until they're 67 years of age to reach full retirement age.
Can You Collect Social Security Earlier Than Retirement Age?
Yes, you can definitely take your Social Security benefits earlier than your retirement age. However, the earliest you can take it is age 62.
It's worth noting that if you decide to take it early because of hardship or because you're no longer able to work, you'll end up paying a penalty in the form of reduced benefits. The penalty increases for each year you take it early. For example, if your retirement age is 67, taking your benefits at age 66 will reduce the overall amount by 6.7 percent, but taking them at age 62 will reduce your benefits by 30 percent.
When you take your benefits early, the reduction affects your benefits for the rest of your life. This means you won't be eligible for full benefits when you turn 67, so be very careful about making the decision to cash in on them early and only do it if you have no other option.
There is an exception to this rule, however, and that's if you decide to keep working while withdrawing your benefits. Should you choose to do this, you will receive a reduction in your benefits if you earn over the income limits set forth. The good news is if you're penalized, it's only temporary that amount will be added back into your checks once you hit the full retirement age.
Are There Limits on How Much You Can Earn?
If you choose to continue working while receiving Social Security benefits and you're not of retirement age, you will be restricted to specific income limits or you run the risk of a reduction in benefits. This reduction, as mentioned above, is not permanent.
For 2019, you can earn up to $17,640 for the year without being subject to penalty. Should you exceed this amount, you'll see a reduction in your benefits by $1 for every $2 you earn over the limit. This changes to a $1 reduction for every $3 you earn over the limit when you reach the year in which you're qualified to retire. Once you hit the retirement month, you'll no longer be subject to this penalty.
The circumstances do change if you're a business owner or self-employed, so if you're unsure how working while drawing Social Security will affect you in this instance, it's a good idea to seek the help of a certified financial expert who can help you navigate the complex nature of your benefits.
What Happens if You Work Past Retirement?
On the flip side of the coin, you can also delay your benefits by a few years if you plan to continue working. Your benefit amount will continue to grow while you work, so you have the opportunity to earn a higher payout each month.
This only applies until you reach the age of 70, however, so after this, there is no benefit to waiting. The difference in benefits paid out can be as much as $500 per month if you wait, so it's an option worth considering, especially if you're in good health and can easily withstand three more years in the workforce.
Social Security for Disability
There are two ways that you can receive Social Security disability benefits:
- SSDI program: You're injured, and you've worked and paid Social Security taxes
- SSI program: You're a disabled adult or child with limited income
Each program operates essentially the same way. Applicants have to meet the same medical requirements and the process for determining the disability is the same.
Qualifying for SSDI
To collect Social Security Disability (SSDI), you have to prove that you not only have a disability but that it's severe in nature and prevents you from working for a period of at least 12 months. The medical condition must be on the agency's approved list.
Qualifying for SSI
Supplemental Security Income (SSI) is a bit different as you do not have to have a work history or to have paid FICA fees. This program is designed to help those who have a disability and low income. It's paid for by general tax revenues and is meant to help people afford shelter, food and clothing.
The program may also be available to those over the age of 65 if they fall within the specified income guidelines. For 2019 the income limits are $1,220 per month.
Can You Earn Money While Collecting Social Security Disability?
Some people who receive disability payments also work while collecting the benefits. However, Social Security has strict guidelines for how much you can earn. For 2019, you cannot earn more than $1,220 per month to be considered disabled. Once you reach this amount, if you're collecting benefits, they will stop.
Social Security for Survivors
Sometimes life doesn't always pan out the way you think it would, and you may find yourself in a tough spot as the survivor of a primary wage earner. Survivors don't only include spouses, they include minor children as well. These benefits can help reduce the financial burden that's left when the income suddenly stops.
To qualify for survivor benefits, it's necessary that the worker earned enough credits. However, they do not have to have the 40 total credits in order for a survivor to be eligible.
Social Security requires that the deceased person have a minimum of 6 credits before you can be considered for survivor benefits. You also have to meet other criteria, including one of the following:
- Be a surviving spouse who is at least age 60, or 50 if you're disabled
Be a surviving spouse of any age who is caring for a child of the deceased who is younger than 16
- Child may also be receiving benefits under the deceased's record if he/she is disabled
Be an unmarried child who is younger than 19 if in school, 18 if not in school
- You can be 18 or older and still qualify if you're disabled with a disability that occurred before the age of 22
- Be a divorced spouse who was married to the deceased person for a minimum of 10 years and is not remarried (unless you remarried past the age of 50 if disabled; 60 if not disabled)
Some family members may qualify for a death payment of $255 providing that they meet the criteria set forth by Social Security. This payment is made to the surviving spouse on two conditions:
- They were living in the same house at the time of death
- They were living apart and receiving benefits on the deceased's record, or became eligible for these benefits after the deceased passed on
If there is no qualifying spouse, the lump-sum payment can go to the child if they are receiving benefits or became eligible upon the deceased's death.
Finding out when or if you qualify for Social Security payments may be complex, depending on your unique circumstances. You can either seek help at the agency or contact a professional who can walk you through the steps and help you determine which benefits, if any, you qualify for.