Social Security
Social Security is designed to provide retirement support for American workers who pay into the system. It is funded through FICA taxes (Federal Insurance Contributions Act). You can collect Social Security once you reach a certain age or become disabled. You may also be able to collect survivor benefits if you're the spouse or child of a recipient who has passed away.
In order to be eligible for Social Security benefits, you must earn enough "credits" during your working years. These credits will count toward your future eligibility even if you switch jobs or take a break from the workforce. The dollar amount needed to earn one credit is usually raised annually. If you were born in 1929 or later, you need 40 credits, or 10 years of work, to qualify for retirement benefits. You typically need fewer credits to obtain disability benefits.
When should I take Social Security? Even if you've accumulated your 40 credits, you can't claim retirement benefits until you're 62 or older. The longer you wait to start collecting benefits, the larger the payout will be. If you wait to claim Social Security until you reach your "full retirement age" -- which is determined by the SSA and is 67 if you were born in 1960 or later -- then you'll receive your "primary benefit amount," which is the full monthly benefit you're entitled to based on your earnings record. The earlier you claim your Social Security benefits, the lower your monthly payment will be.
Example: If your full retirement age is 67 and you opt to claim benefits at age 62, then you'll get just 70% of your primary insurance amount. If you begin collecting at 65, you'll get 86.7% of your monthly benefit. On the flip side, you can earn delayed-retirement credits for waiting past your full retirement age. For every extra year you wait to claim Social Security benefits, your eventual payout will increase by 8%. Your benefits max out at age 70, though, so there's no reason to delay benefits beyond that point.
How much will my benefit be? Your Social Security retirement benefits will depend on how much money you earned during your working years and your age at the time you start collecting benefits. Similarly, your Social Security disability benefits are based on your eligible lifetime average earnings.
The Social Security Administration sends out annual benefit statements to those who are 60 and older who aren’t yet receiving Social Security benefits. You can also use the Social Security online benefits calculator to estimate your monthly benefits. Keep in mind that the younger you are, the less accurate your estimate is likely to be, since your future earnings could affect your overall payout.
Your Social Security benefits are only designed to replace about 40% of your pre-retirement income. Common practice estimates you'll need 70% to 80% of your pre-retirement income to live comfortably in retirement, so you have to take steps to bridge that 30% gap (or an even larger gap depending upon your lifestyle). That means you'll need to create supplemental streams of retirement income.
Will Social Security even be around by the time I retire? According to the Social Security Administration's latest report, the combined funds used to pay retirement and disability benefits are likely to be depleted by 2034. The report also states that once those funds are gone, ongoing taxes should be sufficient to pay about 79% of benefits. Still, with the future of Social Security on relatively shaky ground, if you're nowhere close to retirement at this point, your best bet is to take matters into your own hands. Save aggressively, invest wisely, and think of your Social Security benefits as an added bonus. This way, you're less likely to be thrown for a financial loop if they don't end up coming through.
Click here to visit the Social Security Administration website