[ad_1] Social Security is confusing, to say the least. This guide tells you how Social Security benefits are calculated and how to maximize your benefits. For most Americans, Social Security is a big piece of your retirement plan. This government-run system is pretty complicated and jargony. Yet future retirees need to understand how benefits are calculated and the intricacies of drawing on Social Security during retirement. Table of Contents Overview of How Social Security Benefits are Calculated Minimums to Qualify Averaging Your Earnings Earning Limits Indexing Your Earnings Find Your Indexed Monthly Earnings Percentage of Income Replaced Cost-of-Living Adjustments When Should You Start Collecting Social Security Benefits Full Retirement Age Taking Benefits Early Taking Benefits Late Can You Work While Receiving Benefits? What if You Retire Before Receiving Benefits? Social Security for Spouses Spousal Benefits Work Together In Case of Death or Divorce So When Should I Take My Benefits? How Much Do You Have Saved? How Long Will You Live? What if You’re Married? If You Keep Working The Future of Social Security Making the Best Choice for You This guide is designed to break down the Social Security system as it relates to you. When you’re finished reading it, you will understand how your Social Security benefits are calculated. You’ll understand when you’ll be eligible to take benefits. We also cover how you might increase your benefits and when you should consider drawing on your Social Security benefits. Overview of How Social Security Benefits are Calculated Let’s start with the most complex part of Social Security: how benefits are calculated. If you know much about Social Security, you probably know that it’s not hard to qualify for benefits. Because the Social Security program was set up to help lower-income workers during and after the Great Depression, the bar to qualify for Social Security is set fairly low. Social Security skews its calculations to help lower-income workers. These individuals likely can’t save for retirement on their own, more than higher-income workers. In other words, a lower-income worker will see a greater percentage of lifetime income returned in Social Security checks. A person making $50,000 a year could count on a bigger benefit check than the person making $25,000 a year. The difference between a person making $50,000 a year and a person making $100,000 a year won’t be as significant. All of this can be confusing. But when we look at the calculations for Social Security benefits, things can clear up. Minimums to Qualify Qualifying for Social Security benefits is based on credits. Credits show that you earned a certain amount of money during your working years. To earn one credit, you need to make $1,000 during a working year. You can earn up to four credits per year (even if you earn tens of thousands of dollars). You need 40 credits over a lifetime to qualify for Social Security benefits. So if you earn at least $4,000 a year and work 10 years, you’ll qualify for Social Security benefits. Now, your credits don’t have anything to do with how much Social Security income you can expect. They’re just the basic bar to cross to ensure that you contributed at least something to the Social Security system. Averaging Your Earnings The amount of your Social Security benefit check is determined by your lifetime income average. The Social Security Administration keeps track of your annual income and Federal Insurance Contribution Act contributions each year you work. You can find all this information on your W-2 forms and other earned-income related forms. When you’re ready to draw on Social Security, the SSA averages your earnings over your 35 highest-paying years of work. Then, the SSA plugs that number, along with your age, into a formula. The formula determines what your monthly Social Security check will be. If you work fewer than 35 years, the SSA fills in the off years with zeros, bringing down your average. So, if you worked 32 years, they’ll add each year’s earnings, plus three zeros and divide the total by 35. If you work more than 35 years, the SSA will use your 35 highest-earning years. This is why it’s good to work at least 35 years before drawing on Social Security benefits. Earnings Limits The Social Security Administration counts all of your taxable earnings each year up to a set limit. In 2017, the maximum taxable earnings ceiling is $127,200, and that ceiling generally increases every tax year, at the discretion of the government. While you’ll still pay income taxes on any earned income over $127,200, you won’t pay FICA taxes on that income. And since you aren’t paying FICA taxes on income over $127,200, any income over that amount won’t count toward your Social Security equation Effectively, contribution limits keep high-income earners from getting overly-large Social Security payouts. Even if you earned $200,000 in 2017, you’d never get credit for more than $127,200 in your Social Security calculation. Each year has its own maximum earnings amount, all the way back to when the Social Security system was started. The goal is to level the playing field, whether you were a major earner in 2017 or 1960. Indexing Your Earnings Before the Social Security Administration averages your 35 years of income, it first indexes those earnings. The index factor turns dollar figures from various years into today’s dollars, helping to control for inflation. Index factors are meant to give a more realistic picture of your earnings. For instance, the index factor from 1967 is 8.24, and that year’s maximum earnings is $6,600. Today, $6,600 wouldn’t be much money, but back then, it was a decent annual wage. How do I know this? Multiply $6,600 by 1967’s index factor, which gives you $60,918–a decent amount of money for an individual to earn in 2017. If you want to calculate your Social Security benefits, you’d need to multiply your annual earnings from each year by that year’s index factor. The closer you get to the current year, the smaller the index factor will be. You
