For most Americans, social security is an afterthought. Other than the fact that it’s automatically deducted from your check each pay period, most do not understand how social security works.
For some, Social security may be the primary source of income when entering into retirement. There are many factors that determine how much social security income you will get, the date it’s paid out, and how often you will receive benefits and for how long.
Let’s take a quick look at some of the most common questions concerning social security income and how it will affect you during retirement.
How Social Security Works
Let’s start at the basics. Social Security operates as a pool of funds that every tax-paying citizen pays into each month. The payments are deducted out of your paycheck automatically based on a percentage of your income.
Listed on your paycheck as a FICA (Federal Insurance Contributors Act). This is a 12.4% tax on your earnings. Don’t worry just yet… you only pay 6.2% of this tax, and your employer pays the other 6.2% on your behalf.
Those who are self-employed often wonder if they too will qualify for social security income when they’re older. The answer is simple- did you pay the FICA tax each month?
Self-employed or 1099 contract workers are also required to pay their taxes each month, so if they are not specifying the amount that should go to the SSA, then they may find themselves in a dire situation should they need this source of retirement income when they retire.
There is a limit on how much we pay into social security, as it is capped. Currently the maximum taxable earnings are $127,200. This tax is what funds social security.
Who Collects Social Security?
Social security is collected by those who have reached retirement age and have filed to receive social security benefits. Should you become disabled and unable to work, you can also file to collect benefits earlier than retirement age.
The requirements that the social security administration has for labeling someone as disabled are incredibly rigorous to help prevent any social security fraud. Not only must you apply for disability status, but you must also prove that you are disabled to receive benefits.
Another grouping of people who can apply to receive benefits are spouses of those who are deceased (and their dependents). You may claim what is known as survivor benefits.
For most Americans, you cannot claim any benefits until you are 62 or older. Should you decide to wait a few more years before retiring, you may find yourself in a position to receive more benefits when it comes time to payout.
You will max out your benefits payout when you reach 70, so once you hit that milestone, there is no longer any benefit to waiting. One interesting study by Gallop polls shows that at least 31% of workers plan on staying in the workforce until they are 70 to help them claim maximum social security benefits.
When Will I Get My Social Security Income?
If you meet all of the other requirements such as age, work status, etc. and you’ve filed all of the appropriate paperwork, you may now be wondering when you will start getting your check.
The earliest you can apply for social security benefits is at age 61 years and nine months. Once you have applied, it will take approximately four months until you receive your first social security check. It will arrive the month after your birthday.
From that point forward, you will receive your check once a month, and the date it’s received is all dependent on your date of birth. For example:
- If you were born on the 1st – 10th of the month, your check will arrive on the 2nd Wednesday of the month.
- If you were born on the 11th-20th of the month, your check will arrive on the 3rd Wednesday of the month.
- If you were born on the 21st-31st of the month, you will receive your check on the 4th Wednesday of the month.
How Do I Calculate Benefits Earnings?
The amount of your social security is based on a credit system. As you pay into your FICA, you earn one credit for every $1,360.00 you make, and each American is eligible for up to four credits in a calendar year.
To be eligible for social security, you must have earned 40 credits throughout your lifetime, which equates to about ten years of work.
There are different requirements for those who are collecting on social security disability. It’s best to contact your local social security administration office or your financial adviser, should you need any information regarding specific situations that are out of the ordinary.
Does a 401(k) Affect Social Security?
The short answer is no—not exactly. Having a retirement account won’t affect the amount that you receive each month; however, it can cause you to have to pay taxes on your benefits.
Your 401(k) is money that you have already paid taxes into social security on that money before investing it. Should you find yourself on the cusp of retirement, it’s best to set up an appointment with your financial adviser to review all of your assets before making any significant decisions.
Better yet, contact us for a complimentary consultation review of your social security benefits.
It’s All About Security
Social security is all about financial security. Yet, it is only one part of a much larger picture. To understand where you stand financially, you need to know how social security works and how it applies to your unique situation.
Cost of living fluctuations, a lack of social security income raises, and the threat of social security running out are all issues to be aware of. These reasons are prime examples of why social security should not be your only source of income when you reach retirement age.
Your best course of action is to plan and work with a qualified financial expert to help you create a blueprint that works for you.
For more details on social security or other financial planning topics, explore our website for more information.