Retirement Step 6: Social Security
This article was updated on Dec. 30, 2015.
Social Security? Yeah, right. By the time we need it, it won't even exist.
Many people under 50 believe that. The younger they are, the stronger their belief. But we Fools respectfully disagree, given the prevalence of retirement-age voters and our elected officials' keen attention to such powerful voting blocs. We think Social Security is here to stay -- though the future system will almost surely give recipients less than it does today.
Because Social Security will still play a key role in our retirement, it's wise to understand today's system and keep an eye on its future evolution. When it comes to planning for retirement, every bit of knowledge helps.
How FICA funds Social Security
With few exceptions, wage earners today see FICA (Federal Insurance Contributions Act) take a 7.65% bite out of every paycheck. Self-employed workers hand over twice that amount. These involuntary "contributions" are really taxes that go toward Social Security (6.2%) and Medicare (1.45%). (We'll look at Medicare in Step 12.) What does this "contribution" get you?
Basically, the taxes you pay for Social Security provide Americans with three things: income in retirement, income for survivors of Social Security beneficiaries, and income for those who become disabled before they are eligible to retire. You must work and pay into the system to be eligible to receive these benefits. Generally, to qualify for full benefits, you need to work for at least 10 years, though there are plenty of exceptions. The size of the benefit is based on your earnings and the number of years you have paid into the system.
What Social Security gives you
You're eligible for retirement benefits when you reach age 62, and the longer you wait to claim them (up until age 70), the higher that income will be. Your spouse -- and, in some cases, your dependent children -- may also receive a benefit when you retire. If you die before or after retirement, a survivor's benefit may provide income to your spouse, dependent children, and even parents, depending on their age and work status. Become disabled, and you, your spouse, and your dependent children may also receive disability income based on your work record up to the point of disability.
In and of themselves, each of these benefits is a valuable asset. They provide income protection to our families during and after our working careers. But how much protection? Your annual Social Security Statement (SSS) can help you determine how much you should set aside today to supplement Social Security in retirement. Remember, the system was designed to provide for minimum income needs in retirement, not a life of luxury. If you want to retire in style, then your own savings will have to do the heavy lifting; Social Security is more of an added bonus.
If you don't know how much you can expect from Social Security, then you may devote more than you need to retirement savings. The SSS will show you how much you can expect to receive if you elect to retire at age 62, your normal retirement age (between 65 and 67, depending on your birth date), or 70.
Additionally, it will show you the earnings credited to your Social Security account for each year you have paid into the system, how much you would receive if you became disabled, and how much survivors would receive if you died.
How do you get this data?
You should get a statement automatically, approximately three months before your birthday. If you don't, then you can send the Social Security Administration a completed Form SSA-7004, "Request for Social Security Statement." Or you can create a my Social Security account and make your request online. (And we recommend you create an account regardless, as it's useful in many ways.)
When the statement arrives, look at it closely. See an error in your reported earnings? It could affect your benefit, so contact the SSA immediately to see how it can be corrected. Often, you simply need to send in a copy of the Form W-2 you received for the year in question. Sometimes it takes more effort to fix the mistake. Regardless, in order to ensure all data is correct, you must take prompt action.
Once you reach your 60s, you'll have to make a big decision: Take Social Security at age 62, and receive a permanently reduced benefit, or delay taking Social Security, which will increase the benefit by as much as 8% for each year those checks are postponed, up to age 70. (After that, delaying doesn't result in bigger checks.) Conventional wisdom used to be "Take the money ASAP!" However, given our rising life expectancies and inadequate savings, many experts now recommend delaying Social Security (and perhaps retirement itself) in order to get as much help as possible from Uncle Sam. You'll have to run the numbers yourself, factoring in your other resources, how a surviving spouse would be affected by your decision, and your life expectancy.
Now, on to Step 7: a second career.
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