Retirement Step 6: Social Security
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. 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 Foolish 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 buy you three things: income in retirement, income for survivors, and income in case you become disabled before you 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 at least 10 years. 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 may receive retirement benefits on or after age 62; the longer you wait to do so, 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 need to 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 in the lap of luxury. If you want to retire in style, you'll need to supplement that income with your own savings.
If you don't know how much you can expect from Social Security, you may devote more than you need to retirement savings, thus needlessly decreasing amounts available for other areas of your life today. 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 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. All that information is very Foolish data indeed.
How do you get this data?
You should get a statement automatically, approximately three months before your birthday. If you don't, contact the Social Security Administration and ask for Form SSA-7004, Request for Social Security Statement. Or you can visit the Social Security Administration and make your request online.
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'll simply need to send in a copy of the Form W-2 you received for the year in question to get the error fixed. Sometimes it takes more effort to fix the mistake. Regardless, 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 8% to 12% for each year those checks are postponed, up until age 70. (After that, delaying doesn't result in bigger checks.) Conventional wisdom used to be, "Take the money ASAP!" However, given lengthening life expectancies and inadequate savings, many experts now recommend delaying Social Security (and perhaps retirement itself) in order to get the most 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.
To learn more about this crucial decision, take a free 30-day trial to Rule Your Retirement, which features regular articles on the topic, as well as the "Maximize Your Social Security" special report.
Meanwhile, let's move on to Step 7: figuring out your second career.