Social Security is important to millions of Americans, yet there are many things about Social Security benefits that aren't understood by many people. Five important questions you should know the answers to include:
- Am I eligible for retirement and disability benefits?
- How much will my Social Security benefit be?
- Should I retire early?
- Can I work while collecting Social Security?
- What are spousal benefits?
Am I eligible for retirement and disability benefits?
The short answer is that you'll be eligible for a Social Security retirement benefit after working for 10 years with earnings of at least $5,040 per year, indexed for inflation.
To be specific, you'll need to earn at least 40 Social Security "credits" during your working life. As of 2016, one credit is awarded for every $1,260 in earnings, but there is a maximum of four credits per year. So, no matter how much you earn, you'll need at least 10 years of work to qualify.
Having said that, there are a few things you should know. First, the requirements for other Social Security programs, such as disability insurance and survivors benefits, have different credit requirements. For example, if you become disabled five years into your career, there's no way you'll have earned 40 credits, so less are required in cases like this.
Also, be aware that Social Security is based on your highest 35 years of inflation-adjusted earnings. So, while you can be eligible for Social Security after just 10 years of work, if you have fewer than 35 total years of Social Security earnings, there will be zeros averaged into the formula when calculating your benefit.
How much will my Social Security benefit be?
Your Social Security benefit is based on three main factors: your earnings history, your normal (full) retirement age, and the age at which you start collecting benefits.
As I mentioned, your Social Security benefit is based on your highest 35 years of inflation-adjusted earnings, capped by annual limits. These amounts are then averaged to determine your monthly earnings throughout your working life. Then, a formula is applied to determine your monthly benefit:
- 90% of the first $856 of average monthly earnings
- 32% of the amount greater than $856 but less than $5,157
- 15% of the amount above $5,157
This determines your primary insurance amount (PIA), which is your benefit if you file at your full retirement age. The current full retirement age is 66, and it will gradually increase to 67 for individuals born after 1954. Here's an article that can help you determine your full retirement age.
If you're a few years or more away from retirement, you can get an estimate of what your benefit will be by creating an account at www.ssa.gov and viewing your latest Social Security statement, which contains this and other useful estimates and information.
Should I retire early?
The third factor used in determining your monthly benefit is the age at which you file. Basically, your benefit will be permanently reduced if you file before your full retirement age, and it will be increased if you file later. When it comes to early or late retirement, there are two basic rules to know:
If you start collecting benefits early, it will result in a reduction of 6.67% per year for up to three years before your full retirement age. Beyond three years, your benefit will be further reduced by 5% per year. If you file a fractional year (e.g., two years and five months) before your full retirement age, these reduction rates will be prorated on a monthly basis.
On the other hand, if you choose to wait beyond your full retirement age, your benefit will be increased by 8% for every year you delay retirement, until as late as age 70.
Can I work while collecting Social Security?
The short answer is "yes," but your benefits can be reduced if you earn more than a certain amount before you reach full retirement age. Known as the Social Security "earnings test," for the purposes of work-related benefit reductions, there are three categories of retirees.
- If you are 62 or older, and will attain full retirement age after 2016, $15,720 in earnings are exempt. Beyond that amount, your benefit will be reduced by $1 for every $2 in excess earnings.
- If you will attain full retirement age in 2016, but haven't yet, your first $41,880 in earnings are exempt, and every $3 beyond that will result in a $1 reduction. In this category, only earnings in the months before attaining full retirement age are considered.
- If you have already reached your full retirement age, you can collect your entire monthly benefit, no matter how much you earn.
It's important to mention that an earnings-related reduction can increase your benefit once you reach full retirement age, so it's not completely lost.
What are spousal benefits?
There is a feature of Social Security known as spousal benefits that is designed to provide retirement income to retirees who either didn't work or earned substantially less than their spouses did.
The simplified explanation is that spousal benefits can be worth up to one-half of the primary earner's full retirement benefit. When applying for retirement benefits, the Social Security Administration will calculate your own benefit first. If it is less than half of your spouse's benefit, a spousal benefit will be given to make up the difference.
For example, let's say that you're entitled to a Social Security retirement benefit of $2,000 per month. Your spouse, who was a stay-at-home parent for most of their adult life, only worked part-time and is entitled to a $600 monthly benefit based on their own work record. However, since half of the primary earner's benefit would be $1,000, a $400 spousal benefit will be added to make up the difference.
Just like regular Social Security retirement benefits, spouses must be 62 or older to claim a benefit, and it will be reduced if they have not yet reached full retirement age, although there is no increase given for waiting to collect a spousal benefit beyond full retirement age.
There's a lot more to Social Security...
These are certainly five important questions to ask, but they aren't the only things you should know about Social Security. For example, you should know that some of your benefits may be taxable and that Social Security could change significantly in the future. Just like anything else involved with retirement, what you know about Social Security will help you make the best decisions for you and your family.