An interesting paradox with Social Security is that people count on it being there for retirement, but yet very few of them understand how it works or what the benefits are based on.
I cannot think of another income source that is so loosely managed on the individual level. With that in mind here are 10 facts every American should know about Social Security and retirement…
1. Your Social Security retirement checks do not begin magically appearing in your bank account when you reach retirement age. If you do not apply for them you will never receive a single dime from the Social Security Administration (SSA).
2. In 2011, the SSA discontinued sending annual earnings statements. They later revised this policy change due to public outcry. Statements are now available online.
3. A major downside to the lack of annual statements is the fact that errors in your Social Security record must be corrected within 3 years. Correcting mistakes beyond the 3 year statue of limitations requires a special investigation.
4. In 2014, if you work and receive benefits prior to Full Retirement Age (FRA) the SSA will withhold $1 for every $2 you earn over $15,480. Now after Full Retirement Age, you may work as much as you want with no reduction in benefits beyond standard taxable rates.
5. It is possible to increase your retirement benefit by postponing collection of benefits while continuing to work beyond FRA. The additional work earnings add to your lifetime benefits and you receive a 5/8 of 1% for each month you delay benefits, which equals 8% per year.
6. The year you were born determines your Full Retirement Age. For example, if you were born in 1947, your FRA is 66, but those born in 1960 or later are not eligible until age 67.
7. Social Security disability benefits are automatically converted to retirement benefits after you reach Full Retirement Age.
8. If you take benefits at age 62 (early retirement) you will receive a reduction of about 25% in monthly benefits compared to what you would receive at FRA. This reduction is in addition to any withholdings that result from earning more than the $15,480 earnings cap.
9. Everyone needs 40 quarters of coverage to be eligible for retirement benefits and premium free hospital insurance of Medicare. In 2014 you earn a quarter of coverage for every $1,200 of wages or net profit you earn.
10. The way Social Security benefit amounts are calculated, low wage workers get a higher return than highly paid workers. For example, a low wage worker might earn a Social Security benefit equal to 50% of their pre-retirement income. The average replacement rate for highly paid workers is about 25 percent.
Always remember that the SSA assumes you have researched all your options before filing. Get the most out of your benefit entitlement with my Social Security Retirement Guide.