Most retirees depend on social security. One in four people receives 90% of their retirement income from the plan. About half depend on it for 50% of their income.
Although Social Security is only part of a secure retirement plan, it gives you a rough idea of how much you can expect. If you qualify for Social Security, your monthly benefit is based on two factors:
How much money have you earned during your career?
The age you chose to start receiving payments
Let's see how each of them will affect your future income from Social Security.
Are you entitled to social security?
To qualify for the Social Security benefits, you must earn at least 40 credits during your career. The way these credits are calculated is complex, but you'll likely qualify if you've worked for at least 10 years.
You may qualify for a spousal benefit because of your partner's work history. You may be eligible if your spouse, ex-spouse, or deceased spouse has earned 40 credits. The Social Security Administration (SSA) provides more information on this option.
But your work history isn't just used as part of the qualification criteria; it is also used to calculate the payment amount. When calculating your monthly retirement benefit, the SSA considers the 35 years of your highest-earning work history. If you worked under 35, the SSA would use zero for a few years.
The higher your income during those 35 years, the higher your contribution to the program through FICA taxes and the higher your benefits.
The same limit applies to your earnings and benefits; this amount is $142,800 for the 2021 tax year and $147,000 for the 2022 tax year.
When will you collect it?
The SSA calculates the benefit amount at full retirement age. It depends on the year of your birth. Full retirement age by birth year is:
1943-1954: 66 years old
1955: 66 years and two months
1956: 66 years and four months
1957: 66 years and six months
1958: 66 years and eight months
1959: 66 years and 10 months
1960 and later: 67 years old
The monthly figure you are eligible to receive in full retirement age is your total benefit, not your minimum or maximum benefit.
You have the option of applying for early retirement from the age of 62. However, you can choose to delay benefit payments until age 70.
There are many reasons why you may choose to retire early or delay it. This choice has a direct impact on the amount of your monthly payment. If you retire early, choose a lower monthly rate for the rest of your life. You are guaranteed an increase by choosing to defer your benefit at any age between full retirement age and 70; you lock in an increase.
An example
Let's say you were born in 1965. Your full retirement age is 67 years old. If you retire in 2032, you will receive the full benefit. However, if you retire at age 62, you will only receive 70% of this amount in 2027.
If you were born on the first of the month, SSA calculates your benefits as if you were born the previous month.
For this example, let's assume you earn the median annual salary of US workers based on the most recent SSA data. This would bring your salary to $53,383.18 per year.
Using the SSA's calculator, you'll see that the full retirement age withdrawal in 2032 will entitle you to $1,776 per month. However, retiring at age 62 in 2027 would bring in $1,178 per month. If you have deferred payments until age 70, you'll get $2,249 a month, nearly double what you'd get if you retired early.
Although your salary increases each year during retirement due to the annual cost of living allowances, these increases are still based on the amount from the previous year. So when you get a small benefit, all future payments will be lower.
How to calculate your social security benefit
Calculating your estimated Social Security benefits is not an easy task. Your best option may be to request a Social Security Benefits Estimate (Form SSA-7004) from the SSA. It will contain an estimate of your benefit at age 62 based on your full retirement age and at age 70 based on your current work history.
In addition to these estimates, the SSA has several Social Security benefits calculators that can help you plan for retirement. You can also talk to a tax professional to help you estimate the best age to claim your benefits.
Frequently Asked Questions (FAQ)
What happens to unused social security benefits?
Any benefits you don't receive while you're alive will go into Social Security trust funds, which are used to pay all Social Security beneficiaries.
What income reduces Social Security benefits?
Suppose you start collecting Social Security benefits before you reach full retirement age. In that case, any income you earn above the annual threshold by reaching full retirement age will reduce your eligibility for benefits for that year. For 2021, if you are retired and have not reached full retirement age, SSA will deduct $1 from your benefits for every $2 you earn over $18,960. When you reach full retirement age, SSA will deduct $1 for every $3 you earn above $50,520. These limits are slightly higher for the 2022 tax year, at $19,560 and $51,960, respectively.
How can I increase my Social Security benefits after retirement?
Don't start receiving Social Security payments to increase your monthly allowance when you reach full retirement age. The longer you wait, the more you earn each month. To get the maximum Social Security benefits each month, you should wait until age 70 or retire.
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