When someone mentions Social Security, you usually think of retirement benefits. But Social Security may also provide benefits if you become disabled before retirement age, or
to your family when you die.
Many people underestimate how much Social Security benefits can be worth. In fact, benefits have gone up considerably over the decades and could amount to hundreds of thousands
of dollars to you and your loved ones. Individual benefits are tied to your earnings history.
Potential Miscalculations of Benefits
For several reasons, Social Security may not have your correct earnings history.
First, there may be a name problem. If you've married, divorced or otherwise changed your name, you may not have properly notified Social Security.
Second, payroll forms aren't always filled out exactly the same way. You may have sometimes used a full middle name and other times just an initial, or none at all. The safest
way to avoid this problem is to make sure that the name on your employment forms, including the W-2, matches the name on your Social Security card exactly.
Third, a human or machine error may occur. Social Security has to deal with the earnings records of every working person in the country every year. With well over 100 million workers,
it's possible for a digit to be left off (changing $31,000 to $3,100) or for digits to be reversed (making $31,000 shrink to $13,000). Even if Social Security never makes a mistake
with your earnings record, your employer could make one sending it in.
Preventing Benefit Miscalculations
There's an easy way to be sure your earnings history is recorded correctly with the Social Security Administration.
Social Security sends a yearly statement to everyone 25 or older who has worked under Social Security and does not yet receive benefits. Check it for accuracy and its estimate
of your benefits.
Time Limits on Correcting Records
In general, you have until April 15, four years after the year in which earnings or wages were paid to report a correction to Social Security. For example, if your 1999 wages were
reported incorrectly, you must notify Social Security by April 15, 2003. It might be possible to extend the correction period under special circumstances.
Even if you were to qualify for special circumstances, take heed. By 2003 you may not be able to find your 1999 tax records. Or you may be incapacitated. Or a million other things.
Remember, it's your responsibility to make sure Social Security has your correct earnings. What's at stake are benefits you or your family may need later in life. Report mistakes
Determining the Costs of Social Security
When you're working, you must pay Social Security and Medicare taxes. Below are the rates and limits for the current tax year:
Social Security Taxes
Earning Retirement Credits
Employee: 6.20% on a maximum of $80,400 in wages.
Self-employed: 12.4% on a maximum of $80,400 of net earnings.
Employee: 1.45% on all wages. Self-employed: 2.9% on all net earnings.
Social Security has its own credit system as you work and pay Social Security
taxes. Most people earn the maximum four credits per year, and the dollar amount
per credit changes each year. For the year 2001 , for example, you'll receive
one credit for each $830 you earn ($3,320 in the year 2001 will earn the maximum
The number of credits you need to receive retirement benefits depends on your
birthday. If you were born in 1929 or later, you need 40 credits (10 years of
work). You need 39 credits if born in 1928, 38 credits if born in 1927, and so
If you stop working before you have enough credits to qualify for benefits, your
credits will remain on your Social Security record. If you return to work later,
you can add more credits so that you do qualify.
No retirement benefits will be paid unless you have the required number of credits.
Most people will earn many more credits than they need to qualify for Social
Security. These extra credits do not increase the amount of Social Security benefits.
However, the income you earn while working may increase your benefit level.
Tip: If you have less than the required number of lifetime credits (for example,
you have only 36 credits and you were born in 1950), consider working at least
part-time to build up to 40 credits.
Social Security benefits are based on earnings averaged over most of your lifetime.
Your actual earnings are adjusted or "indexed" to account for changes in average
wages over the years. Then Social Security calculates your average monthly indexed
earnings during the 35 years you earned the most. A formula is used to arrive
at your basic benefit, or "primary insurance amount" (PIA). This is the amount
you would receive at your full retirement age, 65 or older, depending on your
date of birth.
Determining Full/Normal Retirement Age
You may think your Social Security retirement age is 65. What many people don't
know is that your Social Security full (normal) retirement age depends on your
date of birth. For people born in 1937, it's 65. For those born in 1938, it's
65 and 2 months. The full retirement age increases gradually until it reaches
67 for people born in 1960 or later. Take a look at the chart below to see when
you'll be at full/normal retirement age.
|Year of Birth
||Full/Normal Retirement Age
|1937 or earlier
||65 and 2 months
||65 and 4 months
||65 and 6 months
||65 and 8 months
||65 and 10 months
||66 and 2 months
||66 and 4 months
||66 and 6 months
||66 and 8 months
||66 and 10 months
|1960 or later
You can start your Social Security benefits as early as age 62, but the benefit
amount you receive will be less than your full retirement benefit.
If you take early retirement and you were born before 1938, your benefits
will be permanently reduced based on the number of months you'll receive checks
before you reach full retirement at 65. If you start collecting benefits at
62, for example, your benefits are reduced about 20%; at age 63, by about 13
1/3%; and at age 64, by about 6 2/3%.
If you take early retirement and you were in 1938 or later, you'll still
be able to take your retirement benefits at age 62, but the reduction in your
benefit amount will be greater because your full retirement age is even later.
For example, if your full retirement age is 67, starting your benefits at 62
reduces your benefits about 30%; at age 63, about 25%; at age 64, about 20%;
at age 65, about 13 1/3%; and at age 66, about 6 2/3%.
According to the Social Security Administration, as a general rule, early retirement
provides about the same total benefit, just in smaller amounts over a longer
period of time. But not all experts agree with this conclusion.
Some think it's better to start taking benefits as soon as possible. And, of
course, your health, life expectancy, and income once benefits begin are important
factors in deciding when to start taking Social Security retirement benefits.
The earlier you decide to stop working, the sooner you'll need to use Social
Security and other retirement income to pay the bills. And, you may miss the
opportunity to increase your Social Security benefit amount by adding higher
earning years (depending upon your earning history).
If you continue working past your normal retirement age, you'll increase your
Social Security benefit in two ways.
1. The more you work, the more you add to your Social Security
record. Higher lifetime earnings may result in higher benefits when you retire.
2. If you delay retirement, your benefit will be increased by a certain
percentage each year. The increases, which vary depending on your year of
birth, will be added automatically from the time you reach your full retirement
age until you start taking your benefits or you reach age 70 (whichever comes
first). For example, if you were born in 1943 or later, your benefits will
increase 8% per year for each year you delay taking your benefits. See the
table below for the increase that applies for delayed retirement.
|Year of Birth
||Yearly Rate of Increase
|1943 and later
Tip: Regardless of whether you delay your retirement, be sure to sign up
for Medicare when you turn 65. In some circumstances, medical insurance costs
more if you delay applying for Medicare.
Retirement Benefits for Spouses
Widows and widowers can begin receiving benefits at age 60 (or at age 50 if
they're disabled), even if divorced from the wage earner. Once you start receiving
widows' or widowers' benefits, you can switch to your own retirement benefits
as early as age 62 - if you're eligible and your retirement rate is higher
than your spouse's.
In many cases, a widow or widower can begin receiving one benefit at a reduced
rate and then switch to the other benefit at an unreduced rate at full retirement
age. These rules may vary, so consult with a Social Security representative
about the options available to you.
Benefits for Other Family Members
If you're receiving retirement benefits when you die, some members of your
family can also get benefits. They can be:
Your spouse age 62 or older
Spouse's Benefits A surviving spouse receives one-half of the retired
worker's full benefit unless the spouse begins collecting benefits before age
65. In that case, the spouse's benefit is permanently reduced by a percentage
based on the number of months before he or she reaches 65.
Your spouse under 62, if that spouse is taking care of your child under 16
Your former spouse age 62 or older
Children up to age 18
Children 18-19, if they are full-time students through grade 12
Children over 18, if they are disabled
For example, if your spouse begins collecting benefits at 64, the benefit amount
would be about 46% of your full benefit. At 63, it would be about 42%, and 37.5%
at 62. However, if your spouse is taking care of a child who is under age 16
or disabled and receiving Social Security benefits, he or she gets full benefits,
regardless of age.
If you're eligible for both your own retirement benefits and for benefits as
a surviving spouse, Social Security always pays your own benefit first. If your
benefit as a surviving spouse is higher than your own retirement benefit, you'll
receive the higher spouse benefit.
Maximum Family Benefits
If your surviving children are eligible for Social Security, each will receive
up to one-half of your full benefit. However, the amount of money that can be
paid to a family is limited. If the total benefits due to your spouse and children
exceed this limit, their benefits will be reduced proportionately. Your benefit
will not be affected.
Benefits for Divorced Spouse A surviving divorced spouse can also collect
Social Security benefits on a former husband or wife's record if the marriage
lasted at least 10 years. The divorced spouse must be 62 or older and unmarried
to receive spouse benefits. Check with Social Security for the timing of benefits
where the worker/former spouse isn't retired.
The Need to Report to Social Security if You:
direct deposit accounts
for a child who receives benefits
a child who receives benefits
a change in your estimated earnings that would affect your benefit level
a Social Security recipient who becomes unable to manage funds
a pension from work not covered by Social Security
convicted of a criminal offense
the United States for at least 30 days
a non-citizen and related to a beneficiary who dies
receiving Social Security and Railroad Retirement benefits based on your
spouse's earnings record (you are not eligible to receive both benefits and
you will be notified which survivor benefit you will receive)
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Charles M. Bloom, Registered Principal offers securities
and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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