Would you be willing to pay 6.2% from your paycheck to guarantee your income in the event you became disabled or grew too old to work? Well… that’s exactly what Social Security is.
Social security is a federal insurance funded by you, through the Federal Insurance Contribution Act (FICA), and it’s a pay-as-you-go system where contributions are paid directly to beneficiaries.
As of 2019, it supports nearly 64 million Americans, and was created in 1935 under President Franklin D. Roosevelt to aid the economic stress caused by the Great Depression.
Are you eligible?
In order to be eligible to collect a benefit, you must earn credits.
Credits are earned any time in a year you make $1,300, but you can only earn 4 per year, so you must earn $5,200 to receive all four credits, keep in mind that the amount it takes to earn a credit increases every year.
If you earn 40 credits and become disabled or grow too old to work you’re now eligible to receive benefits.
There are some situations where you can still receive a benefit even if you didn’t earn credits.
The first is a surviving spouse who’s not remarried, at least 60, or 50 and disabled, or if younger but caring for a child who is under 16 or disabled.
Second, a child survivor who is 18 and younger or disabled, with some exceptions for step-children, grand-children, step-grandchildren, or adopted children.
Lastly, is a spouse who is 62 and married to a current receiver of benefits who is at least their full retirement age. This spousal benefit increases the longer you wait to claim it.
How much will you get?
To calculate your benefit, you will need to compare each of your working years income to the social security maximum annual earnings amount, taking the lower of the two.
Looking at the chart, if you earned $3,500 in 1958 you would write it down because it’s less than the Social Security maximum.
If you received a raise that very next year and earned $5,500, you would write down $4,800, which is the social security maximum. I am going to complete the form using the maximum amount for each year.
Now we bring historical earnings up to current earnings, multiplying each by the index factor, and select the top earned 35, and then divide them by 420 which is 35 multiplied by 12, this will provide your monthly earned average.
Now multiply the first $926 by 90%, then everything between $926 and $5,583 by 32%, and anything over $5,583 by 15%.
The addition of those 3 will be your monthly benefits amount at your full retirement age – it’s as simple as that.
If you want to save time, use the social security benefit estimator tool by visiting their website. I’ve also included it in the description below.
When should you claim it?
The earliest you can claim retirement benefits is age 62, but the social security administration penalizes early takers with a 25% reduction to their benefits or more.
The administration will increase the amount you receive each year you wait until you reach your full retirement age at which time they’ll provide you 100% of the benefit we calculated earlier, and they’ll pay you even MORE for waiting until your max age of 70, as a matter of fact, the administration will increase your benefit by 8% per year each year you wait with a max age of 70.
For most, waiting until their full retirement age or even their max of 70 is going to be best, unless their family is prone to a low mortality rate.
How much will it cost you?
If you work for a covered employer, you have no choice, you must pay social security taxes.
You pay social security taxes every time you receive a check, through the Federal Insurance Contribution Act, also known as FICA, which breaks out into Social Security and Medicare.
Social Security cost 6.25% of you gross annual wages.
How much longer will it be around?
The short answer…long enough for current retirees and those retiring within the next 5 years to receive 100% of their benefit for half of their retirement.
Even though it’s a pay-as-you-go, there have been many years of overages, however, the social security trust, aka OASI is calculated to exhaust in 2034, while the DI is set to exhaust in 2028…
But don’t forget what’s paid in gets paid out. The administration claims enough inflows to cover 77% of the outflows indefinitely…but they will have to make changes for the 23% – how?
They can increase social security tax, increase the minimum retirement age, reduce benefits, or a combination of the three.