As you come closer to retirement age, it is very important to fully understand all the implications involved with collecting Social Security. Not knowing how the system works, and filling out the paperwork in a rushed manner will only lead to diminished monthly payments; the system is complicated and it needs to be understood to get full potential benefits.
First of all, some basics. Calculation of the benefits you will receive are based on your body of work over a period of forty years. The five years that you earned the least amount are dropped, and the other 35 are averaged to determine your monthly payment. Those who did not work do not get benefits. This is based on a set system where an individual must have worked 40 quarters during their life, and a minimum amount must have been earned during these 40 quarters in order to be considered for Social Security benefits.
A spouse who did not work is eligible for 50% of their working spouses full retirement benefits, and 100% after they die. If a spouse divorced someone after being married at least 10 years, they are eligible for 50% of that spouses full retirement age benefit, if they wait until age 70. At 60 this number is 37.5%.
SS retirement benefits can be started as early as 62 years of age. This does not mean that you have to start receiving benefits when you are 62; you can wait until you are as old as 70. If you choose to start getting benefits at an earlier age, your monthly payments will be smaller. There is a graduated scale involved with the calculations for payments; a 62 year old will get approximately 30% less than one who waits until they are 70. This percentage drops as you near 70.
The SSA, or Social Security Administration, uses your birth date to define retirement age. If you are planning on retiring in 2011, for instance, your retirement age is most likely 66 or 67 years of age; full retirement age means you will get 100% of your benefits.
One consideration to make when deciding when you will retire is that although your monthly payments will be lower if you retire early, this does not mean that you will receive less money in the long run. The reduction takes into account the fact that if you retire at 62 you will end up getting a lot more payments before you pass away than if you retire at 70, and recalculates your monthly benefits based on this. So there is actually no penalty for retiring early.
There are other advantages to waiting until 70 to start Social Security benefits. These individuals can immediately get retirement credits, which can boost monthly payments by 5 to 8%. These credits are assigned based on age; if you are born after 1943 you get 8%. These benefits stop going up when you reach 70.
So, unlike what you may hear from friends and family, there is no disadvantage or penalty involved for retiring early. On average, everyone who retires between the ages of 62 and 67 should see the same amount of money over their lifetime; the difference is in the amount of the monthly benefit check.
There are other considerations. If it is in your plans to continue working after retiring early, you should know that you will need to continue to pay SS taxes on all earning, even if you are receiving benefits. If you are not at full retirement age, there is an earnings cap of $14,160; this goes up to almost $40,000 after reaching full retirement age.
Once again, this should not be seen as a penalty. If you work when receiving benefits, and happen to go over the cap, some of your earnings may be taken from you, but these will be credited to you after full retirement age, and could mean higher payouts later. This is one of the most complicated aspects of Social Security benefits, but is also one of the most beneficial to you in the long run.
Getting to the point where you are considering whether to retire early or wait until full retirement age can be an intimidating time in your life. With many people nowadays deciding to work after retirement, it has become more important than ever to know exactly what is involved when filling out your Social Security paperwork. Understanding all the benefits and implications behind the Social Security system can help ease some of the stress involved with the numerous decisions that need to be made at this important point in your life.
