Retirement: What You Need to Know About Social Security

Last Updated May 3, 2011 1:48 PM EDT

For many people, their Social Security income will be a crucial part of their retirement security. For example, according to research from the Center on Budget and Policy Priorities, Social Security provides the majority of cash income for more than half of all Social Security beneficiaries, and Social Security is estimated to keep almost half of all Americans over age 65 out of poverty.

Social Security income has some unique advantages you won't get with any other retirement income. You receive a monthly check for your lifetime, no matter how long you live and no matter what happens in the economy. Also, your benefits are increased for inflation, and for many people, income taxes on Social Security benefits are reduced. With great benefits like these, learning how to get the most from Social Security is an important step when planning your retirement.

Welcome to Week Five of my series 12 Weeks to Plan Your Retirement. In this post, I'll focus on the most common Social Security retirement benefits. I won't cover disability and family survivor benefits, since they typically won't apply for people who are retiring. I'll provide a checklist of things to learn, steps to take, and important decisions to make. Since Social Security is such a critical topic, I'm splitting the information into two posts to cover the necessary details; this post focuses on your benefits, while my next post provides information on your spouse's benefits.

The formulas and rules used to calculate Social Security retirement income are quite complex, so the checklist below focuses on the most important rules that affect your benefits.
  • Do you have 35 years of covered earnings? Your income is based on a 35-year average of your covered wages (that's wages from your employer or self-employment income). Social Security doesn't count any wages above the Social Security Wage Base ($106,800 in 2011). Each year's wages are adjusted to account for wage inflation before being used in your 35-year average wage. The 35 years out of your entire working career that produce the highest average are used; they don't need to be consecutive. If you worked for fewer than 35 years, you'll have some zeros entered into your 35-year average, which will drag down your average earnings.

So here's one of the first things to check -- do you have covered earnings for at least 35 years? If not, you may want to continue working until you have 35 years of earnings figured into your average earnings. And if you have enough covered earnings, you may want to continue working longer than 35 years -- this can still boost your Social Security income, if you earn enough to drop some of your low-earning years out of your 35-year average.


  • What is your earnings history? Until earlier this year, you should have been receiving statements in the mail from Social Security regarding your earnings history. Check to make sure this history is correct; it's possible that some of your earnings haven't been recorded properly. The Social Security Administration plans to provide these statements online in the near future, so you can still continue to check your earnings history.
  • What is your Full Retirement Age (FRA)? You can start receiving Social Security income as early as age 62, but your benefits are reduced based on the length of time that you start benefits before hitting your FRA. Your FRA is based on your year of birth; it's age 66 for people currently retiring, but it increases gradually to age 67 for people born in 1960 or later. Your benefits increase depending on the length of time you start Social Security benefits after your FRA, but there's no increase for delaying past age 70.
  • What are the early and delayed retirement factors that apply specifically to you? Here are links to the factors that reduce or increase your income if you start at an age other than your FRA. For example, if your FRA is age 66, your income starting at age 62 is reduced permanently by 25 percent. On the other hand, if you delay starting benefits until age 70, your income is increased permanently by 32 percent.

Note that you don't need to start your Social Security income when you stop working; if you have other sources of income, it usually pays to delay starting your Social Security benefits.


  • How much Social Security income will you receive? The easiest way to discover the amount of income you might expect from Social Security is to use the calculator on the Social Security website. If you input your Social Security number, the calculator will estimate your benefits (using your actual covered earnings history) if you start at age 62, at your FRA, and at age 70. Then you can input other start dates to see the impact of starting your income at different ages. The system automatically calculates your benefits using the early or delayed factors described above, if they're applicable to you.
  • When should you start Social Security benefits? This is a very important decision, since it impacts the amount of Social Security income you'll receive over your lifetime. For many people, delaying benefits as long as possible is a smart move, since you'll maximize the total income you'll receive from Social Security over your lifetime. You'll want to analyze when to start your Social Security income because this decision can have an impact on when you decide to retire. (The decision about when to start Social Security benefits gets trickier for married couples; I'll cover these considerations in my next post.)
  • Should you work while collecting Social Security benefits? If you're receiving Social Security income before your FRA, your Social Security income might be reduced by the earnings test. If your wages or self-employment income exceed a certain threshold -- currently $14,160 per year -- then your Social Security income is reduced by $1 for every $2 of earnings over the threshold. The earnings test only considers wages and self-employment income, not pension or investment income. And once you attain your FRA, the earnings test doesn't apply and you can earn an unlimited amount of wages without any reduction to your Social Security income. This is one more reason to consider delaying your Social Security income at least to your FRA.
Want to quickly learn more about Social Security benefits? The Center for Retirement Research at Boston College has an excellent online Social Security Claiming Guide. Want to get every single question answered? A good friend of mine, Andy Landis, published an excellent and very thorough book, Social Security, The Inside Story. It offers a wealth of details, and Andy recently published the 2011 edition, so it's up to date.

Remember to continue working on any unfinished retirement planning steps from previous weeks. In particular, continue taking steps to improve your health. If you live a long life, you'll be sure to get your money's worth from Social Security!

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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