What you need to know about Social Security

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(MoneyWatch) For most people, Social Security income will be crucial to their retirement security. The program provides at least half of income for almost two-thirds of retirees receiving the federal benefits and 90 percent of income for about one-third.

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 your Social Security benefits is an important step when planning your retirement.

Welcome to week seven of my series, 16 Weeks to Plan Your Retirement. In this post, I'll focus on the most common Social Security retirement benefits people receive. I won't cover disability or 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 on this topic into three posts to cover the necessary details. This first post focuses on your benefits, while my next post provides information on your spouse's benefits. The third post this week covers the rules regarding working while collecting Social Security benefits. Next week, I'll address strategies to help you maximize your lifetime payout.

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 ($113,700 in 2013). 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 that can be 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.

Do you have 10 years of covered earnings?

You'll need to pay into Social Security for at least 40 calendar quarters, or 10 years, to be eligible for any retirement income that's based on your earnings record.

What is your earnings history?

You can check your earnings history online at the Social Security website. Review your numbers to make sure your earnings history is correct; it's possible that some of your earnings haven't been recorded properly.

What is your Full Retirement Age (FRA)?

You can start receiving Social Security income as early as age 62, but your benefits will be reduced based on the length of time that you receive benefits before hitting your FRA. (FYI: The FRA is sometimes also called the Normal Retirement Age, or NRA.)

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 will 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.

It's important to note that you don't need to start your Social Security income when you stop working. If you have other sources of income you can rely on, it usually pays to delay starting your Social Security benefits until at least your FRA.

How much Social Security income will you receive?

The easiest way to determine 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 you should 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.)

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. I also recommend two books: "Social Security, The Inside Story," by Andy Landis, and "Social Security for Dummies," by Jon Peterson.

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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