|The right time to start drawing
Social Security benefits
Each year, a few months before your birthday, you
receive an innocuous little four-page Social
Security statement from the government that could have a big
impact on your golden years. Unfortunately, most of us don't take
the time to give it more than a cursory glance before tossing it
in the nearest circular file.
But the closer you get to decision
time, on when you will officially retire and begin tapping the Social
Security benefits you've accrued over the years, the more this simple
statement can help you determine when retirement might make the
most sense -- in dollars and cents -- for you.
Yes, Social Security figures prominently as a safety
net for you and your family, should you die suddenly or become disabled.
It is also the place to enroll in Medicare; you want to do that
at age 65 regardless of whether you retire.
But, determining when to start collecting regular
Social Security retirement benefits requires some forethought. Here's
how to work through the math to determine when to officially retire
and begin receiving your monthly checks.
How benefits are calculated
Let's start with the basics: your Social Security number. It has
been used on every tax form you and your employers have sent in
since your first day of work to keep track of your earnings. To
be fully insured, you need 40 credits earned over your lifetime.
You get up to four credits per year based on your earnings. For
2005, you receive one credit for every $920 you earn, so you max
out your four credits with an annual income of $3,680 or more.
That's a pretty easy bar to clear, by design: Social
Security sprang from the depths of the Great Depression to enable
all working Americans to survive when their prime earning years
are behind them. Financial planners estimate that Social Security
benefits today provide, on average, about 40 percent of what you'll
need to maintain your lifestyle once you hang up your dancing shoes.
OK, so just about everybody approaching retirement
age qualifies for Social Security. However, the Social Security
Administration calculates your benefit amount based on your average
earnings over 35 years, not on your number of credits or how much
you paid in taxes. That's why it is important to look at page
three of your statement, which lists your earnings history year
by year, and make sure the figures match up with what you actually
Jack Carney, 57, an accredited asset management specialist
with M.W. Boone
and Associates in Bellevue, Wash., explains that in calculating
your eventual benefit amount, Social Security caps the maximum wage
contribution each year. For 2005, the wage contribution cap is $90,000,
and the maximum monthly benefit amount at full retirement is $1,939.
"The way it works is, if I made $7,200 my first
year out of college, that counts as much toward my Social Security
as someone this year making $85,000," says Carney. "If
the (wage contribution) cap was $8,000 and you earned $6,000, you
get credit for three-fourths of a maximum Social Security benefit
How does this figure into retirement planning?