Have you ever wondered how the FICA tax information on your pay stub impacts your future retirement benefits?
Understanding Social Security can be daunting. But you must use all the resources available to you to get familiar with it so you can make the best decisions for your future. And remember, a CD and high-yield savings account are both low-risk places to park your money in retirement.
Here is a list of some little-known Social Security benefits that will help you get started. Putting your knowledge to good use can make a big difference in your retirement income.
The Bankrate Daily
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There are many ways to claim benefits
There are many ways to collect Social Security benefits, says Alicia Munnell, director of the Center for Retirement Research at Boston College. You can’t ask Social Security to list them all, so what’s the right choice?
It’s hard to beat waiting until you’ve reached full retirement age to start collecting Social Security because the monthly benefit is so much higher. For example, if you were born in 1955, your full retirement age is 66 years and 2 months. That would be the age at which you can collect 100 percent of your benefit.
But if you start collecting at 62, you will collect only 74.2 percent of the monthly benefit. If you delay your benefit until age 65, you will get 92.2 percent of the benefit.
Likewise, if you receive Social Security benefits as a spouse, the longer you wait, the bigger the benefit, provided your wage-earner husband or wife waited until full retirement age to start collecting.
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Longevity pays off
On the other hand, some people advocate drawing Social Security benefits at the first opportunity.
Doug Carey, founder and president of the financial planning software firm WealthTrace, says Social Security doesn’t see itself as an oddsmaker, but it does require you to bet on your longevity.
For example, the break-even point for someone who earned the inflation-adjusted equivalent of $70,000 per year for 35 years is about age 80. If this person waits until 70 to claim Social Security and lives until at least age 90, he’ll accumulate almost $162,000 more in benefits than he would if he had claimed at 62. But there’s a possibility of losing the bet and getting nothing.
Retired law professor and Social Security expert Merton Bernstein says the odds of the longevity bet are bad — so claim early. “You never know when the bell will ring. I subscribe to the Woody Allen principal: ‘Take the money and run.'”
Don’t want to take out your benefits early but need additional cash quickly? A personal loan may be a good option for you.
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There’s a reward for delaying divorce
If you’re not happy in your marriage after 9 1/2 years, hold off at least six months before filing for divorce.
Why? You must be married at least 10 years to stake a claim to your ex-spouse’s Social Security benefits. If you terminate the marriage after nine years and 11 months, you’re not eligible.
If you make it for 10 years, you can collect a Social Security benefit based on up to half of your ex’s earnings or on the basis of your own earnings, whichever is higher. This is particularly important if one parent stayed home with the kids while the other worked.
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Widows and widowers can get benefits
If an ex-spouse dies, you may be able to receive benefits similar to a widow or widower. If you are at least 60, the marriage lasted at least 10 years and you didn’t remarry before age 60, you’ll most likely be able to collect your late spouse’s benefit.
Social Security does a good job of explaining widow and widower benefits, but it doesn’t clearly spell out a key difference between widow/widower benefits and spousal benefits.
A widow or widower can start collecting Social Security benefits based on their own earnings record, then switch later to survivors benefits. Or, they can begin with survivors benefits and later switch to benefits based on their own earnings record — even if they are filing before full retirement age. You can’t do that with spousal benefits.
In other words, a widow can begin drawing survivors benefits on her late husband’s Social Security when she is as young as 60, but only at a reduced rate. Then she can choose to leave her own Social Security alone, allowing it to grow in value until her full retirement age, or even age 70. This works for widowers, too.
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You can use a lawyer for an SSDI application
When you apply for Social Security Disability Insurance, or SSDI, your first step should be to hire a lawyer or other expert adviser.
Allsup, a private firm that advises people about how to get SSDI, says Social Security doesn’t make it clear that an applicant can have representation from the very beginning of the application process.
Two-thirds of SSDI applicants who file on their own are denied, according to Allsup, and more than 50 percent of applicants who try to get through the process on their own fail.
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35 years is the magic number
The Social Security website offers an explanation of how your benefits are calculated, but it’s difficult to follow. A simpler explanation can be found at MyRetirementPaycheck.org, which is sponsored by the National Endowment for Financial Education.
Your Social Security payment is figured using a complex calculation based on a 35-year average of your covered wages. Each year’s wages are adjusted for inflation before being averaged.
If you worked longer than 35 years, the government will use the highest 35 years. If you worked fewer than 35 years, the government will average in zeros for the years you are lacking.
You don’t have to be a math genius to figure out the impact of that — it drags down your average. If you can avoid zeros by working longer, you’ll increase your Social Security payment.