Chapter 24 Social Security

“I don’t mind being a senior citizen;I just don’t look forward to graduation.”

Do I Need to Read This Chapter?

● Do I know how social security works? ● Am I trying to decide whether to collect social security at age 62 or collect it later?

● Am I a woman who is counting on social security? Am I alert to all my options? ● Am I,or any family members,eligible for nonretirement social security benefits such as Medicare,disability income,or survivor’s benefits?

Some people overlook their social security benefits when calculating their projected retirement income.Other people may count too much on these benefits.Financial planning is a system that must encompass all phases of investments;so know the rules of social security—because for many of us,it has become our most common investment.

How Does the System Work?

Both you and your employer contribute a percentage of your wages to social security,up to a designated maximum each year,as well as a percentage to Medicare with no limit.These contributions by both employees and employers are broken down into three separate trust funds:

OASI—old age and survivor insurance.This is a self-contained account separate from other U.S.Treasury revenue which will fully take care of

benefit payments to retirees and their survivors.These funds may not be spent for any other purpose. DI—disability insurance.The same rules apply here as to OASI except that benefit payments go for the disabled. HI— health insurance.Known also as Medicare,the fund pays all costs of hospital (Part A) but only 20 percent of doctors’ fees and other charges (Part B).The balance is funded from general Treasury revenues.

How Are Retirement Benefits Calculated?

Social security benefits are based on earnings averaged over most of a worker’s lifetime.Your actual earnings are first adjusted,or “indexed,”to accountfor changes in average wages since the year the earnings were received.Your benefit is then calculated on your average monthly indexed earnings during the 35 years in which you earned the most.The government applies a formula to these earnings and arrives at your basic benefit,or primary insurance amount (PIA).This is the amount you would receive at your full retirement age,for most people,age 65.However,beginning with people born in 1938 or later,that age will gradually increase until it reaches 67 for people born after 1959.

As you can see from the above,the benefit computation is complex,and there are no simple tables that I can present that will tell you how much you will receive.However,there are several ways you can determine an estimate of your retirement benefits: 1.Request a social security statement.Make your request over the Internet, and the government will mail you a detailed report of your lifetime earnings and an estimate of retirement,disability,and dependent benefits. 2.Compute your own benefit estimate using a program that you can download for your PC.A version for the Mac is also available. 3.Use the government’s online calculator. 4.Read the government’s publication Your Retirement Benefit:How It Is

Figured.

The monthly benefit may be increased annually by the cost of living adjustment based on the consumer price index.

What Happens If You Want to Retire before Age 65?

Many individuals have asked me what I think about retiring before age 65.I have always felt that it is better to retire too early than too late.However,you have to understand the social security payout implications.

Consider retirement as the goal not of reaching retirement age,but of entering a retirement zone.At the center of this zone is the standard retirement age, which is 65 if you were born before 1938 and 65-plus (up to a maximum of 67) if you were born after 1959.At that center point you will be entitled to receive 100 percent of your primary insurance amount as it is computed from your record earnings.On the low side of the retirement zone is age 62,which will provide you with early retirement benefits between 70 and 80 percent of your PIA.It is 80 percent if your full retirement age is 65 and 70 if your full retirement age is 67.

If you decide to collect benefits as early as age 62,monthly benefits may be reduced by up to 25 percent.Consider this option if you must retire early or if you decide that enough is enough — and also if you feel you may not live to full life expectancy.

If you decide to collect benefits at full retirement age,65–67,you will receive 100 percent of the benefits accrued to you.Consider this option if you are still working,as there is no penalty for your employment.Also,if you expect to live till your life expectancy and can rely on other investments until you reach full benefit age,this is the best method.

If you decide to collect benefits at a later date by deferring benefits payments to you till you are age 70,for every year that payments are deferred,the increase could be as much as 5 to 8 percent.Consider this option if you have other means of income or expect to live beyond your life-expectancy age.

What is the best course of action? Of course,each of us is different,and various factors such as health,age,and finances will enter into the decision,but here is an example using approximate amounts of benefits:

At age 62,the average benefit is about $1,450.

At age 65,the average benefit is about $1,800.

At age 70,the average benefit is about $2,150.

Thus,there is an approximate difference of $700 per month between retiring at age 62 and retiring at age 70.However,if you did choose to receive social security benefits at age 62,you would have received about $140,000 by the time you turn 70 years of age,and the person who will first start at age 70 to receive social security will have had nothing.Still,the person who retires at 70 will get about $700 more per month for the rest of his or her life.

When Are You Eligible for Full Social Security Benefits?

Year You Were Born Your Full Retirement Age

1937 or earlier 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943–1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67

Source: Social Security Administration.

What Is “Unretirement”?

Take note of this important point.It can make a big difference in your retirement;yet many people aren’t aware of it.If you take retirement at age 62,it does not mean that you will be locked into 80 percent of your social security benefits for the rest of your life.You are allowed to stop your social security benefits and begin them again years later,thus giving you a higher monthly check.This can occur,for example,if during your retirement you take a job that pushes your earnings above the limit,which in turn results in a cut in your benefits.

One method to “unretire”is to call the Social Security Administration (SSA) and report that you are “unretiring”yourself.In order to do this,you will have to furnish the SSA with an estimate of what you will be earning.You will still

remain on the benefit roll,but you will not receive a monthly check.At the point you decide to reenter the retirement world,you simply notify the SSA of your intentions.When you again begin to receive your monthly check,you may notice a change in the amount you received upon your initial retirement.For each month that you receive social security benefits before the age of 65,the SSA will reduce your payments by 5⁄9 of 1 percent,but the months or years you had suspended your benefit check do not count.Your new check,now that you are retired again,would be larger because it would reflect a reduction by only the number of months you actually received your benefit check before “unretiring.”

For example,if you retire at 62 and take benefits for one year before you rejoin the workforce,when you retire again,your new benefits will be calculated as though you retired only one year early (age 64),which would give you a 6.5 percent (approximate) reduction,instead of a 20 percent reduction,for the rest of your life.Also,any benefits would include an annual cost-of-living adjustment that was made during your suspended time.

What Happens If You Want to Retire after Age 65?

If you decide to work past age 65,you move to the other side of the zone, known as the high end.At this point you will receive a higher monthly social security benefit (more than 100 percent) when you do finally retire.The amount will range from a 3.5 percent increase to an 8 percent increase depending on your date of birth.At age 70,you will have reached the highest end of the retirement zone and will not receive any further increase in benefits. However,you do not have to retire to collect your full social security check because you are entitled to full benefits after reaching age 65 no matter how much you earn.

Also,as far as social security benefits are concerned,it makes no difference what time of the year you retire.Most people,in fact,retire toward the end of a calendar year simply as a matter of convenience and personal preference. However,the social security law permits you to retire at any time during the year without forfeiting any benefits;payments start any month you choose, provided you meet all the conditions of eligibility.

Have you set your retirement date? I recommend applying for social security benefits about three months earlier. This leaves plenty of time to process your claim and handle any questions or problems that may arise.

How Do You Know You Are Getting Accurate Social Security Benefits?

It would be unthinkable for a person to let years go by without balancing a checkbook;yet that same individual will usually wait until age 65 before making certain that his or her social security account had been accurately credited.By then,if there are errors,it may be too late.

However,there is a way to remedy this situation while you are currently employed.Contact your social security office and ask for the free “Request for Earnings and Benefit Estimate” statement, which will verify your earnings record to date.Merely save your W-2s (or tax forms if you are selfemployed) and compare the figures.Forty quarters of coverage will entitle you to receive full social security benefits at retirement.By periodically examining your social security account (every three to five years),you will be assured that the income paid from your account will represent all that you have earned.

Are There Special Rules for Widows and Widowers on Social Security?

When a person who has worked and paid social security taxes dies,the widow or widower may be eligible for survivor’s benefits.Up to 10 years of work is needed to be eligible for benefits,depending on the person’s age at the time of death.

Social security survivor’s benefits can be paid to: ● A widow or widower.Full benefits at full retirement age or reduced benefits as early as age 60. ● A disabled widow or widower.As early as age 50.

● A widow or widower at any age if he or she takes care of the deceased’s child who is under age 16 or is disabled and is receiving social security benefits.

If your divorced spouse dies,you can receive benefits if the marriage lasted 10 years or longer and you are age 60 or older (or age 50 if you are disabled.) Benefits paid to a surviving divorced spouse who is 60 or older (age 50 if disabled) will not affect the benefit rates for other survivors.

In general,you cannot receive survivor’s benefits if you remarry before the age of 60 unless the latter marriage ends,whether by death,divorce,or annulment.If you remarry after age 60 (50 if disabled),you can still collect benefits on your former spouse’s record.When you reach age 62 or older,you may get retirement benefits on the record of your new spouse if they are higher.

Your remarriage would have no effect on the benefits being paid to your children.

If you are collecting survivor’s benefits,you can switch to your own retirement benefits (assuming you are eligible and your retirement rate is higher than the widow’s or widower’s rate) as early as age 62.

In many cases,you can begin receiving retirement benefits on either your own or your spouse’s record at age 62 and then switch to the other benefit when you reach full retirement age,if that amount is higher.

What Are the Family Benefits of a Social Security Plan?

The social security tax that you and your employer pay places you and your family in line for collecting more than just retirement benefits.You may also collect Medicare and disability income.If you become disabled,you get benefits at any age (assuming you have enough quarters of coverage).In order to qualify for disability benefit,you must have earned 20 credits of coverage during the 10-year period ending with the calendar quarter in which you became disabled.However,if your disability is blindness or if you become disabled before reaching age 31,more lenient rules apply.

A child (either natural or adopted) may be entitled to benefits upon the death of a parent.To qualify,the child must have been a dependent and (1) be unmarried and be either under age 18 or,if a full-time high school student,

under age 19 or (2) regardless of age,be disabled before age 22.The child then would receive a monthly benefit equal to 50 percent of the amount the parent would have gotten at age 65.

Keep in mind that there is a maximum on family benefits. The benefit percentages for family members are the maximum each relative can collect. When more than one family member is collecting benefits based on the insured’s earnings record, the actual size of the benefits checks is likely to be smaller. Why? The social security law places a dollar cap on the total monthly benefits paid to a family based on the earnings of one family member.

Thus,you can see that in order to plan for retirement,all areas of income,whether actual or potential,must be considered.

And on the topic of planning for retirement,remember that it wasn’t raining when Noah built the ark.

It’s a Wrap

● Social security is a costly investment—and an involuntary one at that—so it pays to know how it works. ● The social security insurance program includes old age and survivor’s insurance,disability insurance,and health insurance known as Medicare. ● You can qualify for SSI in either of two ways:by working and earning a minimal amount for at least 40 quarters or by being the nonworking spouse married to a retired or disabled worker. ● If you retire at age 62,begin collecting social security and then decide to

“unretire,”you can avoid being locked into the 80 percent benefit level for the rest of your life. ● By waiting until age 65 or older to collect SSI,you will receive higher benefits,no matter how much you may earn. ● At age 70 you are entitled to full SSI benefits,plus additional increments.

● It’s advisable to check the accuracy of your social security records every three to five years. ● Women can collect SSI based on their own work record,their spouse’s work record,or several other options if divorced or widowed. ● Children may be entitled to SSI benefits upon a parent’s death,subject to certain family maximums.

“If you worry about what people will think about you,it is because you have more confidence in their opinions than you have in your own.”

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