Social Security: What you need to know

Social Security is an important piece in the retirement planning puzzle. Social Security retirement benefits represent the largest piece of many retirees’ incomes.

What are Social Security Retirement Benefits?

It is a system designed to replace about 40% of a worker’s income in retirement. Employees and employers each pay into the system through taxes. On your paycheck, you see the 7.65% tax as FICA (Federal Insurance Contributions Act). FICA represents two numbers. The first is OASDI (Old Age, Survivors, & Disability Insurance) which is 6.2% of your gross pay. The other amount goes toward Medicare at 1.45% of gross pay. The 6.2% OASDI tax on gross income is subject to a wage base of earnings up to $128,400. The wage base number is adjusted annually for inflation

Who is eligible for Social Security?

To collect Social Security benefits, a worker must work 40 quarters (~10 years of work). Spouses (and ex-spouses of more than 10 years) and children of workers can also qualify.

When can I start taking Social Security?

Social Security is available at different ages depending on your personal situation. In general, the earliest the benefit can be taken is age 62 for a reduced amount. One exception is for spouses of deceased workers who can be eligible as early as age 60. Full retirement age (FRA) is the age you receive your full benefit. FRA for a worker depends on birth date and currently ranges from ages 65 to 67. You must start taking your benefit at age 70.

For every year you do not take Social Security, it increases by about 8% per year between ages 62 and 70.

It is important to note that the FRA for Social Security varies based on birth date. For Medicare, everyone has the same starting age of 65.

Can I take Social Security at age 62 and continue to work?

Yes. However, SSA created deterrents for workers turning on Social Security retirement benefits early. The first is that benefits are permanently reduced if taken before FRA. The second is earnings limits. The earnings limit applies to money earned while taking your benefit before your FRA. The earnings limit is adjusted for inflation each year. If you earn over the earnings limit, you must pay back $1 for every $2 over the limit. For 2018 the earnings limit is $17,040.

Were you born before January 2, 1954?

You might have additional strategic planning opportunities if you have not yet turned on your Social Security benefits. Check with your financial advisor to ensure you’re aware of all of your options.