Thinking about when you can retire? If you're wondering about the right retirement age for you, determining how much you will receive in Social Security benefits is a great first step to helping you decide when to take the leap.
What determines Social Security benefits?
Remember all those times you looked at a paycheck and saw a deduction for Social Security? When you retire, you'll start to collect this money. Your payments will be based on your lifetime earnings (an average of the 35 years in which you earned the most) and adjusted to account for changes in the average wage over time.
If you're self-employed, you probably pay all your Social Security and Medicare taxes when you file your tax return.
Factors that determine what your Social Security benefits will be include: The age you retire and the year you were born. You can start receiving benefits as early as age 62 or as late as age 70. Generally speaking, your payments will increase the longer you wait to retire. Also keep in mind full retirement age isn't 65 for everyone; it varies depending on your birth year due to changes implemented through the Social Security Amendments Act of 1983. These changes were designed to ensure the Social Security Fund would not run out of money.
If you were born in 1950, for example, the age you can start collecting full benefits is 66. If you start receiving retirement benefits early at 62, you will only receive 75 percent of the monthly benefit because your benefits will last for an additional 48 months. If you wait until age 65, you will get more of the monthly benefit (93.3 percent) because you will be receiving the additional benefits for only 12 extra months.
Cost of living
The amount of benefits you receive will account for the current cost of living and increase over time. The Social Security Administration says that you are eligible for a cost-of-living increase when you turn 62 (even if you elect to receive your Social Security benefits later).
If you work for the government, some federal employees and state or local government employees may be eligible for pensions that are based on earnings not covered by Social Security. If you are eligible for a retirement or disability pension from work on which you didn't pay Social Security taxes, a different formula to your average indexed monthly earnings is applied, which can be figured out here.
Social Security benefits calculator
To find out how much you will get from Social Security, you can also use the SSA's retirement estimator, which will provide an approximate dollar amount. You can use the estimator tool only if you have enough credits to start qualifying for benefits, which for most people is at least age 40. However, you cannot use the calculator if you are at least 62 and already receiving Social Security benefits, waiting for a decision about your application for benefits or Medicare, or eligible for a pension based on work not covered by Social Security.
You can also create a personal account at My Social Security, which will allow you to keep track of your earnings and verify them each year.
Growing your retirement income
Unfortunately, Social Security doesn't always cover your entire cost of living in retirement, especially given rising healthcare costs. Social Security benefits represent 33 percent of elderly Americans' income. That's why it's important to have a savings strategy to help fill that retirement income gap. Other income sources may include dividend-paying stocks, bonds, mutual funds or income-producing rental properties, but all investments come with risks.
Annuities are an investment that offers retirees tax-deferred growth during the accumulation phase, with the potential to pass on benefits to a surviving spouse (or child) for his or her lifetime. As always, check with a trusted financial adviser to determine the best way to maximize your retirement income.