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Social Security Retirement Benefits: The Facts

Added on 12/12/05

SUMMARY

1. A person does not have to stop working in order to receive benefits. Only their age and the amount of their lifetime earnings will determine how much, if any, benefits they will receive.

2. Only wages and self-employment income will affect your benefits. Income from rents, interest, dividends and other pensions will not.

3. Benefits are calculated using ALL of the income earned between age 22 and retirement, less the low five years. IT IS NOT TRUE THAT ONLY THE LAST 5 YEARS OF EARNINGS ARE USED IN CALCULATING BENEFITS.

4. One may retire as early as 62, but will receive a reduced monthly payment for the balance of his/her life. Generally it is advised to begin receiving payments as soon as you are eligible. A person would have to live to about age 82 to make up the lost benefits between the early retirement age of 62 and the full retirement age.

5. Social Security benefits are subject to federal income tax if your other income + 50% of your benefits exceeds $25,000 for a single person or $32,000 for a married couple

6. Social Security consists of a number of benefits. They are:

   1. Retirement Benefits

   2. Survivors Benefits

   3. Widows and Widowers Benefits

   4. Disability Benefits

   5. Special Benefits

7. Make application to Social Security about 2 months before your intended retirement date. Call Social Security for your appointment at 1-800-772-1213.

HOW BENEFITS ARE CALCULATED

1. All of your earnings from age 22 until 2 years before retirement are adjusted for inflation.

2. The earnings from step one are added to the earnings of the last 2 years. From this total is subtracted the lowest 5 years of earnings.

3. The Total earnings arrived at in step two are divided by the number of years between age 22 and retirement minus 5. Example. A person retiring at age 62 has worked 40 years between age 22 and age 62. Subtract 5 from 40 = 35. Divide the total earnings arrived at in step 3 by 35. From this average annual wage, the benefits are computed. The monthly benefit is rounded DOWN to the nearest dollar.

4. A specific formula is applied to the average annual wage to arrive at the social security benefit amount. Generally the benefits paid are between 30% and 50% of the average annual wage. The higher the average wage the lower the percentage paid.

5. Individuals that wait until their normal retirement age receive the full benefit computed in step 4. In addition they may draw their Social Security and continue to work and earn as much as they please, without affecting their benefits.

6. A person may retire as early as 62, but the benefit computed in step 4 is reduced about 0.5% for each month between full retirement and the age that benefits are started. Example: A person born in 1940 may retire with full benefits at age 65 and 6 months. If they retire at age 62 their benefits will be reduced by approximately 21% (42 mo. x 0.5%)

7. Individuals retiring before the full retirement age may continue to earn wages. If those wages exceed the annual limit ($12,000 in 2005), then the individual will lose $1 of benefits for every $2 in earnings. Example: An individual is 63 and entitled to $10,000 of benefits. He works at a job paying $18,000. He will lose $3,000 of benefits ($18,000 - $12,000 = $6,000/2 = $3,000).

8. Only earnings from self-employment or wages are considered when computing benefits. All other income is not considered for the test in step 7.

9. Individuals that continue to earn wages while they are receiving social security benefits will have their benefits recalculated each year for the earnings in the prior year. Generally the Social Security Administration does this in October or November of each year. The individual will receive a lump sum payment of the added monthly benefits to which they were entitled beginning in January of the year they are computed. Example. Henry worked in 2004 and received SS benefits in 2004 & 2005. In November 2005 Social Security recalculates his 2005 benefits for the wages he received in 2004 and increases them by $30/month. In December of 2005 he will receive the new benefit + $330 for the months January 2005 thru November 2005.

10. Each January, benefits are increased for inflation. The adjustment is announced in November of each year. In 2006, the inflation adjustment is 4.1%.

RETIREMENT BENEFITS

In order to get Retirement Benefits, you need to meet the following conditions:

1. Have worked and paid Social Security or Self-employment taxes on your earnings for 40 quarters (10 years).

2. Each year the Social Security Administration defines the dollars of wages that will earn a quarter of earnings during that year. Unless you worked very little thru you career, you will earn 4 quarters of benefits for every year that you worked.

3. You are 62 or older when you apply for benefits.

4. The age for full retirement varies.

   1. For individuals born in 1937 or earlier, full retirement is 65 years.

   2. For individuals born in 1938 full retirement is 65 years and 2 months. For each year from 1939 to 1943, add two months. Example: A person born in 1941 gets full retirement at 65 years and 8 months

   3. Those born between 1943 and 1952 receive full retirement at age 66.

   4. Those born in 1953 get full retirement at age 66 years and 2 months. For each year from 1954 to 1958, add two months. Example: a person born in 1956 gets full retirement at age 66 and 8 months. Those born in 1958 and later years get full retirement at age 67.

    

SURVIVORS BENEFITS

If a worker dies before reaching retirement and leaves children under the age of 18, the children will receive benefits until they are 18. The benefits are computed as though the worker had reached full retirement. For individuals that die before they are 30, less than 40 quarters are required for his surviving children to receive benefits. The younger the individual is when they die the fewer quarters they need for survivors benefits.

Generally each surviving child receives a payment equal to the retirement benefit of the deceased parent. The maximum family payment is twice the retirement benefit. Example a man dies with 3 children – each child will receive 2/3 of the father’s annual retirement benefit.

If a widow or widower also survives he/she will also receive benefits, again subject to the maximum family benefit. The widow or widower will receive a reduced payment if they earn more than the limit listed in Step 7 under HOW BENEFITS ARE CALCULATED.

WIDOWS AND WIDOWERS BENEFITS

A widow or widower has several options:

1. If the individual is under age 60 at the time of the spouse’s death, there will be no benefits unless there are children under age 18.

2. If the individual is age 60 or older they may apply for benefits under the deceased spouse.

DISABILITY BENEFITS

Disability benefits are difficult to get. The definition of Social Security disability is very stringent. Once qualified the individuals receives the following benefits:

1. Payments are computed as though the individual had reached full retirement.

2. Payments are made for any dependents under age 18, subject to the family maximum of twice the individual retirement benefit.

SPECIAL BENEFITS

Married couples have the following options:

1. If both spouses worked they may collect benefits under their own accounts as each qualifies for benefits. Example: Mary is 62 and John is 64. The John is earning too much money to apply for benefits, but Mary is not. The Mary may collect benefits under her own account and continue or stop working. When John begins collecting benefits, Mary may switch to receiving benefits under John’s account. Example: Mary begins receiving $400/mo of benefits under her account at age 62. When John is 66 he begins drawing benefits of $1,500/mo. Mary is now 64. If she switches to John’s account her benefits will be $675/mo. She switches to John’s account.

2. If one spouse worked and the other did not, or does not have 40 quarters of earnings, then the non-working spouse will collect benefits from the account of the retired spouse. The non-working spouse must be at least 62 and the spouse that worked must be collecting benefits. Generally the non-working spouse will receive 50% of the amount paid to the retired spouse. Example: Mary never worked outside of the home. John begins collecting benefits at age 65. At that time Mary is 62. Mary will receive a benefit that is about 40% of the amount collected by John.

3. A widow or widower collecting benefits from the account of a retired spouse, will lose his/her benefit when the retired spouse dies but will begin receiving the amount that the retired spouse was receiving. Example John receives $1,000/mo and Mary $400/month. When John dies, May will receive $1,000/month.

Divorced Individuals that were married at least 10 years before they divorced have the following options:

1. A person that is 62 or older has a divorced spouse that is receiving benefits. That person may begin to receive benefits as though he/she were still married as described above.

2. If the former spouse dies, then the remaining divorced spouse will receive the benefit that the divorced spouse was receiving.

3. Like married individuals above, couples that were married at least 10 years before they divorced will get the same benefits of currently married couples.

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