Friday, July 30, 2010

Social Security is a key factor in retirement planning. How it works

Even if you're not ready to retire, it's a good idea to know what the Social Security Administration will do for you when that day comes. While finding out what Social Security will pay you in monthly benefits seems straight forward enough, the complexity of the payout program is not easy to penetrate, especially if the retiree has not yet reached "full retirement age" as determined by a Social Security formula.
But knowing how much you will collect and at what age from Social Security is an important part of the retirement planning process. It's a complex process, especially for those age 62 to 66.
For instance for people born during the years 1943-1954, the full retirement age is 66. For those born in years after 1954, the agency's full retirement age begins to increase.
But Social Security will begin paying you benefits as early as age 62. However the monthly amounts are reduced 25 percent from your full-retirement age benefit. At age 63, the reduction drops to 20 percent and at 64, a bit more than 13 percent. On the other hand, if you wait beyond full retirement age to collect benefits the monthly payout increases by a certain percentage each year up to age 70.
Here's an example. If your monthly benefit at full retirement age of 66 is $1,000 a month, you can start collecting as early as 62 with a reduced monthly benefit of $750. If you wait to begin collecting benefits until age 70, the monthly payout is $1,320, according to an agency formula.
There's another strategy that might allow you to have your cake and eat it too. If you choose to start taking benefits before full retirement age you can (at a future time) pay back the amount received. The agency will then increase your monthly benefit to full-retirement levels.
Confused, yet?
Working while receiving benefits
When you reach your full retirement age, you can work and earn as much as you want and still receive your full Social Security benefit payment, but if you are younger than full retirement age and your earnings exceed certain dollar amounts, some of your benefit payments during the year will be withheld, the agency explains in its most recent publication.
In addition to these factors -- your entire work record, your marital history and how much you earned during your working life -- are additional factors in determining your Social Security benefit.
Do not rely on friends or even financial planners and investment advisers to have Social Security facts straight. Each situation is different and what might work for your cousin may not be the correct formula or the right strategy for you.
A major area of confusion (mostly affecting Sixty and Single women) has to do with collecting Social Security benefits on an ex-spouse. If your ex-spouse is living, you can do that if:
- You were married 10 years or more.
-  You have been divorced at least two years,
-  You are currently unmarried,
-  You are age 62 or older,
-  You are entitled to receive a higher benefit based on your ex-spouse’s work than you are based on your own work, and
- Your ex-spouse is age 62 or older or receives disability benefits.
If your ex-spouse is deceased you can collect benefits on his/her account, if:
- You were married 10 years or more,
- You are age 60 or older, or you are age 50 and disabled under Social Security’s rules,
- You do not re-marry before attaining these ages (OK to remarry after these ages and either retain the survivor benefit, or switch to a benefit from your current spouse, if higher.)
Benefits estimator
The Social Security Administration is gearing up to help millions of baby boomers who are approaching full-retirement age of 66 by sending out regular statements regarding benefits. In addition, there are a number of online resources available to help determine those benefits.
A calculator at will allow you to create what-if scenarios to compare various retirement options. But those tools, while helpful, are generic and your circumstances may be different. In addition to its online services, seniors can arrange a face-to-face interview with a Social Security representative by making an appointment online or by phone.
As your retirement date gets closer, a personal interview with Social Security may be an important piece of the planning because once you know what you will be receiving in benefits, you then can figure out where the rest of your retirement income will come from -- either part-time work or from retirement savings or both.
Social Security is the largest source of income for most elderly American, today, reports the agency, but "Social Security was never intended to be your only source of income when you retire," it said in its latest mail out. "You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire."
Keep in mind that according to U.S. Census data, the typical 65-year-old today will live to age 83 and one in 10 65-year-olds will live to age 95. For Social Security resources, see below:

- To calculate benefits:
- Retirement investment options:
- Financial planning calculators:
- Retirement planning calculators:
- Social Security Administration Web site:
- SSA telephone: 800-772-1213 (or 800-325-0778 for deaf or hard of hearing).


  1. I really like your article on financial planning and thought maybe your readers would be interested in a free retirement planning calculator called Nest Egg Software.
    It allows you to change things like retirement year, annual retirement income, and return rates for different baskets of money and see the results instantly.
    Here is a quick overview of the software:

  2. Mark,
    Thanks for the calculator option. I keep re-configuring the numbers as I move into semi-retirement.