When it comes to the topic of Social Security, do you feel a bit confused? If so, you aren’t alone. Research has shown that most people overestimate their Social Security payments by more than $300.
It’s hard to accurately plan for retirement if you don’t understand how Social Security works and how much you can expect to receive. In this blog post, I’ll review the basics that you need to know.
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What is Social Security?
Social Security was established as a safety net for aging Americans. Before the Social Security Act of 1935, care for the elderly fell to families and the communities they lived in.
Social Security is a type of insurance — it helps replace your income from work if you retire, are disabled, or die and leave a family behind. That’s why the official name is the Old-Age, Survivors, and Disability Insurance (OASDI) program.
Unlike pensions, which are pre-funded, Social Security operates on a pay-as-you-go system. All employed workers contribute to the system, knowing they’ll receive the benefits down the road when they retire.
It’s financed as a payroll tax, and employees pay 6.2% of their wages toward Social Security benefits. Today, 61 million Americans rely on Social Security benefits, and an additional 169 million workers pay into the system.
How Does It Work?
Anyone can apply for Social Security, but to qualify, you’ll need to meet certain guidelines. If you wait until your full retirement age, you’ll receive the full retirement benefits. Your full retirement age will be between 65 and 67, depending on the year you were born.
However, recipients can begin collecting Social Security payments as early as age 62. But if you start collecting your benefits early, your monthly payments will be lower.
You can use the Retirement Age Calculator to help you determine your full retirement age. For instance, this chart illustrates what you can expect to receive if you were born between 1943 and 1955. In this example, the individual’s full retirement age is 66-years-old.
|Age you began receiving benefits||Percentage of benefits received|
When should I begin collecting benefits?
Many people are divided on the age when individuals should start collecting Social Security benefits. The advantage of waiting until full retirement age is that you’ll collect 100% of your Social Security benefits.
But there’s no guarantee you’ll make it to your full retirement age, and you would have to live for a long time to make up the difference in payments if you wait. Ultimately, each person needs to decide for themselves when they’re ready to start collecting benefits.
The Main Types of Social Security Benefits
There are four ways you can receive Social Security benefits, depending on your particular situation. These benefits are retirement, disability, survivors, and supplemental.
When you think of Social Security, retirement benefits are probably the first thing that comes to mind. If you’re at least 62 or older and have worked for 10 years or more, you’re eligible for retirement benefits.
The amount you receive is determined by your pre-retirement salary and how early you begin collecting benefits. According to AARP, the average Social Security payment is $1,543 per month. In 2021, the most you can receive is $3,148 per month.
Retirement benefits are helpful to get by in your later years, but they won’t be enough to live on for most people. Ideally, you should have other sources of income as well.
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If you cannot work due to a disability and have limited resources, you may qualify for disability benefits. Like retirement benefits, disability is only available to adults who have worked for at least 10 years or more.
And you must have a medical condition that will last for at least a year, or that could be fatal. Before applying, you may want to review the Adult Disability Checklist to ensure you meet the requirements and have all the necessary information.
Survivor benefits are available to widowed spouses and dependents of eligible workers. This benefit is designed to protect families with young children. If you’ve worked and paid into Social Security for most of your adult life but die before you can reap the benefits, your spouse or dependents could access those benefits instead.
The level of help your or your family receives depends on a variety of factors. The Social Security Administration will consider the worker's age at the time of death, the survivor’s ages, and how they are related to the deceased individual.
And finally, supplemental benefits are available to individuals who can’t earn a sufficient income on their own. For instance, if you’re an adult with a disability or have a child with a disability, you may qualify for supplemental benefits.
Supplemental benefits are designed to meet your basic needs, like helping pay for housing, food, and clothing. The amount you receive depends on your monthly income and current living situation.
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How Do I Apply for Benefits?
You can apply for benefits on the Social Security website. Depending on the type of benefits you need, you can find the correct application and apply online.
The Bottom Line
Social Security benefits exist to act as a safety net for older Americans. The amount you receive will depend on your age and your pre-retirement salary. To learn more, be sure to visit the Social Security website.