Social Security Benefits - SmartAsset

Are you factoring Social Security benefits in to your retirement planning? If so, you should know the basics of Social Security eligibility and payments. That way, you won’t get any unpleasant surprises when it comes time to claim your benefits after decades of hard work. Don’t worry – we’ve got you covered with our guide to Social Security and how retirement benefits work.

Find out now: Calculate your Social Security income

Social Security Background

Social Security began as a form of forced savings that, combined with employer pensions and individual savings, would ensure a dignified retirement for all Americans. Sounds great, right? For all the dire predictions about Social Security insolvency, the system is still going strong and is in fact the only income source for many retirees. All the more reason to understand Social Security benefits, who gets them, how and when.

Social Security Eligibility and Credits

Social Security eligibility is calculated based on a credit system. A person needs 40 credits of “covered” work to be eligible for monthly Social Security checks in retirement. Let’s unpack that sentence, shall we? A credit is equal to one quarter of a year, which means that 40 credits equals 10 full years of work. If you worked here and there, with gaps in between, that’s fine too. You just need to have a total of at least 40 credits.

But what does “covered” work mean? It means that Social Security taxes were taken out of your wages while you were doing that work. Babysitting for your neighbor doesn’t count and neither does under the table or off the books work. Another, less well known form of un-covered work is, sometimes, public employment. Weird, right?

It turns out that when you work for the government or other tax-exempt organization, your earnings might not be subject to Social Security taxes. That means your work isn’t covered. The most famous example of this phenomenon is the 1.2 million public school teachers who are not covered by Social Security. If you’re a public school teacher, whether your work is covered depends on the state where you teach. The reason? Some states opted in to federal Social Security taxes while others did not. In theory, state pensions make up for the lack of Social Security earnings.

Social Security Monthly Payments

Average monthly Social Security retirement benefits currently stand at $1,294. Your benefits could be higher or lower than that amount, but let’s work with the average. Compare that number against the amount you’re currently spending each month. Are you feeling nervous about saving enough for retirement or confident that you won’t have a retirement savings shortfall? If the former, why not bump up your retirement savings?

After your years of earning and (we hope) saving, you can apply for Social Security benefits in retirement. When you apply for Social Security benefits, you’ll be able to specify how you want to receive your monthly payments, so have your bank details handy when you begin your online application to start claiming your retirement benefits.

Social Security Retirement Age

Technically, you can begin collecting Social Security benefits at 62. But that’s not what the Social Security Administration calls your full retirement age (FRA). Full retirement age ranges from 65 to 67, depending on when you were born. If you’re reading this, your FRA is probably between 66 and 67. Here’s a handy Social Security chart that tells you your FRA based on your birth year. Spoiler alert: FRA is 67 for anyone born in 1960 or later.

Why the difference between 62 and your FRA? Well, the Social Security Administration knows that some folks get to 62 and just can’t work anymore. On the other hand, the government wants people who can continue to work to do so. That way, they’ll draw less money from the Social Security coffers and have more earnings of their own. If you take Social Security benefits at any time between age 62 and your FRA, you’ll get less than your full entitlement. If you take benefits at your FRA, you’ll get all the benefits you earned. But if you wait until age 70, you’ll get even more benefits by way of what are called Delayed Retirement Credits. For every year you wait to claim benefits between your FRA and age 70, you’ll get an 8% bump in your benefits.

If you’re able to delay claiming benefits until age 70, doing so will increase your benefits and help decrease the risk that you’ll outlive your retirement income. The risk with waiting until age 70, of course, is that you’re not guaranteed to live long enough to reap the benefits of your Delayed Retirement Credits. Most people, though, would rather leave a little savings behind than outlive their savings.

The Takeaway

If you’re currently living large, it’s a good idea not to count on Social Security benefits to be your sole source of support in retirement. Use our retirement calculator to find out how much you need to be saving. Oh, and when you use our calculator, you can choose whether or not to include Social Security benefits in the final assessment. Treat saving for retirement as a gift from Current You to Old You. And be generous.