June 29, 2012

Optimize Your Social Security Benefits

No doubt, Social Security gets a lot of press, and much of it can lead people to believe that the future of the program is out of their hands. While that may be true in some respects, individuals do actually have some control when it comes to making decisions that determine how to get the most from the Social Security check they will receive.

Why Social Security will feel the pinch

The Social Security program pays benefits for retirement income, disability income, and death and survivorship in the sum of hundreds of billions of dollars per year (www.ssa.gov). The amount of income a person receives from Social Security is based on the average income earned over the person's lifetime. Spouses who had limited employment income, or none at all, are also eligible for benefits through their working spouse.

The payroll taxes collected from a person's paycheck funds the program. The federal government and the Federal Reserve Board manage the money that is put into the Social Security Trust Fund. Payments made to beneficiaries today are made from monies collected by the people in the workforce today. Therefore, one of the threats that Social Security faces is when the number of retirees exceeds the number of people in the workforce, because not as much money will accumulate in the fund. The amount of money available may not be enough to pay Social Security benefits.

This will occur as the baby-boomer generation continues to age into the Social Security window of eligibility, which is age 62 to 67. The generation that follows the baby-boomer generation is fewer in number, yet it will be supporting the baby boomer's Social Security benefits. Longer life expectancies also play a part in this. People are living longer and therefore remaining on Social Security longer than previous generations. This situation will diminish the fund as well.

Taking action to optimize Social Security benefits

Politicians will continue to determine how to manage the situation created by the discrepancy between the number of people in the workforce versus the number of retirees. However, individuals do have some decision-making power as to how Social Security will best support them during retirement and how to get the most out of the program. The U.S. Social Security Administration is the source of thorough information about Social Security. Their website, www.ssa.gov, offers information about the program and an avenue for applying online.
  • Earn as much as you can. Social Security benefits are determined from a person's 35 highest-earning years. That figure is then used to calculate a primary insurance amount, which is what an individual gets if benefits are initiated at the normal retirement age. Normal retirement age is shown in the Social Security Administration's chart below.

    Normal Retirement Age

    Year of birth Age
    1937 & prior 65
    1938 65 and 2 months
    1939 65 and 4 months
    1940 65 and 6 months
    1941 65 and 8 months
    1942 65 and 10 months
    1943-54 66
    1955 66 and 2 months
    1956 66 and 4 months
    1657 66 and 6 months
    1958 66 and 6 months
    1959 66 and 10 months
    1960 and later 67

    Source: U.S. Social Security Administration

  • Delay taking Social Security benefits. The U.S. Social Security Administration's chart shows how benefit rates are affected by waiting to take benefits. Benefits are increased if a person delays retirement beyond normal retirement age.

    Source: U.S. Social Security Administration

    Generally, Social Security uses a formula based on the primary insurance amount, or PIA. If you wait to start receiving Social Security until your full retirement age (FRA), you get 100 percent of your PIA. If you take it at 62, when you first become eligible, you get only 75 percent. But if you wait until age 70, you get 132 percent of the PIA.

    It is important to note that while a person may not choose to apply for Social Security benefits until after age 65, he or she must still enroll in Medicare. Medicare is a separate program, and penalties can be assessed if a person does not enroll at age 65.

  • Review the spousal benefit option. If one spouse files for Social Security, the other receives the spousal benefit amount. The spouse who receives the spousal benefit amount delays filing for their own Social Security benefit for as long as possible, and therefore the amount of that benefit is greater once it is taken.

  • Pay attention to the work rules. A person can be employed and also receive Social Security. If a person is younger than full retirement age and earns more than $14,640 for all of 2012, $1 is deducted from the benefit for each $2 earned above the $14,640. If a person is full retirement age or older, he or she may keep all of the benefits regardless of how much is earned.

    www.Reuters.com and Steve Goss, chief actuary of the Social Security Administration, say, "Social Security is not in imminent danger of running out of money, but it faces a financial crunch a bit further out - around 2035. That is when Social Security's Trust Fund is projected to be exhausted due to the drawdown of benefits by the baby-boom generation. At that point, the program would have sufficient tax revenue to pay only about 76 percent of promised benefits." Therefore, while the future of Social Security appears to be steady but also in decline, individuals of any age can start planning and implementing a plan for garnering the most out of their Social Security benefits.

    Source: csa.us

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