Understanding Social Security

Social security is a part of the retirement plan of many American workers. Approximately 96% of American workers are covered under Social Security. Knowing how the Social Security system works will help you be prepared when you retire.

How do you qualify for retirement benefits?

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. Credits are equivalent to full working quarters. You earn one credit for each quarter of your working life. For example, if you work for 1 full year, you have earned a total of 4 credits. The number of credits you need to get retirement benefits depends on when you were born. For example, if you were born in 1929 (or later) you need 40 credits (or 10 years of work) to be eligible for benefits.

How much will your retirement benefit be?

  • Your benefit payment depends on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years you didn’t work or had low earnings, your benefit amount may be lower than if you worked steadily. This is directly related to the amount of Social Security you have contributed. The age that you decide to retire also affects your benefit. You can choose early retirement, typically at age 62, which reduces the benefit you would get at your full retirement age. For example, Social Security suggests your benefits at early retirement would be about 25% lower than what you would receive at your full retirement age. You can also choose to work beyond your full retirement age. If you do, you can increase your future benefits. If you delay retirement, each year you work adds another year of earnings to your Social Security record and increases your lifetime earnings. By delaying retirement age until age 70, you are eligible for maximum benefits.
  • The online Retirement Estimator provides an immediate and personalized retirement benefit estimate to help you plan for your retirement. The estimator will also let you create scenarios to compare retirement options and dates as well as expected future earnings.
  • Note: If you face health conditions that require you to retire early, you may want to contact Social Security to determine eligibility for Social Security disability benefits.

How do I decide when to retire?

Choosing when to retire is an important, personal decision – based on your personal needs and lifestyle. Regardless of the age you retire, contact Social Security in advance to learn about your choices and options to ensure you make the best decision. Sometimes, your choice of a retirement month could mean higher benefit payments for you and your family.

Financial experts suggest you plan for 70-80% of your preretirement income to have a comfortable retirement. Social Security replaces about 40% of pre-retirement income for the average worker so savings from employer sponsored savings, pensions, personal savings, and investments are important. You may be wondering if you adequately planning and preparing; the Ballpark E$timate is an easy-to-use, interactive tool that helps you quickly identify approximately how much you need to save to fund your retirement. The Ballpark E$timate includes projected Social Security benefits and earnings assumptions on savings in an understandable way. Creating a long-term plan can help you plan for a solid financial future.

There are special considerations and benefits for widows, widowers, spouses (current and former), children, and disabled dependents. You need to talk to Social Security to understand how the rules may apply to your situation. Because of your personal considerations and circumstances, it’s important to contact Social Security to better understand options related to your benefits. For example, if you are divorced – and were married for more than 10 years – or have an unmarried child under 18, benefits may vary. These are just 2 examples of how benefits may change based on circumstances.

How do you apply for Social Security retirement benefits?

Depending on your circumstances, you will need some or all of the documents listed below:

  • Your social security number
  • Your birth certificate
  • Your W2 forms or income tax return for last year
  • Your military discharge papers (if applicable)
  • Your spouse’s birth certificate and Social Security number if they are applying for benefits
  • Your children’s birth certificate and Social Security number if you are applying for benefits
  • If not born in the U.S., proof of citizenship
  • Name, routing number, and account number of financial institution for direct deposit of monthly benefit

Will I have to pay taxes on the benefits?

About 40% of people who get Social Security have to pay income taxes on their benefits. At the end of each year, you will receive a Form SSA-1099 (similar to a W2) from the Social Security showing the amount of the benefits you received over the course of the year. You will use this form when you complete your income tax returns to find out if you must pay taxes on your benefits. While you may not be required to have Social Security withhold federal taxes, you may find it easier than paying quarterly estimated tax payments.

How might my benefits change?

If you get a pension from work for which you paid Social Security taxes, that pension won’t affect your Social Security benefits. However, if you get a pension from work not covered by Social Security – for example, the federal civil service, some state or local government employment, or work in a foreign country – your Social Security benefit may be reduced.

Understanding Social Security can help you be prepared when you retire.