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Social Security and You
On average, Social Security benefits currently represent
approximately 39% of the typical retiree's income, according to the Social Security Administration. For future generations of retirees, Social Security may represent
a much smaller percentage of retirement income.
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A System at Risk
When Social Security was established in 1935, the
average lifespan among Americans was 63. Today the average lifespan is more
than 77 years, according to the National Center for Health Statistics.
In 1950, 16.5 workers paid retirement benefits for each
retiree. By the year 2030, when Baby Boomers will be leaving the workforce in
large numbers, the ratio may be approaching two workers to every one retiree.
By then, the burden of taxes on each worker may well be unmanageable. This aging
of the population has led some experts to predict that the Social Security system
may run out of funds by the year 2041, a possibility that makes building your
own funds for retirement more important than ever.
Does all of this mean you will have no Social Security
to draw on when you retire? While an exact timetable of what will happen to
Social Security is uncertain, present trends clearly indicate that your own
efforts to build financial security for your retirement years are more crucial
than ever. The time to begin planning for retirement -- no matter what
your age -- is now.
Even under the best scenario, the Social Security system
was created as the foundation for retirement, but it was never intended to provide
the sum total of financial security during the retirement years. So the more
you can do for yourself to save and invest for retirement, the better off you
may be.
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How Much Will Social Security Pay?
The exact amount of your Social Security benefit
will depend upon your earnings history. You should receive an estimate of this
benefit, your "Social Security Statement," about three months before your birthday.
You can also call the Social Security toll-free number at
| Sources of Retirement Income For average current retiree: |
|
| Social Security Benefits | 39% |
| Pensions | 19% |
| Savings & Investments | 16% |
| Employment/Other | 26% |
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How Social Security Works
Social Security contributions are paid by you and
your employer. Your contributions were deducted from your paychecks since the
day you started working and are matched by an equal amount paid by your employer.
These contributions pay for the following:
Retirement benefits: Collectible at any time
after age 62 and based on the number of years you've been working and the amount
you've earned. In some cases, your children and your spouse may also be eligible
for benefits on your account.
Survivor's benefits: A kind of life insurance
coverage available to your spouse and dependents.
Disability insurance: Provides a monthly
income in the event you are unable to work due to a disability. Eligibility
depends on the number of "credits" you have earned and your age.
Medicare: Entitles you to medical benefits
and coverage, including hospital insurance after age 65. Bear in mind that Medicare
is also experiencing funding issues, and the Hospital Insurance Fund could run
out by 2026.
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Social Security Benefits for Other Family Members
When you receive Social Security benefits, other
payments may also be made to:
- a spouse age 62 or older;
- a spouse under age 62 who is caring for a child under
16, or a disabled child who is receiving benefits from your earnings; and
- unmarried children under 18 (or under 19) if they are
enrolled full-time in high school.
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When You Retire Determines What You Get
- Currently you can retire at normal retirement age (between
age 65 and age 67 depending on when you were born) and receive full benefits.
- Retire between 62 and 65 and receive a reduced benefit.
- Continue working and delay the receipt of benefits,
and get a bonus for each year of work past normal retirement age, up to age
70. "Delayed retirement credits" will gradually be raised to 8% by 2008 in
order to encourage later retirement.
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Changes in Your Monthly Benefits
Your monthly Social Security check may change to
reflect the following:
- Cost-of-living increases.
- Eligibility for disability benefits after retirement,
but before you reach normal retirement age.
| Bonus for Claiming Late Benefits | |
| Year you reach normal retirement age | Increase for each year retirement delayed until 70 |
| 2000-2001 | 6% |
| 2002-2003 | 6.5% |
| 2004-2005 | 7% |
| 2006-2007 | 7.5% |
| 2008 and after | 8% |
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Make the Most of Your Benefits
You must apply for Social Security benefits and for
Medicare benefits. If additional insurance is being considered, remember to
apply within six months of Medicare eligibility to be accepted without regard
to preexisting conditions. When you apply, you'll want to:
- Decide whether you'll collect your own Social
Security benefits, based on your earnings and work history, or your spouse's.
Presumably, you'll want to choose the one that pays the most. If you retire
before a spouse, you can collect your own benefits, then switch and choose
the spousal benefits if they are greater.
- Remember to apply for retirement benefits a few
months before you want them to start. Some time is required to process all
the paperwork, including Social Security number, proof of age, and evidence
of recent earnings (W-2 forms from the last two years, or, if you're self-employed,
copies of your two most recent tax returns).
- Apply for Medicare before you retire.
- Apply for any additional health insurance within
six months of Medicare eligibility.
- Reconcile your Social Security earnings report
with your own records at three-year intervals. Report any discrepancies.
- Don't forget that Social Security checks can
go to a former spouse to whom you were married 10 or more years -- at
62 for a divorced spouse -- at 60 for a surviving divorced spouse --
and at 50 for a disabled surviving divorced spouse. Children, in certain cases,
may be eligible for benefits under a grandparent's earnings.
- Bear in mind that "earnings limitations" (which
change each year) may limit the amount you may earn while still receiving
Social Security benefits. Those limitations end when you reach normal retirement
age.
- Keep Social Security records up-to-date if you change
your name, in order to have your earnings credited properly.
Regardless of your Social Security options, think of
Social Security as only a small percentage of your total retirement plan and
set aside a portion of your income on a regular basis. Saving and investing
for your own retirement nest egg is a "must."
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Summary
- Social Security benefits will only account for a small percentage of your retirement income needs.
- For information on your benefits, call Social Security at
(800) 772-1213. - You can choose to receive full retirement benefits at normal retirement age, or delay receiving benefits until age 70 and receive additional credit by doing so.
- Remember to apply for retirement benefits a few months before you want them to start. Apply for Medicare before you retire to maintain continuous coverage.
Checklist
- Begin contributing as much as possible to tax-advantaged workplace retirement plans and/or IRAs.
- If you're facing a potential retirement income shortfall, consider the role that annuities may be able to play in helping you establish a predictable income stream during retirement.
- If you're planning for an early retirement date that would require you to begin receiving reduced Social Security benefits, consider working longer in order to qualify for the full benefit amount.
- Take a fresh look at your retirement portfolio's asset allocation (investment mix).
