When can you apply for Social Security?
When you turn 62 you can apply for Social Security payments providing that you were a contributor.
Many low-wage, part-time, and self-employed persons who have not contributed to Social Security might find that they are not eligible.
Also if you a widow or widower you can receive some part of the Social Security of your spouse who was eligible. You collect a percentage of your spouse’s Social Security payments or your own if you were a contributor. Whichever is greater.
The more that you earned in your working lifetime, the more you will receive.
Unfortunately, Social Security payments are not what most people expect.
The actual amount that you will receive will be quite low.
The average monthly Social Security check in 2015 is $1,328.
Social Security is not a Retirement Program
Although Social Security was never designed to be a pension program, nearly 20% of married retirees and 50% of unmarried retirees rely on Social Security for most of their income, according to the Social Security Administration.
How are Social Security payments calculated?
Social Security payments are calculated as a percentage of your best 35 working years. So if you didn’t earn much money during the last 35 years, then your Social Security payments will not be that high.
In fact, if you have only paid into the Social Security system for 30 years, it might pay you to contribute for an additional 5 years. Otherwise those 5 years will be counted as years of zero income and pull down your average.
The procedure to calculate Social Security benefits includes these three steps.
►First, a worker’s previous earnings are adjusted for inflation for your entire working lifetime taking only the best 35 years. So if you worked 45 years, up to 10 “bad” years when you were unemployed or had little income will not be counted against you.
►Second, these adjusted earnings are averaged and divided by the number of months in 35 years to arrive at Average Indexed Monthly Earnings (AIME).
►Third, the Social Security benefit formula is applied to AIME to produce the Primary Insurance monthly payment
Here is the Social Security Benefit Calculator so that you can figure it out for yourself.
Some things that you should know about Social Security
In theory, the money that you have paid into Social Security is held in “your account” just for you.
In practice, the money that you paid into Social Security was immediately paid out to current beneficiaries and “loaned” to the Federal government.
So most of the money is not really in “your account” at all.
Will Social Security go broke?
The Social Security trustees estimate that by 2033 the trust fund will be empty. That is why there is so much pressure on Congress to raise the retirement age, lower the benefits, stop indexing payments to inflation, and increase taxes.
Not to worry.
These changes will probably not affect current retirees or those soon to be retired.
Retirees vote while many young people don’t and current workers are not paying attention to what is happening. So they are the ones who will suffer.
Let me put to rest a rumor.
Social Security payments are NOT based on your last 10 years of income
This misunderstanding comes from the fact that you must have been paying into the Social Security system for 40 quarters or about 10 years to be eligible for anything. And you won’t get a refund on the taxes that you have paid either.
This can be a problem for part-time workers, the self-employed, and especially for women who have hardly worked out of the home and who have not been paying Social Security taxes.
If a housewife or part-time worker hasn’t contributed to Social Security for at least 10 years, they will receive nothing until their spouse dies at which time they can get a percentage of his or her Social Security – if there is any.
So if you have worked and been contributing to Social Security for only 8 years total, you need to work 2 more years otherwise you will still get nothing. If you only contributed for 9 years and 11 months you get nothing. Better work 1 more month.
Best 35 years
If you have contributed to the Social Security system then your Security payments are based on the average of your best 35 years adjusted for inflation. If you have not worked at least 35 years, then any years of zero income will be averaged into your earnings.
If you have worked (and contributed) for more than 35 years, then the worst years will not be averaged in.
Are Social Security payments taxed?
For most people Social Security benefits are not subject in federal income taxes. You will, of course, have to pay taxes on any wages, unemployment payments, self-employed profits, and 401(k) withdrawals less deductions.
You can work while collecting Social Security without a penalty.
You can receive Social Security retirement payments and still work depending on whether you have reached your full retirement age.
Use the Social Security Administration Retirement Age Calculator to find your full retirement age based on your date of birth.
If you haven’t yet reach your full retirement age your Social Security payments will be reduced $1 for every $2 your earnings about the 2015 limit $15,720.
When you reach your retirement year, they will deduct $1 for every $3 that you earn* above the $41,880 limit. And when you reach your retirement month or more, they will no longer make any deductions.
In other words starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings.
* Earnings are only the wages you make from your job or your net earnings if self-employed including any bonuses, commissions and vacation pay. Pensions, annuities, investment income, interest, veterans or other government or military retirement benefits are not counted as income.
You were born between 1943 and 1954 so your full retirement age will be 66.
If you are now less than 66 years old and earn less than $15,720 beyond your Social Security payments than your Social Security payments will NOT be reduced.
However, if still continue to work and make $30,000 this year. That would mean that you earn $14,520 (not counting your Social Security payments) over the annual limit ($30,000 minus $15,729 = $14,520). Your Social Security benefits will be reduced by $7260.
Moreover, you will still have to pay taxes on the $30,000 that you earned.
This is a 50% tax on the amount over the limit
This is a severe penalty.
For example, if you are still working and want to collect Social Security then become a subcontractor to your current employer and receive your $30,000 as a billing for services under your corporate name. As a corporation you can keep the profits in the company.
Don’t pay yourself any salary. Just plow all the profits back into the business. Be sure to have lots of legitimate expense as you must pay taxes on your profits. But don’t pay dividends to yourself at this time.
Then when you reach your full retirement age you can take the money out of the business as income without affecting your Social Security payments.
Of course, you might still have to pay taxes on what you take out.
But you will have avoided the 50% tax penalty as mentioned above.
Please check with your accountant before implementing these ideas.
When should you collect Social Security?
Most Americans start collecting at 62 years old.
However, each year you delay collecting means a benefit increase of about 8%.
My suggestion is that if you are still working before full retirement age and can’t start an incorporated retirement services business, then you should delay getting Social Security early.
And if you are planning to live a long time, you will also benefit in delaying payments.
If you need the money now, take it – because even if you wait until you are 66, you will have lost all payments that you could have received in the last 4 years starting at 62.