A Brief Guide to Social Security

If you're starting to plan for retirement, Social Security may be an important source of retirement income. Millions of Americans depend on Social Security today. For some, it is their primary source of retirement income, and for others, it is supplemental income.

Benefits of Social Security

​Unlike other sources of retirement income, Social Security offers a variety of benefits. Social Security is a predetermined amount of income based on your earning history, and it is guaranteed income that cannot be taken away. Social Security is a source of lifetime income that can never run out, and is inflation-adjusted to help retirees keep up with rising living costs. While Social Security checks stop at death, survivor benefits are paid to surviving spouses and dependents.

How you become eligible for Social Security

To qualify for Social Security benefits, you must work in a Social Security-covered job for at least 10 years and earn the required 40 credits. Each credit is based on a certain minimum dollar amount and you can earn a maximum of four credits for any year. For 2017, the amount of income needed to earn one credit is $1,300.

How retirement benefits are calculated

There are plenty of calculators available to help you estimate your benefits. The exact amount of your benefit is not calculated until you turn age 62—at that time, your annual earnings are indexed to account for wage inflation. After your earnings are indexed for inflation, your highest 35 years of earnings are recorded.

If you worked more than 35 years, only the highest 35 years are counted. If you worked less than 35 years, the missing years are filled in with zeroes. Each year of indexed earnings are totaled and divided by 35 to calculate your Average Indexed Monthly Earnings (AIME). In order to calculate Social Security benefits, your AIME is divided into three parts. Predetermined percentages are applied to each part, and they are added together to arrive at your Primary Insurance Amount (PIA).

When you can start receiving benefits

Until recently, full retirement age was 65. Now retirement age gradually increases, beginning with people born in 1938 or later, until it reaches 67 for people born after 1959 (this calculator can help you determine your retirement age). Early eligibility begins at age 62, but if you retire early, your benefits may be reduced by as much as 30 percent. If you choose to delay receiving your retirement benefits, benefits are increased by as much as 8% for every year you wait (depending on your date of birth).

When should you apply for Social Security benefits, and how does Social Security factor into your retirement planning? The advisors at Attentive Investment Managers can help with the rest. Drop by our office to pick up your free copy of a full Social Security guide that's available to our clients.