When planning for retirement, think about all of the different sources from which you will draw income: your employer-sponsored plan, your IRA, an after-tax savings account, a pension and, of course, Social Security.
The Social Security program is a pay-as-you-go system.
The money you pay in today is paid out to retirees who currently are receiving their monthly benefits. Every paycheck you receive has a deduction for Social Security taxes. Your annual income is tracked by the Social Security Administration. They send a Social Security statement every year about three months before your birthday. You can compare the information to your past W-2 forms or tax returns and report discrepancies to 800.722.1213.
The Social Security Administration determines eligibility through a credit system, and you will become eligible for retirement benefits when you earn 40 credits. Benefit calculations are based on indexed earnings over your lifetime. For most tax-payers, the Social Security benefit is calculated by indexing the earnings from the 35 highest income-generating years and adjusting upward at a decreasing rate, using a three-part scale for higher income workers. The Social Security Administration applies cost-of-living increases to benefits as needed. Your Social Security statement will give you an estimate of your benefits in today’s dollars, or you can go to SocialSecurity.gov to use one of their benefits calculators.
Some individuals will need to pay federal income taxes on Social Security benefits.
This happens when you have other reportable income, including wages, interest, dividends, 401(k) distributions or IRA distributions. Your Social Security benefit will be taxable, but according to the IRS, no one will pay federal income taxes on more than 85% of Social Security benefits. As always, you should consult a tax adviser when planning and estimating your future taxes.
To calculate how Social Security will impact your retirement income, estimate how much you’ll receive and when your monthly checks will start to arrive; your start-date is based on your birthday.
- For people born before 1938, your full eligibility date is your 65th birthday.
- If you were born between 1938 and 1942, your eligibility date increases two months per year.
- People born between 1943 and 1954 are eligible for full benefits at age 66.
- People born between 1955 and 1960 are on a graduating scale that increases two months per year while those born after 1960 are eligible at 67.
You can apply for early retirement at age 62, but remember that your monthly benefits will be lower.
Because Social Security is a pay-as-you-go system there are concerns that benefits could run short as the number of retirees increases and the number of workers paying Social Security taxes declines. For this reason we recommend utilizing your employer-sponsored retirement plan and IRA options .
For more information visit SocialSecurity.gov.
Need help figuring out how much Social Security you will get after taxes? Check out thisSocial Security calculator from Financial Engines.