There are a lot of myths and misconceptions about Social Security. And rampant speculation about its impending demise. But Social Security is a cornerstone of many Americans' retirements. And despite the rumors, it’s not likely to disappear anytime soon.
Social Security is a federal government program that provides income to taxpayers and their dependents. It funds more than just retirements.
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The 4 Social Security Programs
Retirement Social Security is the program most people are somewhat familiar with. In addition to retirement, Social Security also has programs for disability income, survivor’s benefits, and Supplemental Security Income (SSI).
The retirement, disability, and survivors Social Security programs are funded through payroll taxes. SSI is funded through the general fund and is not through the payroll tax.
1. Social Security Disability Income
Social Security Disability Income covers qualifying major disabilities. The disability must be expected to last at least a year and prevent you from doing pretty much any type of work. Due to the strict qualification requirements, there are many disabilities that Social Security’s disability program doesn't cover. Break an arm and will have to miss work for six or eight weeks? Not covered.
From a financial planning standpoint, Social Security Disability is a program of last resort.
In the case of the most routine disabilities, Social Security isn’t going to cover anything. It’s for extreme cases.
So it's in your best interest to have coverage other than Social Security Disability. This could involve programs through work or individual policies. The coverage Social Security provides is important for those extreme cases. However, it's not something you can count on receiving if you’re disabled. It’s not a substitute for actually having disability insurance.
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2. Survivor’s Benefits
There’s a lot to survivor’s benefits. We’ll cover the major points.
Your surviving spouse can get retirement benefits based off of your work history — they don’t need to have qualified on their own. As a surviving spouse, they can begin collecting retirement benefits as early as age 60, age 50 if disabled.
They can get survivor’s benefits at any age if they are caring for your surviving child under age 16 and that child is also receiving Social Security benefits. Your unmarried children can receive benefits until age 18 — age 19 if they are still in school, and at any age if they become disabled before age 22. Your dependent parents can also receive benefits if they are at least 62 years old.
The total survivors’ benefits are limited to 150 to 180 percent of the deceased worker’s total benefit amount. Plus, if you're working and you exceed income guidelines, your benefits may be reduced.
The survivor’s benefits can be an important part of your financial plan. They generally aren’t sufficient to eliminate your need for life insurance, but you should factor them into your calculations of life insurance needs. That way, you can make sure you’re not overinsured.
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3. Supplemental Security Income
This program is administered by the Social Security Administration but funded by the general fund, not through payroll taxes like the other Social Security programs.
Supplemental Security Income is for people who are either age 65 (or older), disabled, or blind, and have little income or resources. Other Social Security programs require eligibility based on work history. SSI does not.
You can collect both Social Security and SSI. Obtaining SSI may qualify you for Medicaid. Plus, in many states, it's also a qualification for food assistance. Many states also supplement SSI payments.
It’s a great program to help some of society’s most vulnerable, but it shouldn’t be part of your financial plan.
4. Retirement Social Security
For most people, Social Security is going to be a major portion of their retirement income. Understanding Social Security and making the correct decisions about when to begin collecting are extremely important.
Your retirement benefit is based on your full retirement age, which in turn is based on the year you were born and will be between age 65 and 67. Retiring before your full retirement age will result in a reduced benefit amount.
You can begin receiving benefits as early as age 62, and you don’t need to have retired from work to begin collecting.
But if you haven’t reached your full retirement age, working will reduce your benefit. Once you reach full retirement age, working no longer reduces your benefit.
If you delay collecting beyond your full retirement age, your benefit will increase by approximately eight percent per year, up until age 70. Delaying past age 70 doesn’t make any sense, as your benefit won’t increase past then.
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Your benefit is calculated off of your 35 highest-earning years. If you have less than 35 years of earning history, then zeros are used for those years. Working additional years, especially high-earning years, can really boost your benefit.
Social Security maintains a record of your earnings. You can obtain a copy along with an estimate of your benefit through the Social Security website. Sometimes there are mistakes in your record. You can have records fixed for up to three years, three and a half months after the end of the year with the mistake. It’s important to review your earnings history periodically.
When to Begin Collecting Retirement Benefits
This is a complex question. The biggest variable is an unknown: how long you will live to collect. If you have health issues that might reduce your life expectancy, it may be in your interest to begin collecting as soon as you retire.
For most people, those with small or moderate retirement assets, it’s a harder decision. For these people, delaying as long as possible, up to age 70, will provide protection by increasing their benefit amount. This will become increasingly important in later years.
You also need to consider whether anyone else can collect off of your record. Your decision affects survivor benefits, and delaying can make a big difference in your survivor’s income.
Many people will benefit from reviewing their options with a qualified adviser. There’s no one best way — it depends on your own financial situation. And the consequences of the wrong decision are large. It’s too big of a piece to leave to chance.
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