According to the Social Security Administration, just this year about 64 million Americans will be paid over one trillion dollars in Social Security benefits. When to start claiming your retirement Social Security benefits is one of the many complex financial decisions you will need to make. Long before figuring out when to claim your benefits, it’s helpful to understand more about how Social Security benefits are earned and calculated.
Am I eligible to earn Social Security benefits?
If you are working in a job, chances are you are paying Social Security taxes and therefore earning Social Security credits. The Federal Insurance Contributions Act (FICA) tax rate is the combined Social Security and Medicare tax rate. For 2019, the Social Security portion is 6.2% of the first $132,900 that you earn. If you are self-employed, you will also pay the employer portion of Social Security tax for a total of 12.4%.
In the year 2019, you earn one credit for each $1,360 of earnings (this amount increases each year based on average earnings levels). You can earn a maximum of 4 credits each year. For certain types of work, there are special rules that apply for earning credits.
If you were born in 1929 or later, you need 10 full years of work (or 40 credits) in order to be eligible for retirement benefits.
How are my Social Security benefits calculated?
Your Social Security retirement benefits are based on your lifetime earnings. Every year there is a maximum earnings, which is the maximum amount that you pay Social Security tax on. You don’t get any benefit for any earnings above that annual limit. For 2019, the annual limit amount is $132,900. The amount you earn each year is adjusted to account for changes in average wages over the years. This indexed amount makes it so that what you earned many years ago is comparable to your earnings today. After the annual earnings are adjusted, the Social Security Administration chooses the 35 years with the highest amount of earnings and calculates your average monthly indexed earnings. A formula is applied to that average amount in order to calculate your primary insurance amount. The primary insurance amount is what you get if you claim Social Security at your full retirement age (FRA). Your FRA is 65 if you were born in 1937 or earlier, 67 if you were born in 1960 or later, and anywhere in between 65 and 67 if you were born between 1938-1959.
Once you turn age 62, you are eligible to receive cost of living adjustments (COLA) on your benefits each year. The cost of living adjustment increase to Social Security benefits updates each year. For 2019, it is 2.8%.
How can I view my current Social Security earnings history?
Each year, your employer will send a copy of your W-2 to the Social Security Administration for them to record your earnings. It is important for you to verify that the information the Social Security Administration receives matches what is recorded on your statement.
As long as you are a worker age 18 or older, you can visit https://www.ssa.gov/myaccount/ and create a Social Security account to view your current earnings history and verify that everything looks correct. If you don’t create an online account before age 60, you will receive a mailed statement each year starting at age 60. You can also complete a form in order to request to receive a mailed statement.
I encourage you to set up an account and check it annually. You don’t want to find out that your earnings were incorrectly recorded and you aren’t earning the benefits you should be!
Source
Social Security Administration: https://www.ssa.gov/
