THE BLOG
08/04/2014 11:51 am ET Updated Oct 04, 2014

Social Security Benefits Made Easy - Part 3

Today, Baby Boomers, we start to dig into the meat and potatoes of the Social Security system.

Here are a few definitions, requirements and handy tips you should know before we begin.

Remember, contribution rates, applications and benefits have varied over the years since the Social Security Administration first came on line in 1935.

The following information is the most current I can offer based on the 2014 requirements.

Program Purpose: The retirement benefits of the Social Security System are an insurance meant to supplement the savings, investments and other sources of income in the retirement years of wage earning citizens.

Eligibility: All U.S. citizens are eligible for Social Security based on their earnings history.

As we discussed yesterday, credits are earned by paying the FICA tax.

In 2014, you earn 1 credit for every $1,200 in earnings up to 4 in a year and 40 in 10 years.

This is officially known as your "Primary Insurance Account" or "PIA."

Self-employed individuals and military personnel earn credits the same way as standard employees do.

Insured Status: "Fully Insured Status" means you have earned the needed amount of credits (40 in 10 years) to receive full available insurance benefits based on your age at application.

"Currently Insured Status" means you have restrictive coverage and minimum benefits under the program having attained at least 6 credits in a period of 3 years and 3 months ending with death, disability or retirement.

Taxes: Employees contribute 6.2% and employers 6.2% of your earnings to FICA.

If you are self-employed then you contribute the entire 12.4%.

Contribution Base: Capped at $117,000 in 2014.

Benefit Amount: Based on your monthly average of your highest earning 35 years of employment.

Application: Up to 3 months prior to benefit eligibility month

Payment: Made by direct deposit, debit card or electronic transfer account.

The official website is: www.ssa.gov

Once you create an account (if you haven't already) you can find out how much your eligible benefits are.

There is also a retirement estimator tool found here.

Most of us baby boomers are interested in the Retirement Benefits that paying into the Social Security System has afforded us.

But, if you remember yesterday's discussion, I pointed out that there are actually 5 different benefit programs now processed through the SSA.

These are:

  • Retirement Benefits
  • Disability Benefits
  • Survivor's Benefits
  • Medicare Benefits
  • Supplemental Security Income

They can all kind of tie into each other based on your retirement situation so it is important to take a look at each one individually.

But, how they are administered are all based on the primary retirement benefit program so let's take a simple step by step look at your retirement benefits first.

Retirement Benefits

A "full retirement" requires you have a total of 40 credits at retirement age.

In 2014, the calculation are as follows:

  • If you were born in 1937 or earlier, your full retirement age is 65.
  • If you were born between 1938 and 1942 then add 2 months per year after the age of 65.
  • For instance, if you were born in 1940 your full retirement age is 65 years and 6 months.
  • If you were born between 1943 and 1954 your retirement age is 66.
  • If you were born between 1955 and 1959 add 2 months per year.
  • If you were born in 1960 or later then your full retirement age is 67.

Why did the government make it so complicated to figure out when you retirement age is?

Why didn't they just leave well enough alone?

Well, a couple of things added to the confusion.

First of all, the original Social Security Act of 1935 set the minimum age for receiving full retirement benefits at 65.

In the 1980's Congress noted significant improvements in the health of senior citizens and increases in average life expectancy.

Since the program first began paying monthly SSI benefits back in 1940, the average life expectancy for men at the age of 65 had increased by almost 4 years to the ripe old age of 81.

For women (not to be outdone by men) reaching the age of 65, their average life expectancy had increased almost 6 years to the age of 84.

In 1998, the average retirement age for both men and women retiring was 64.

In 1998, nearly 69% of men and women who retired started taking Social Security benefits before age 65.

Did you think our government wanted to foot this extra expense?

Obviously, the characteristics of the average US senior citizen had changed more than the government had anticipated.

But, did you know that, if eligible, you can take an "early retirement" with reduced benefits at the age of 62.

If you retire due to health problems, then disability benefits may also be available.

If you so desire you can opt for a "delayed retirement."

Each additional year of work is an extra year of earnings, which increase your benefit.

There is an automatic percentage increase per year you delay retirement up to the age of 70 which can be as much as 8% if you were born in 1943 or later.

So, if you were born in 1943 and you delay your retirement benefits until you are 70 you could receive up to 124% (3 years X 8%) of your basic benefits had you applied for retirement benefits when you were 66.

Some of us Baby Boomers may be considering working as long as we can to rebuild our retirement savings accounts.

In this case, if you plan on working while receiving benefits you can but some limitations apply.

In the case of early retirees, $1 in benefits is deducted for every $2 in earnings exceeding the annual limit of $15,480 in 2014.

If you are working in the year of your retirement then only $1 of every $3 earned is deducted after the annual limit of $41,400.

There are no limits on the amount of income you can earn starting in the month of your full retirement age.

Do you have to pay taxes on your benefits?

Not if your sole source of income is your social security benefits.

However, if you have other substantial income such as wages, self-employment, interest and dividends that must be reported on your tax return in addition to your benefits.

If you file a Federal tax return as an "individual" with a combined income (earnings and SS benefits) between $25,000 and $34,000 you must pay income tax on up to 50% of your benefits.

This can rise up to 85% if your income exceeds $34,000.

If you file a joint return and you and your spouse have a combined income between $32,000 and $44,000 you may have to pay income taxes on up to 50% of your benefits and up to 85% if your income exceeds $44,000.

So, are you feeling a little better prepared for how you are going to utilize your social security benefits?

Tomorrow we will continue our discussion on the remaining benefit programs and hopefully answer some of your questions like:

Am I eligible for spousal benefits?

Can I collect benefits from an ex-spouse?

Are my children eligible for benefits?