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In this article, we’re going to take a deeper look at Social Security Retirement Benefits, what they are , and how they work.
What is Social Security?
Social Security is a social protection program that provides replacement income for qualified American retirees and their families. It provides individuals with a degree of income security when they retire or are faced with disability, survivorship, incapacity, unemployment, or rearing children.
What are Social Security Retirement Benefits?
A Social Security retirement benefit is a plan designed to guarantee income security when you retire and can give access to medical care for certain beneficiaries. The program also caters to disability, survivorship, incapacity, unemployment, or rearing children. Read on to find out more about Social Security retirement plans and how they could work for you in the future.
Established by legislation, social security is run by the federal agency known as the Social Security Administration (SSA). It is the term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States. It can include programs such as social insurance, social assistance, national provident funds, mutual benefit programs, and universal programs.
So, in layman’s terms, social security is a government-funded program set up to help you in the future, whether it be with a retirement plan, disability funding, or if you have lost your income for some or other reason.
How Does Social Security Work?
Social Security is an insurance program designed to provide retirement support for American workers who pay into the system while they are employed. It also provides support for workers who become disabled or survivors of workers who have died and dependents of beneficiaries.
So, if you have worked for a certain number of years and have been paying into a Social Security program when you retire or if you become disabled or ill, you will be eligible for benefits from that program.
The program is funded through FICA taxes (Federal Insurance Contributions Act) and replaces a percentage of your pre-retirement income based on your lifetime earnings. You will pay taxes into the social security program while you are working. This accumulates and is available to you at retirement age, or for other reasons such as disability, survivorship, incapacity, unemployment, or rearing children.
The money is spread over two Social Security trust funds for retirees (OASI Trust Fund) and disability beneficiaries (Disability Insurance Trust Fund). The money is used to pay benefits to people currently eligible for them and the unspent money remains in the fund.
How Much Do I Have to Pay Every Month?
The Social Security Administration levies a 12.4% tax on earnings (6.2% is paid by you, and 6.2% is paid by your employer) to fund Social Security benefits. Social Security benefits for workers who pay into the system are worked out based on their average indexed monthly earnings (AIME) during their 35 highest-earning years.
The amount of an individual’s average wages that Social Security retirement benefits replace varies depending on their earnings and the time they have been paying into the program. Higher lifetime earnings result in higher benefits.
So, the amount you will pay into Social Security every month will, therefore, vary depending on your age, your salary and, and how long you have been paying into the system. If you have earned well during your working years, you would have paid a higher percentage into the system. You will also be eligible for greater benefits when you eventually retire.
What Happens if I Change Jobs?
Actual earnings are adjusted to account for changes in your average wages since the year you began to earn a salary and then calculated as the average monthly earnings during the 35 years in which you worked.
Although your salary may have changed over the years due to job changes or other circumstances, the amount you will receive from the Social Security system when you retire will be calculated on your average earnings during your 35-year working tenure.
When Can I Begin to Receive Benefits?
If you have been paying into the system, you can begin to claim benefits at the age of 62 or retirement age, which is 66 or 67 years, depending on the year you were born. We’ll go into that in further detail later on in the article, but generally, you can start receiving benefits from the age of 62.
Types of Social Security Benefits
There are four categories of Social Security benefits that fall under the Old Age, Survivors,and Disability Insurance Program (OASDI): retirement, disability, dependents, and survivor’s benefits. Let’s take a look at each category to get a better understanding of the system and what it offers.
1. Retirement Benefits
Social Security retirement benefits are available to workers who have paid into the Social Security system for at least 10 years. Eligibility for early retirement benefits is at age 62, however, higher monthly benefits are paid out at the “full retirement age” of 66. Even higher benefits are paid as the retirement year is pushed back up until the age of 70, at which point the benefit maxes out.
If you enjoy your job and can wait a few more years to retire, you will receive higher benefits, so hang in there if you can! At the age of 70, however, you will have to take retirement to receive the benefits from the system.
2. Disability Benefits
If you cannot work due to a physical or mental disability and are considered disabled under the medical guidelines of the Social Security program, you may also be eligible for Social Security disability benefits. Eligible beneficiaries and family members of disabled workers can receive benefits similar to their full retirement benefits.
3. Survivors Benefits
The Survivors Benefits category applies to the spouse and children of a deceased worker. They may be eligible for survivor benefits based on the worker’s earnings record, including surviving spouses who are 60 or older, or 50 or older and disabled, provided they have not remarried. A surviving spouse who is caring for a child who is younger than 16 or is disabled, may also be eligible for survivor’s benefits.
4. Dependents Benefits
The dependents of spouses of retired or disabled workers who qualify for Social Security retirement or disability benefitsmay be entitled to benefits based on the main member’s earnings record. For children to receive benefits, they must generally be younger than 18 or disabled. Elderly parents aged 62 or older may also be able to collect benefits if they are dependent upon a beneficiary who is deceased.
Now let’s take a closer look at Social Security and Retirement Plans and how they can help you in your later years.
Social Security and Retirement
There are three sub-categories of Social Security Retirement Plans. If you have been in the Civil Service or have worked for the Federal government at any stage, you are eligible for specially designed Social Security Retirement Plans as seen below. Social Security Retirement Insurance is available for anyone who is employed to join.
1. Civil Service Retirement System (CSRS)
The Civil Service Retirement is a government-funded benefitcontributory retirement system for certain Federal employees.
Who is eligible for Civil Service Retirement System (CSRS)?
Eligibility for Civil Service Retirement is based on the ageof the individual and years of creditable service. Individuals must also have served in a Civil Service position for one of the last two years before retirement to be eligible for this benefit.
The Civil Service Retirement System has five distinct categories:
- Optional
- Special Optional
- Early Optional
- Discontinued Service
- Disability
2. Federal Employees Retirement System (FERS)
The Federal Employees Retirement System (FERS) is a retirement plan that provides benefits from three different sources for new Federal civilian employees.
Who is eligible for Federal Employees Retirement System (FERS)?
Eligibility for the Federal Employees Retirement System (FERS) is determined by age and the number of years of creditable service worked. Age requirements may be affected for disabled individuals.
The Federal Employees Retirement System (FERS)Basic Benefit Plan has four different categories, namely:
- Immediate
- Early
- Deferred
- Disability
3. Social Security Retirement Insurance System
The federal program known as Social Security Retirement Insurance is administered by the U.S. Social Security Administration (SSA). It is funded by the Federal government.
Who is Eligible for Social Security Retirement Insurance?
Social Security retirement benefits become available to workers who are at least 62 years old and paid into the Social Security system for 10 years or more. Full retirement age (FRA) is between 66 and 70 years of age. Individuals who wait to retire within the full retirement age bracket will receive higher monthly benefits, which are determined by their lifetime earnings.
The bracket for full retirement age varies depending on the year in which individuals were born. If you were born between 1943 and 1954, the full retirement age is 66. For those born in 1955, it is 66 and 2 months. If you were born in 1960 or later, the full retirement age is 67.
Take a look at the table below, which graphically shows how the year in which you were born affects your retirement plan.
Other Forms of Retirement Plans
There are other forms of retirement plans in addition to Social Security Retirement Plans, such as pensions. Let’s take a look at the difference between a pension and a Social Security Retirement Plan.
What is the Difference Between Pension and Social Security Retirement Benefits?
Pensions and Social Security Retirement Plans are two of the most common income streams that retired individuals draw on today. The two programs are funded and structured in totally different ways.
The key difference between a pension and a Social Security retirement plan is that a pension is a workplace retirement plan. An employer makes contributions to a pool of funds on behalf of employees. A Social Security retirement plan is a federal government plan. It is funded through payroll taxes that is collected from employees through their companies.
Pensions
A private pension is a retirement plan created by an employer for the future benefit of their employees. In a pension plan, employers contribute certain amounts of money,on behalf of employees, to a retirement plan. Governed by certain laws and regulations, employersinvest the money as they see fit and upon retirement, employees receive monthly payments.
Pension plans were once hugely beneficial and if employees worked for the same company for many years, they would have enjoyed generous pension benefits. Today, with the introduction of IRAs and 401(k) plans, pensions are now known as “defined-benefit plans” because the payment amount received in retirement is decided in advance.However, this amount may not be enough to support you during retirement, which is why pensions are becoming redundant.
Private pension pay-outs depend on several factors such as the length of employment at a company or the level of salary earned and, in some cases, employees can choose to receive their pay-outs as amonthly annuity check or a lump-sum payment.
Pension Scandal
In the past few decades, changes in the law regarding pension assets saw many companies plundering the profits of pensions for personal gain, which has resulted in a mass decrease of pension portfolios. This,in turn, has led to underfunded pension funds and left many retirees high and dry.However, while private-sector pensions are gradually becoming obsolete, millions of Americans still choose them as retirement plans.
Social Security Retirement Plans
A Social Security Retirement Plan may look the same as a pension, but they differ. A Social Security retirement plan is a federal government plan which is funded through payroll taxes collected from employees and companies. Upon retirement, workers who have paid into the system during their working years will be eligible to receive monthly benefits from the age of 62.
Social Security isn’t designed to fully replace an income or meet all financial needs in retirement. The amount of money that will be received each month is based on how many years the worker has been paying into the system and their level of earnings over 35 years of work.
But for most retirees without a pension, a Social Security retirement plan will not be enough. Many companies now offer workers 401(k) plans, which are self-directed investments intended to generate retirement income.
Key Differences between Pension and Social Security Retirement Plans
There are several other differences between pensions and Social SecurityRetirement Plans:
| Pension | Social Security Retirement Plans |
|---|---|
| Pensions don’t usually provide disability benefits unless the employee is disabled in an on-the-job accident. | Social Security Retirement plans offer a disability insurance program that covers workers if they become disabled. |
| Children don’t usually benefit from pension income. | Children benefit from Social Security Retirement plans. |
| Pensions offer lump sum pay-outs. | Social Security Retirement plans do not offer lump sum pay-outs. |
| Pensions can begin as early as 55, are usually taken around age 65, and must begin to be withdrawn at age 72. | Social Security can begin at age 62. |
As we know, Social Security is a form of financial protection for individuals to guarantee income security when they retire. It can also ensure access to curative or preventive medical care, particularly in cases of old age.
So, what is the difference between Social Security and other programs like Medicare? Let’s take a closer look.
What is Medicare?
Medicare is a federal health insurance program for American citizens who are 65 years and older, people with disabilities, and people with permanent kidney failure that requires dialysis or a kidney transplant, commonly known as End-Stage Renal Disease.
This Federal Program is supported through payroll withholding and the money is put into a third trust fund, managed by the Centers for Medicare & Medicaid Services. Medicare has four tiers: Medicare Part A – hospital insurance; Medicare Part B – medical insurance; Medicare Part C – Medicare Advantage (private insurance), and MedicarePart D – Prescription drugs.
Parts of Medicare Social Security
1. Medicare Part A (hospital insurance)
Medicare Part A (hospital insurance) is available for inpatient care in a hospital or a skilled nursing facility (following a hospital stay). Part A also pays for some home health care and hospice care.
2. Medicare Part B (medical insurance)
Medicare Part B (medical insurance) helps pay for medical services such as office visits from a variety of health care providers. It also helps pay for home health and outpatient care, including tests and lab work, and some preventive services.
3. Medicare Part C – Medicare Advantage Plan
Medicare Advantage (previously known as Part C) includes medical and may include prescription drugs and other benefits such as dental services, eyecare, and audio care. This is a bundled type of plan that includes the benefits of Parts A, B & D all in one plan.
4. Medicare Part D – (Medicare prescription drug coverage)
Medicare Part D covers the cost of prescription drugs.
Supplemental (Medigap) policies help pay coinsurance, out-of-pocket co-payment, and deductible expenses. These plans work with Original Medicare parts A & B and help to fill in the coverage gaps.
What Do Medicare and Social Security Have in Common?
- Both programs are individually funded by payroll taxes
- Both programs provide benefits to eligible people
- Both programs help people with certain disabilities
What is the Difference Between Medicare and Social Security?
| Medicare | Social Security Retirement Plans | |
|---|---|---|
| What is it? | Government-run health insurance program. | Government-run income benefits program. |
| Who is it for? | Anyone who is 65 years and older who have worked and paid taxes for at least 10 years (and anyone with a disability or end-stage renal disease). | Retirees who have worked and paid taxes for at least 10 years, widowers, and other family members with certain circumstances. |
| How does it work? | Once eligible, people enroll in the Medicare program and pay the government a set amount each month for their Medicare program. | Each month, the Social Security Administration (SSA) gives money to people who are eligible for these benefits. |
Planning for Retirement: Important Things to Consider
Retirement planning doesn’t happen overnight. Planning for your future evolves over several years from the time you start working until you decide to retire. Essential steps to good retirement planning include building up a financial portfolio that will stand you in good stead when it comes to retirement age.
- Your first step when planning for retirement is to set out some goals for your future. Work out how much time you have left before retirement age. This will determine how much money you will need to set aside to reach your goals.
- The next step is to do some research into the various options you have for investing your money. Decide which ones will give you the best returns over the time you are going to be investing.
- The final thing that you need to take into consideration when planning for retirement is the dreaded “t-word”- taxes. If you have received tax deductions over the years for the money you have contributed to your retirement account, you will need to pay that tax back once you begin withdrawing on your savings.
When you sit down to begin retirement planning, you should include deciding on realistic timelines. Also, assess risk tolerance, estate planning, and estimate expenses required after-tax returns.
Building A Solid Retirement Plan
Understand the Time Horizon
An effective retirement strategy is dependent on how old you are and at what age you expect to retire. If you invest your money into a retirement plan early in your career, your investment portfolio can include riskier investments. So there is more time for them to recover should stocks fall.
It is important to keep inflation in mind when investing money into a retirement plan. To maintain the lifestyle you want during retirement, good returns on your investment that are greater inflation are very important.
Work Out Your Spending Needs During Retirement
Another important factor when putting together a retirement plan is deciding on the size of a retirement portfolio. Most people believe that after retirement they will spend less money than when they were working. This often works out to the opposite due to several factors. These include an increased cost of living, unplanned medical expenses, and living longer than expected! Better planning can lead to more money being available for other expenses such as traveling.
Calculate the Rate of Your Investment Returns After Tax
The next step in planning a comprehensive retirement strategy is to take tax into consideration. Bear in mind that you will need pay tax on the rate of your investment returns. Decide on the amount of money you will need for living expenses during retirement. Figure out the time you have to reach this goal and calculate the rate of your investment post-tax.
Investment returns are typically taxed according to the type of retirement account that is held. Therefore, the realistic rate of return on the investment portfolio must be worked out after deducting tax from the equation.
Balance Risk and Returns in Your Portfolio
One of the most important steps in retirement planning is to have a balanced portfolio. This takes both risk and returns into consideration to ensure they are balanced.
Markets tend to move through long cycles of rising and falling. Investing money for retirement should be left alone to rise and fall with the cycles of the market. When the mutual funds in the portfolio have a bad year, add more money to them.
Don’t Forget About Estate Planning
This is one of the most important aspects of a retirement plan and one that is quite often overlooked. It is absolutely essential that some form of life insurance policy is in place. This is to make sure the assets of your estate are distributed as required. It is vital to make sure that sufficient tax planning has been put in place. This helps to cover all tax implications associated with the estate.
Final Thoughts
Retirement planning is essential in today’s financial climate to ensure comfort and security in your later life. Creating a comprehensive retirement plan is challenging. It can be difficult to strike a balance between realistic expectations of returns and a projected standard of living. The best solution is to focus on creating a flexible portfolio. You can be update this regularly to reflect changing market conditions and retirement objectives.
