Social Security is a system in which workers pay tax on their income to secure financial support for themselves and their family in the future. Generally, Social Security benefits are available when you are no longer able to work due to age. You can claim the benefits as early as 62.
The day you begin your first job, you start paying into the Social Security system, and what you contribute is determined in part by how much you make. But with the demise of many 401K savings and pension plans and the rise of health care costs due to the recent recession, many Americans are finding it tough to retire with the means to live stress-free on Social Security benefits alone. The average monthly Social Security payment of $1,200 per individual provides just $14,400 a year, not much more than the federal individual poverty line of $10,890.
There are many things that can affect how much Social Security benefits you can claim in retirement. Here are five factors that can affect your ability to claim Social Security benefits or earn a suitable amount to live on from them.
You can retire as early as age 62, however, your benefits are reduced. For example, if you were born in 1955, your full retirement age is 66 and 2 months and at age 62, you will get only 74.2% of the monthly benefit entitled. At age 65, you will get 92.2% instead.
Types of Employment
If you were a government employee in a specific pension program, you may not be eligible for Social Security, depending on your retirement plan. And employees of nonprofit organizations before 1984 did not pay into the Social Security system.
Income Tax on Inheritances, Gifts, Annuities and Dividends
Generally, Social Security benefits are not taxable. However, if you receive certain family inheritances, gifts, annuities or dividends, it may affect the amount of Social Security benefits you receive. The IRS publication 554 offers detailed information on gifts as well as pensions, prepaid insurance plans, profit sharing, annuities and disability pensions.
Maximum Taxable Earnings
For 2014, the maximum amount of earnings you can be charged a Social Security tax on is $117,000, so your contribution is capped at $7524. This figure has changed frequently since being implemented in 1937, so you should check for changes each year.
Spouses can receive approximately 50 percent of a retired worker’s benefits; so can divorced spouses who were married at least 10 years. However, if a spouse is working, he or she may be earning a substantial income and working towards greater benefits, not claiming spousal assistance.
If you are getting ready to settle into retirement, it is essential that you keep up-to-date with the Social Security benefits you stand to receive. Retirement estimators are available to calculate your earnings on the Social Security site.
Social Security can provide survivors insurance and when you die, certain members of your family may be eligible for benefits. Private life insurance policies and annuities do not go through the probate process and will not affect the Social Security benefits.