If you’ve worked the long, hard life and are getting close to hanging up the laptop computer for good, here are some facts about the portion of your retirement that the government will provide.
You qualify for Social Security retirement benefits as early as age 62 if you have held a job and paid Social Security taxes for at least 10 years. If you are younger and want an official estimate of your future benefits, call 800-772-1213 and request Form SSA-7004-PC. Its questions are easy to answer; you can ask for estimated retirement amounts at various ages, from 62 to 70, the period during which postponed benefits rise significantly in terms of monthly income.
The payout for someone who will retire at age 65 depends on that person’s income and present age. To qualify for the highest payment, you will have to earn the highest amount of income subject to Social Security tax — and continue to do so over several years. For example, the top amount subject to the tax in 1991 was $53,400 and in 1995 it was $61,200.
So how much can you look forward to? If you were born in 1950 and earned $40,000 in 1994, for example, Social Security’s computers estimate that your maximum monthly benefit when you eventually retire will be $1,178. If you were born in 1940 and earned $61,200 or more in 1994, your monthly benefit will be an estimated $1,325. (Those figures are 1994 dollars. Because actual payments are adjusted each year for inflation, you should view your future benefits in terms of their present buying power.)
Social Security almost certainly won’t replace most of your income from work, although people who earned low wages most of their working lives might get benefits equal to as much as two-thirds of their final pay. More likely, the Social Security pension will provide one-third or less of your nest egg — and you will have to provide the rest.
Social Security penalizes workers for early retirement. Retiring at the youngest age, 62, will cost you 20 percent of what you could have claimed at 65, which Social Security currently considers the “full” retirement age. For 1995, the maximum annual benefit at age 62 was $11,508 per worker, or $17,256 for a couple with a nonworking spouse also age 62. The age of full retirement, however, is due to rise for people now in their early 50s and younger. If you were born between 1943 and 1954, you’ll have to wait until you’re 66 years old to get the full benefit. If you were born after 1959, make that age 67.
Unless you postpone this pension until age 70, it probably won’t pay to work after your Social Security checks start rolling in. If you do, you will be docked for earning more than a minimal amount. In 1995, a 65-year-old flunked the so-called earnings test if he or she made more than $11,280. For every three dollars above that, you would have received one dollar less in Social Security benefits. If you were younger than age 65, the earnings threshold was a mere $8,160, and the penalty for earning more was one dollar in lost Social Security benefits for every two dollars of pay.
The good news about working beyond age 65 is that the extra income will increase your average earnings once you do retire, so you could wind up ahead in the long run. By staying on the job until age 70, you qualify for benefits as much as 40 percent higher. In addition, people who delay retirement get a special credit. This credit, which is a percentage added to your Social Security benefit, varies depending on your date of birth. For people turning 65 years old in 1995, the rate is 4.5 percent per year.
For example, if you delay receiving benefits for three years (until age 68), your benefit increases by 4.5 percent times three, or 13.5 percent. That rate will gradually increase in future years, until it reaches 8 percent per year for people turning 65 in 2008 or later.
No matter how old you are, you must pay income taxes on part of your Social Security benefits if your other income pushes above fairly modest levels — $32,000 for married couples and $25,000 for singles. If your income is over $44,000 for married couples, and $34,000 for singles, you will be taxed on as much as 85 percent of your Social Security benefits. For this, the government counts as income half of your Social Security benefits and all your tax-free interest on municipal bonds.
Source: Lifetime Financial Strategies at www.excite.com.
