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retirement

A Rundown of Social Security Benefits

Here are the basics of what you'll get and when.

Social Security, which gets much of the credit for driving down the poverty rate among America's senior citizens, has become a political hot potato in recent years. Depending on who's talking, the system stands to go bankrupt sometime in the next three or four decades unless something's done. Simply put, there will be too many Americans living longer and becoming eligible for Social Security and too few younger Americans to support their payments.

 

In the meantime, here's a rundown of what you get for your Social Security taxes.

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Retirement benefits. You'll get regular monthly checks if you reach a certain age and have worked a certain length of time in a job covered by Social Security. You are considered fully covered if you have worked in a covered job for at least 40 calendar quarters (employees of nonprofit organizations who were forced to join Social Security in 1984 get a more generous schedule). You needn't be fully insured to qualify for benefits.

The earliest you can retire and receive benefits is age 62, but your payments will be reduced if you retire before your full retirement age. If you were born between 1943 and 1954, you can collect full benefits starting at 66. The schedule will add two months each year until 2027, when workers born in 1960 and later will have to be 67 years old to qualify for full benefits. The age for eligibility for Medicare is 65.

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A spouse entitled to benefits from his or her own work record receives whichever is larger: his or her own entitlement, or an amount equal to half of the spouse's.

Taxes on benefits. For most retirees, Social Security benefits are still entirely tax-free, and they are at least partially tax-free for the rest. If your adjusted gross income, plus nontaxable interest, plus one-half of Social Security benefits exceeds $25,000 if you're single, or $32,000 if you're married, then up to 50% of your benefits can be taxed. And if your income is more than $34,000 on a single return, or $44,000 on a joint return, a different formula takes over that almost always requires 85% of your benefits be taxed.

The IRS uses an worksheet to figure this out. Here, in a nutshell, is how the three-tier taxing system works: Assume that you and your spouse get $10,000 in Social Security benefits. If half that amount plus your adjusted gross income and tax-exempt interest total less than $32,000, none of your benefits would be taxed. If the combination totals $33,000, however, $500 worth of your benefits (one-half of the amount over the threshold) would be subject to tax. The one-half-of-the-excess rule would operate until your income plus half your benefits totaled $42,000. From that point on, half of your benefits -- $5,000 -- would be considered taxable income.

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How work affects Social Security. If you are between age 62 and full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different limit until the month you reach full retirement age. The amount is indexed for wage inflation and rises a bit each year. From full retirement age on, you can earn any amount and still receive your full benefits. And note that the limitations apply only to money you earn, not to income from stocks, bonds, real estate, pensions, or other "nonearned" income. See www.ssa.gov for annual limits.

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Disability income. People who are blind, or disabled in ways that prevent them from working, may receive assistance based on their average earnings under Social Security. The rules are tough, though. Disability is defined as an inability to work because of a physical or mental impairment that has lasted or is expected to last at least 12 months or to result in death.

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Survivors' benefits. The spouse, children, parents, and, in some cases, grandchildren of a deceased eligible worker may be entitled to cash benefits. Specifically eligible are:

A widow, widower, or surviving divorced mother if caring for the worker's child who is under 16 (or disabled) and who is receiving benefits based on the deceased worker's earnings

  • A widow or widower 60 or older (50 if disabled)

  • Unmarried children under 18, or under 19 if full-time students at a secondary school

  • Unmarried children who were severely disabled before 22 and who remain disabled

  • Dependent parents 62 or older

  • If the marriage lasted ten years or more, checks can go to a surviving divorced spouse of 60 or a disabled surviving divorced spouse of 50.

Medicare. Medicare provides hospital and medical insurance to Social Security recipients. If you're eligible, coverage takes effect automatically when you reach age 65. Part A, which covers bills for hospitals (within limits) and similar institutions (nursing homes and hospices, for example) is automatic. Part B of Medicare, which covers doctors' bills, outpatient treatment at hospitals, prescription drugs, and some other costs, isn't automatic. If you want it, you have to pay for it via monthly premiums deducted from your Social Security checks.

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How -- and when -- to contact Social Security. It's especially important to contact the Social Security Administration if you're unable to work because of an illness or injury that's expected to incapacitate you for a year or longer, or if you're 62 or older and plan to retire soon.

If you're nearing retirement and wonder what your benefits will be, call the SSA at 800-772-1213 and ask for a "Request for Social Security Statement." About two to four weeks after returning the completed form to the SSA, you'll receive your estimate in the mail. You can also request the statement on the SSA's Web site at www.ssa.gov, where you'll find a wealth of helpful information, plus a directory to local SSA offices.

Even if you intend to keep working after 65, you should check in with the Social Security people three months before your 65th birthday to enroll in Medicare, which will become available to you at 65 whether or not you retire.

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