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  • W. Scott Hurt, CFP®, CPA

Ready To Simplify Social Security? Your Top Six Questions, Answered


Ready To Simplify Social Security? Your Top Six Questions, Answered

Social Security may seem complicated, and there are certainly a myriad of rules to consider.


However, you don’t have to be a mathematician or economist to make the most of your Social Security benefits.

Let’s look at the answers to some of retirees' most critical Social Security questions.


How Do Social Security Benefits Work?


Social Security provides retirees with a consistent income stream once they retire and claim their benefits. In general, your Social Security income is estimated to replace about 40% of your pre-retirement income, but that number could vary significantly from person to person.


To qualify for Social Security benefits, you need to earn a minimum number of credits over your working years. You receive a credit by earning a certain amount of income from covered employment within a year. For 2021, you earn a credit for every $1,470 in income, up to 4 credits per year. To qualify for a retirement benefit, you need to earn 40 credits. For disability benefits, you need 20 credits.


Social Security benefits are funded through payroll taxes of 12.4%. If you are employed through a company, then your employer pays half of that amount for you. If you are self-employed, you pay the full 12.4%. You do get a little break come tax-time as you can deduct your half of the tax. Ultimately, you’ll only owe 12.4% on 92.35% of your income.


The amount of your income that is subject to the payroll (FICA) tax is capped by a limit set by the IRS each year. For 2021, that cap is $142,800.


Social Security benefits are one of the only types of retirement income that considers inflation. Each year, the Social Security Administration announces a cost-of-living adjustment (COLA). In 2021, benefits are set to increase by 1.3%. With the modest rise in Medicare premiums, beneficiaries will actually see an increase in their monthly checks.

Can You Calculate Your Benefit?


Qualifying for Social Security and determining the amount of your benefit are two different situations. In addition to ensuring that you earn enough credits to earn eligibility, you also need to track your benefit amount.

Social security benefits are based on lifetime earnings. The Social Security Administration calculates your benefits by indexing your highest 35 earning years against a formula to come up with your primary insurance amount. Your primary insurance amount is the value you’d get for claiming at your full retirement age—in other words, for filing “on time”.


Because your lifetime earnings directly affect the size of your Social Security benefit, we recommend that you check your earnings record often. If you do and notice a problem, you have time to correct it. You can check your earnings history on the Social Security website by creating an online account. You can also check out your local Social Security office for other questions or other benefit enrollment questions.


While it may seem like there isn’t much planning opportunity with your earnings record, there is a particularly key item we think you should pay attention to—your total number of earning years.

Work The Full 35 Years


Since Social Security benefits are calculated from your highest 35 years of earnings, it makes sense to make sure you at least have 35. If you don’t, say you only have 29 years, then the SSA inputs a 0 in their formula for every year under 35, in this case, 6.

Those zeros could have a significant impact on your monthly benefit. It’s often wise to work a few extra years to replace some of those zeros and boost your future benefit. If you are in your peak earning years, then those zeros could be replaced with above-average earnings. In the grand scheme of things, those extra earnings can make a big difference in your total Social security retirement benefit.


There is a maximum benefit depending on when you file, regardless of your earnings. For 2021, those maximums are:

  • Start at age 70 - $3,895/month ($46,740/year)

  • Start at FRA (full retirement age) - $3,113/month ($37,356/year)

  • Start at age 62 - $2,324/month ($27,888/year)


When Should You Enroll?


The decision of when to claim your benefit is perhaps the most debated question about Social Security. It may also be the most important. Your enrollment plays a major role in your future benefits.

If you claim at your full retirement age, you will receive your primary insurance amount as described above also known as your full benefits. However, you have two other choices. You can increase that benefit by accruing delayed retirement credits (up until you turn 70) or you can claim your benefit as early as 62 in exchange for a reduced benefit.