The Social Security program is a Government-operated retirement plan that provides monthly income to retirees. It was designed to meet the basic needs of retirees, but if you're not yet close to retirement, we recommend that you don't rely too heavily on Social Security in your financial planning. Most people need 70-80% of their pre-retirement income to maintain the same standard of living, and the Social Security income is a lot lower than that.
If you work for an employer, Social Security taxes are withheld from each paycheck and sent together with the employer's matching contribution to the IRS; the company also reports your earnings to Social Security. If you are self-employed, you pay the Social Security taxes and the IRS reports your earnings to Social Security. "Credits" are earned through work and taxes; these credits go toward the Social Security benefits. In order to be eligible to receive the benefits, you are required to have at least 40 credits or 10 years of work.
The types of benefits provided by Social Security are:
The income received as retirement is based on the participant's average earnings during his or her life. There is a limit to the contributions made each year, but in general, the more a participant earns, the more money he or she will receive.
A participant is eligible to collect this income if "fully Insured", meaning that a person has to have worked for at least 10 years or 40 calendar quarters. The Social Security Administration will provide an estimate of the monthly income to those close to retirement.
In order to collect the benefit, the participant must be fully insured, be 62 years old, and must apply two or three months prior to the date of retirement. If you decide to wait until age 65, the benefits increase by about 7% for every year of delay.
Benefits can be lost after starting the collection of the income if the amount of the adjusted gross income is above a certain amount, which changes periodically. Also, part of the income can also be taxed if the retiree's AGI is above a certain amount.
Considering the amounts that you will receive at retirement it is important to look at all your other options. Make maximum contributions to tax-deferred accounts and diversify your portfolio.
Benefits are payable if a participant has suffered sever physical or mental disabilities preventing them from working regularly for a year or more or in cases when the condition might lead to death.
A participant's spouse who is at least 62 years of age, or younger but caring for a child under 16 is eligible to receive retirement or disability benefits.
At death, some members of the participant's family can be eligible for benefits. The participant's widow(er) age 60 or older, or age 50 or older and disabled, or any age caring for a child under 16; and/or unmarried children under 18 or 19 if still in school or 18 or older if disabled.
There are two parts to Medicare:
- Part A: hospital insurance
- Part B: medical insurance
People over 65 or people receiving disability benefits automatically qualify for Medicare. Part A pays for inpatient hospital care, skilled nursing care, among others. Part B pays for doctor's fees, outpatient hospital visits, and other medical services and supplies.
Social Security benefits for a single person are not taxed unless the total of the recipient's modified AGI plus one-half of the benefits exceeds $25,000. For a married couple filing jointly, the amount must not exceed $32,000. For married couples filing separately, all benefits are taxable. If a participant has a part-time job, Social Security benefits are cut.
Americans over the age of 65 automatically qualify for the health insurance plan known as Medicare, which is a government-sponsored program that provides health care options with any participating doctor or hospital.
When a spouse in a married couple has to enter a nursing home, the other spouse can keep their home and financial assets up to a specific amount, which changes from year to year. The spouse staying at home can receive the other spouse's income if the monthly amount received is less than a specific number, which also changes from year to year.
Long-term nursing care insurance is another option. Most of the restrictions from the past are no longer a problem, and now the money can be spent in various ways: home care expenses such as a nurse or a housekeeper or a driver; assisted living in an apartment complex where meals are taken in a common area; or a traditional nursing home.