Most people rely on Social Security for their retirement years as an additional benefit to their pension or retirement income. Determining when you are eligible to start receiving Social Security and how much it is can be complicated and depends on many factors. You can use the Social Security Administration’s calculator to help you determine what age you should be to collect and how the benefit fits into your estate planning.
How Does Social Security Work?
Social Security was enacted in 1935 to provide income for those retiring from the workforce. It is funded through FICA (Federal Insurance Compensation Act), a federal payroll tax where a percentage of wages is deducted from each paycheck and from self-employment taxes. You earn credits toward Social Security benefits as your work and pay the payroll tax.
Monthly benefits paid to retirees are based on 35 years of your highest earnings. If you have not worked 35 years, your payout will be lower.
Benefits are calculated on your full retirement age. In recent years, Social Security began using a sliding scale to determine the full retirement age depending on the year you were born:
- If you were born in 1954 or earlier, the full retirement age is 66.
- For those born between 1955 and 1960, the benefit is paid according to an incremental scale up to age 67.
- If you were born in 1960 or after, the full retirement age is 67.
You may start claiming benefits at age 62, however you would not receive your full benefit. If you wait until age 70, you will receive your highest monthly payment; earning an additional 8% for each year you delay receiving your benefit beyond your full retirement age.
What is the Social Security Calculator?
Social Security has an online calculator that can help you decide when to claim your benefit. It allows you to compare monthly benefit estimates if you start collecting at the earliest age of 62, at full retirement age, or if you wait until age 70.
For those who do not have a Social Security account, the agency will mail a statement to you three months before your 60th birthday, detailing your estimated benefits. When you receive the statement, you should use the information to calculate the best age to start drawing your benefit.
If you don’t have a Social Security account, you should create one. The account details your personalized monthly benefit estimates, allows you to access your statement, gives benefit estimates for your spouse, and provides your yearly earnings.
Why Use the Social Security Calculator?
Deciding when to start receiving your Social Security benefit is a huge decision. Your monthly check depends on what age you want to start collecting, years in the workforce, and your average lifetime wages.
The Social Security calculator will help you determine the best retirement scenario for you. Based on the estimated monthly benefit you would receive; you can decide at what age you can comfortably retire. There are several online calculators offered by the Social Security Administration to help determine your retirement benefit, including benefits from a job that did not pay Social Security taxes.
Estate Planning and Social Security
Even though Social Security benefits are a major factor when it comes to retirement income, it is often overlooked when creating an estate plan. You need to know the types of benefits available and how they work if you are married or single, or if you or a family member is disabled.
If you are married, you and your spouse may want to collect at different ages depending on the monthly amount you are entitled. A couple may want to consider spousal benefits. For a single person, you may want to factor in your other retirement income.
There are four types of Social Security benefits:
- Retirement – This is the benefit you are entitled to if you paid into Social Security throughout your career and meet the requirements.
- Spousal – If you are retired or disabled, your spouse may be qualified to receive a benefit based on your earnings.
- Survivor – Widowers, widows, and children of eligible workers can receive this benefit.
- Disability – The Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs pay benefits to you and family members with disabilities.
Social Security caps the maximum monthly benefit you can receive. As of 2021, the average monthly benefit is $1,543 and the average disability payment is $1,277. For those claiming the benefit at age 62, the maximum monthly check would be $2,324; at full retirement age (66 and 2 months) the maximum is $3,148; and at age 70, the maximum would be $3,895.
What is a Representative Payee?
Having a Power of Attorney is crucial in any estate plan, since this person will step in to oversee your finances in the event you cannot. Did you know that the Social Security Administration, however, does not recognize a Power of Attorney?
Whether you are receiving benefits now or in the future, you should contact the Social Security Administration and appoint an advanced representative payee. This designee serves as the payee for your benefit if you are unable to manage your payments. A representative payee can also be appointed for a minor child or a disabled person who is eligible to collect. Up to three alternate designees can be named.
If you do not appoint a representative payee, Social Security will appoint one if you are incapacitated. That’s why you should have a designee in place before anything happens.
You still need to have a Power of Attorney, since the representative payee has no legal authority to take care of your other finances. The Power of Attorney will manage your estate’s finances and other legal responsibilities including paying bills and filing your income tax.
Estate Planning Documents
Among the documents you should have include:
Last Will and Testament
Ensures your final wishes will be honored. Name those you want to inherit your assets. You can also choose a guardian for your minor children if something happens to you.
Health Care Proxy
Also known as a Power of Attorney for Health Care. This is a person you choose to carry out your medical care wishes if you are incapacitated.
Trust
Assets held in a Trust and managed by a trustee will transfer more smoothly to beneficiaries upon your death.
Pet Power of Attorney
Gives authority and instructions to a caregiver to provide for your pets if you are not able to.
Pet Trust
Set aside funds for your pet's care in case it outlives you, ensuring your pet's new caregiver has the resources to care for them.
Retirement and estate planning go hand-in-hand. Where retirement benefits provide income for your post-work years, an estate plan protects you and what you own now and provides for your loved ones after you pass.
Don’t wait until you’re a few years from retirement to use the Social Security online calculator. If you find you are not earning enough, you have time to find ways to increase your income; the more you earn now, the more you will receive in Social Security benefits later. You should also look into other retirement benefits such as a 401(k) or IRA (Individual Retirement Account).
Also, don’t procrastinate on your estate plan. Life changing events can happen at any age. You are never too young to have an estate plan.
