When you pay self-employment or payroll taxes, you are earning retirement credits that lead to eligibility for Social Security and Medicare. In 2020, you get one credit for every $1410 that you earn, and the maximum accrual is four credits per year.
In past years, this amount was lower because there are annual adjustments to account for inflation. However, the amounts have been relative to the modest figure that we see this year. Once you have at least 40 credits in the bank as it were, you will qualify for these programs.
Full Social Security Eligibility Age
Under currently existing laws, everyone that is eligible will qualify for Medicare when they reach the age of 65.
It is cut and dried for people that that were born between 1943 in 1954. The eligibility age for these folks is 66, but it then goes up by two months for each succeeding year.
So if you were born in 1955, you would become eligible two months after you reach the age of 66. For people born in 1956, the eligibility age would is 66 years and four months. It goes up in this manner until 1960. People born during this year in any later year are eligible when they celebrate their 67th birthdays.
You do not have to wait until you reach your full eligibility age to start drawing a benefit. If you choose to do so, you can apply for Social Security when you are as young as 62. This can sound great on the surface, but your benefit would be reduced by somewhere between 25% and 30% depending on your birth year.
This is one major negative, but there is another one that may force you to rule out an early benefit. There is an income limit of $18,240 in 2020. If you make more than this in a year, your benefit be reduced by one dollar for every two dollars that you earn that exceeds this amount.
Delayed Retirement Credits
When you are eligible for your full benefit, you are not required to submit an application for Social Security. You can hold off and accumulate delayed retirement credits. If you do this, your benefit will be increased by 8% for every year that you delay.
This arrangement ends when you are 70, so there is no incentive to delay after you reach this age.
How Much Will You Receive?
Your Social Security benefit will be based on your highest 35 earning years. The maximum amount of income that can be taxed for Social Security purposes is $137,700 in 2020. Since there is a ceiling on the amount that can be taxed, there is also a maximum benefit, and it stands at $3790 a month.
For our information, the average Social Security benefit this year is $1503. You can find out exactly what you can expect to receive if you establish an account on the Social Security Administration website. Your numbers are updated on an annual basis, so you can always stay apprised of your anticipated benefit amount.
Benefits for Spouses
If you are married and your spouse is already collecting Social Security, when you reach the eligibility age, you can start to receive your own benefit based on your work record. You would alternately receive a benefit that is equal half of the amount that your spouse is receiving if this is more than your benefit.
A surviving spouse can receive the full amount that their deceased spouse was receiving if it is more than the benefit that they were entitled to when the spouse was alive.
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We are here to help if you would like to develop a plan for aging that blends into the ideal estate plan. You can send us a message to request a consultation appointment, and we can be reached by phone at 585-374-5210.