Are you approaching retirement and thinking about Social Security, already retired and wondering about those benefits, or simply curious what the “FICA” deduction on your paycheck is actually for? Here are a few Social Security tips for how this program works for retirement.
What is Social Security?
Social Security is shorthand for the Old-Age, Survivors, and Disability Insurance program; it was created in 1935. Before Social Security, the nation didn’t have a way to help older people save and pay for retirement. Some people had pensions, few others had savings, but most simply worked as long as they could.1 At its inception, Social Security provided old-age income, unemployment insurance, and aid to dependent children;2 support for survivors and disabled workers would come later.
Who receives Social Security?
Most Social Security recipients are retirees: Nine out of 10 people of retirement age receive benefits, totaling about 48 million Americans.3 The remaining 18 million Social Security recipients are dependents of retired workers, disabled workers and their dependents, and survivors.
How does Social Security work?
Social Security collects funds from both employers and employees; it then distributes those funds to eligible recipients. Here’s how:
- People currently working pay into the system through payroll deductions (6.2% for Social Security, 1.45% for Medicare) or self-employment taxes. (On a paystub, this is the “FICA,” which stands for Federal Insurance Contributions Act.) Your employer matches your FICA contributions; if you’re self-employed, you pay both employer and employee contributions. That money goes into a trust fund, dedicated to future Social Security obligations.
- People who are paid Social Security retiree benefits receive monthly checks, funded in part from those FICA deductions.
What age can you take Social Security?
You can claim Social Security as early as age 62. You will, however, leave some money on the table. Waiting until you reach your Full Retirement Age (FRA, between ages 66 and 67 depending on the year you were born) is something to consider. Benefits increase an additional 8% every year you wait, up to age 70.
How much will you receive in retirement from Social Security?
The short answer? It depends. Currently, the average monthly retirement benefit is $1,907.4 Your exact amount depends on:
- Lifetime earnings: Social Security uses the highest 35 years of earnings to calculate your benefits, called average indexed monthly earnings.4
- Filing status: Your Social Security benefit also depends on if you’re filing for yourself, or as a spouse, divorcee, or widow.
- Credits: For full Social Security retiree eligibility, if you were born after 1929, you must accumulate 40 credits over your lifetime;5 that translates into 10 total years of work. (One quarter, or three months, of work earns you one credit, and you can earn up to four credits per year.)
Tip: Not sure how your status as a spouse, divorcee, or widow affects the best age at which you want to claim Social Security? Learn how to sort through the options.
Can you live off Social Security benefits in retirement?
Probably not; Social Security retirement benefits were never intended as a full income replacement. Currently, full benefits may total about 40% of your pre-retirement income. Instead, Social Security is designed to work with other savings—such as your employer-sponsored plan or IRA—to fund the length of your retirement.
How can you learn more about your Social Security benefits?
The easiest way to track your credits, lifetime contributions, and work history is set up a Social Security account online.
What's next?
- Checking on your current retirement savings and contribution levels can help you better understand how Social Security fits in with your current plans. Log in to your Principal account or set up your own retirement savings if you don’t have an employer-sponsored plan.
