Social Security Benefits Guide

For most Americans, social security is an important part of your retirement plan. This government-managed system is quite complex and the jargon is very old-fashioned. However, future retirees need to understand how to calculate benefits and the complexity of using social security during retirement.

This guide is intended to break down the social security system associated with you. After reading, you will understand how your social security benefits are calculated. You will understand when you are eligible for benefits. We also described how you can increase your benefits and when you should consider using your social security benefits.

Overview of the calculation method of social security benefits

Let's start with the most complex part of social security: how to calculate benefits.

If you know a lot about social security, you may know that getting benefits is not difficult. Since social security schemes were established to help low-income workers during and after the Great Depression, the threshold for obtaining social security eligibility is quite low.

Social security has distorted its calculations to help low-income workers. These people are likely to be unable to save more for their retirement than for high-income workers. In other words, low-income workers will see a larger percentage of their lifetime income return in social security checks. A person who earns $50,000 a year needs a welfare check more than someone who earns $25,000 a year. The difference between a person with an annual income of $50,000 and a person with an annual income of $100,000 is not that great.

All of this can be confusing. However, when we look at the calculation of social security benefits, things can be solved.

Minimum eligibility requirement

Eligibility for social security benefits depends on credits. Credits show that you earned a certain amount of money during your work.

To earn a credit, you need to earn $1,000 in a working year. You can earn up to four credits per year (even if you earn tens of thousands of dollars). You need 40 credits in your life to get social security benefits. So if you earn at least $4,000 a year and work for 10 years, you are eligible for social security benefits.

Now, your credit has nothing to do with the social security income you can expect. They are just a basic barrier to crossover to ensure that you contribute at least to the social security system.

Average your income

Your social security benefit check amount is determined by your lifetime average income. The Social Security Administration will track your annual income and contribution to the Federal Insurance Contribution Act. You can find all of this information in the W-2 form and other income related forms.

When you are ready to take advantage of social security, the Social Security Administration will distribute your income evenly to the highest-paying job in 35 years. The SSA then inserts this number, along with your age, into the formula. This formula determines your monthly social security check results.

If you work less than 35 years, SSA will fill those years with zeros, which will lower your average. So if you work for 32 years, they will add annual income, plus 3 zeros, divided by 35. If you work for more than 35 years, SSA will use your 35-year maximum income. This is why it is a good thing to work for at least 35 years before enjoying social security benefits.

Income limit

The Social Security Administration calculates all your taxable income to a set limit each year. In 2017, the maximum taxable income limit is $127,200, which is generally increased annually, according to government decisions. Although you still have to pay income tax on income of more than $127,200, you will not pay FICA tax on this income. Moreover, since you do not pay FICA taxes for incomes in excess of $127,200, any income above this amount is not included in your social security equation.

In fact, donation restrictions prevent high-income earners from getting too much social security spending. Even if you earned $200,000 in 2017, you will never get more than $127,200 in your social security calculations.

Every year, I have my own maximum income, which dates back to the beginning of the social security system. Whether you are the main earner in 2017 or 1960, the goal is to make the game flat.