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Although deciding when to claim your hard-earned Social Security benefit may seem complicated, it’s important to take the time to consider your options. Here are three things that can help you understand the dollars and cents of this key component of your retirement income.
1. How Your Benefit Is Earned and Calculated
Social Security work credits are issued based on your earnings; it takes a minimum amount of earnings in a year to receive one credit, and you can earn up to four credits each year. The required earnings per credit is adjusted each year, so it can vary. The bottom line is that in order to receive Social Security income once you retire, you must have earned a total of 40 work credits. That is the equivalent of 10 years of work over the course of your lifetime.
Putting more numbers into play, the size of your monthly Social Security check is based on the 35 years in which you earned the most money. If you worked from age 20 to age 65, only the highest-earning 35 years of that timespan will be used to determine your benefit. That means if you had some lower-earning years at the beginning of your career, they can be offset by higher wages you earned later in life.
2. How Age Determines the Size of Your Benefit
This is something that confuses many people, so seeking information from sources like Lundervold Financial planning seminars in Minnesota or in your area can help you sort things out. In a nutshell, although you can begin collecting Social Security as early as the age of 62, you’ll receive less money each month if you start that early. That’s because you will likely be paid for a longer period of time than if you waited until later to collect. At 62, your initial monthly benefit will be lower than if you waited until you were 70 to start getting payments. For many, it comes down to collecting sooner or collecting more. It’s important to make the right choice for you and your family, so consulting an expert can help you understand each option.
3. How Your Social Security Benefit Is Adjusted
Inflation has likely factored into your budgeting throughout your life, so it’s helpful to know that adjustments will be made to your Social Security income to address these fluctuations. Cost-of-living adjustments are calculated annually and are based on a formula that is tied to changes in the consumer price index. If inflation is low, your increase will be as well, and the reverse is true when inflation rises. These changes are automatic and generally appear on the first distributions made each calendar year.
Learning how Social Security benefits are earned and calculated, how your age affects the amount of your benefit, and how payments are adjusted annually can give you a better understanding of how this income stream works. That should go a long way toward helping you to make smart choices about when to begin collecting Social Security.
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