Understanding Social Security Benefits

Social Security benefits have been designed to provide working Americans with a source of retirement income. This income is the staple for many people above the age of 65; however, not everyone understands how Social Security benefits are calculated or what benefits are offered. Whether you are approaching retirement or interested in Social Security disability benefits, you need to understand the ins and outs of the system so you don't miss out on the benefits you earned during your working years.

Retirement Benefits
Social Security retirement benefits are based on the number of years you work, the number of credits you earn and the average amount of money you earn each year. In order to qualify for retirement benefits, you will first need to earn 40 credits. You earn one credit per $1,050 earned, as of 2008. The most credits that you can earn in a year are four. This means that you will need to work at least 10 years in order to qualify for retirement benefits. The 10 years do not need to be consecutive; you can work eight years, take three years off and then work two additional years to get the 40 credits.

After you have earned enough credits to qualify for Social Security retirement benefits, your estimated retirement benefits will be calculated. These benefits are calculated based on the average amount of money that you made during your work lifetime.

If you leave the workforce to take care of your family or recover from illness, or if you are unemployed for more than a calendar year, you will have a zero-earnings year in which you receive no credits or Social Security earnings. If you have more than 35 years of work history to draw upon, then zero-earnings years will not be counted. If you have fewer than 35 years of work history, the zero-earnings years will be factored in, negatively impacting your average payment.

Annual Social Security Benefit Statement
Each year, you will receive your Annual Social Security Benefit Statement. This statement will be about four pages long. Page one is a general overview of what is new with Social Security and your retirement estimates.

Page two is where you will find your estimated benefits. All the benefits that you qualify for will be listed on this page. For example, you may qualify for retirement benefits, disability benefits, family benefits and survivor benefits. You will also be informed on this page if you qualify for Medicare. It is very easy to understand this breakdown because the statement will say clearly whether or not you qualify for the benefit and how much the estimated value of that benefit will be.

Page three is your earnings record. Here you will see a breakdown of how much you have earned during your work lifetime and how much money you have contributed to the Social Security program so far. The final page is an information page about the Social Security program.

Depending on your age, what you find in your benefits statement may be cause for concern. Younger workers shouldn't be too concerned about the estimates because they have many years left in the workforce and typically have yet to reach their peak earnings years. As you get closer to retirement, the numbers become more reliable, making the benefits statement a valuable financial planning tool. If you're within 10 years of retirement, you should discuss your benefits statement with a financial planner to be sure that you've got enough retirement savings to supplement your Social Security benefits and live comfortably.

Delaying Benefits
Many people question whether they should collect their Social Security benefits early, at age 62, or wait until later to start collecting payments. The overall value of your Social Security payments is the same, no matter what age you begin receiving them. However, if you decide to collect payments early, your monthly payments will be smaller. If you are healthy, you should wait to collect Social Security benefits until you are between 65 and 70. This will help you pay your living expenses during your later years when your other savings may be gone. If you are unable to work, or you're financially strapped, then collecting early may be an option for you.

Social Security Disability Benefits for People Under 65
Generally, you will need to be older than 62 in order to receive Social Security benefits; however, you can claim disability benefits when you are younger. There are two different disability programs that you can apply to-the Social Security Disability Program and the Supplemental Security Income Program.

To qualify for benefits through the Social Security Disability Program, you or a family member will need to have worked for a minimum number of years and paid into the Social Security program. If you qualify, you will receive a monthly stipend that will be based on the average monthly income you earned during your working lifetime. After two years of receiving Social Security Disability, you will also qualify to receive Medicare benefits. Finally, if you want to go back to work, then you can take advantage of the Ticket to Work Program, which provides beneficiaries with free training and placement services.

The second program that you can apply for is the Supplemental Security Income Program. This program is designed for low-income adults and children with disabilities. This program provides a monthly stipend, access to the Medicaid program and access to a variety of social services programs, including food stamps.

It is easy to forget that, if you have been working, you've been paying into Social Security. At some point, it is your right to access those benefits, but you also need to understand the system and know how much you will receive so you can develop a budget when it's time to use your Social Security.

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