8/20/2012 2:15 PM ET|
What you'll get in Social Security
Check your earnings record. The third tab shows the Social Security record of what you've earned each year since you started to work. It's important that these records be correct, because your benefits are based on them. Your retirement benefit, for example, is calculated from your 35 highest-earning years. A too-low number in any year could mean you won't get all the benefits you've earned. If you've kept your tax returns from previous years, you should be able to compare those to the Social Security record and spot any errors. Social Security provides a link to help you report any errors.
By the way, if you're a high earner, the numbers in the "Taxed Social Security Earnings" column will differ from those in the "Taxed Medicare Earnings" column. That's because there's a cap on how much of your income is subject to Social Security taxes (this year it's $110,100), but there's no such limit on how much is subject to Medicare taxes. "Taxed Medicare Earnings" has the numbers you'll want to check against your tax returns.
Knowing your estimated benefits is important for your financial future. Here's why:
You can make better retirement calculations. If you want to retire someday, you should be using retirement calculators to get a handle on how much you need to save each year (MSN Money has a handy calculator here). But those savings goals can be pretty daunting, especially if you started late or haven't saved much, when you don't include your promised Social Security benefit. Even if you reduce your promised benefit by 25%, to reflect the haircut to come if Congress doesn't act, adding in Social Security income can help lower your savings goal to a more manageable amount. That, in turn, can inspire you to start saving more, since your goal won't seem so impossible to achieve.
(Whether you can customize your Social Security benefit calculations depends on the calculator. Retirement calculators typically will estimate Social Security benefits based on your current earnings, but some, including MSN Money's, allow you to override that amount with a figure of your own choosing.
You can see the substantial penalty for filing early.
Most people apply for Social Security before their full retirement ages, and that's often a mistake. Applying early permanently locks you into a smaller check. If you live beyond your mid-70s -- as most of us will -- you'll get less overall than if you'd waited. If you apply early for Social Security and keep working, your checks will be reduced by $1 for every $2 you earn over a certain amount ($14,640 in 2012), thanks to the earnings test. Once you reach full retirement age, the earnings test disappears.
Waiting longer to file for Social Security is also a kind of longevity insurance. If you live into your 80s or 90s, your "retirement price tag" could be much bigger than you expect as inflation raises the cost of living, notes Jonathan Peterson, the author of "Social Security for Dummies." The chances of depleting your retirement savings also rise the longer you live. A bigger Social Security benefit could help you offset both risks.
Filing early has particular hazards for married couples. Someone who applies for spousal benefits before her full retirement age gives up the option of switching to her own benefit later. Only if she applies for spousal benefits at full retirement age can she later switch.
Those who file early also may be locking in a smaller benefit for their surviving spouse. Unlike spousal benefits, which are based on what the higher-earning worker would receive at full retirement age, survivors benefits for retirees are typically based on what the higher-earning worker actually was receiving in retirement.
The closer you are to retirement age, the more relevant all these calculations become. But even if you're decades away, knowing your promised benefits can help you better plan for retirement.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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