Social Security Benefits: 10 Things You Need to Know

CNBC

Social Security Insurance was established in 1935 as a financial safety net for older Americans. Eight decades later, all Americans pay into the system, with Social Security the largest source of income for citizens age 65 and older.

During 2012, nearly 160 million workers will continue to have 4.2 percent of their pay deposited into the Social Security Trust Fund instead of the usual 6.2 percent, according to a statement from the IRS based on the Temporary Payroll Tax Cut Continuation Act of 2011.

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The program is based on contributions that workers make into the system. While you're employed, you pay into Social Security; when it's your turn to retire you receive benefits.

You can start your Social Security retirement benefits as early as age 62 or as late as age 70 (if you were born in 1960 or later, your full retirement age is 67). Your monthly benefit amount will be different depending on the age you start receiving it.

The amount of money you receive from Social Security is based on a number of factors, including how much income you earned throughout your working years, the year you were born, and the age at which you file for benefits. If you claim Social Security early, your benefits will be reduced by a fraction of a percent for each month before your full retirement age.

Even if you’re not approaching retirement, whatever your age, or income, Social Security is a part of life that impacts us all. Staying aware of the changes in this important government program will help you be better prepared, in both your present and future financial planning efforts.

The following 10 points are based on best practices recommended by the U.S. Social Security Administration of policy website.

1. How Benefits Are Calculated

Benefits are based on your lifetime earnings. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.

Social Security recipients below their full retirement age (66 for those born between 1943 and 1954) can earn up to $14,640 in 2012 (not including tax withholdings).

2. Paying Income Tax on Benefits

Some states tax Social Security benefits, while others don't. Check the laws in the state where you reside.

No matter where you live, you will have to pay federal taxes on your Social Security benefits if you file a federal tax return as an individual and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income of more than $32,000.

3. If You Wait to Claim, Benefits Increase

Monthly Social Security payments will be bigger if you wait until your full retirement age to sign up for benefits instead of claiming at age 62. Even if you delay your claiming decision by a year, you will get a boost in your benefit.

4. Claiming Benefits After Your Full Retirement Age (Older than 65)

If you wait as long as possible to collect, your payments could increase by 8 percent annually after your full retirement age. Additionally, you get two-thirds of 1 percent more for each month you delay.

5. Maximum Social Security Retirement Benefit

The maximum possible Social Security check grew to $2,513 per month in 2012. That is up from $2,366 in 2011. In order to get this amount, a worker would need to earn the maximum taxable amount ($110,100 in 2012) every year after age 21.

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6. Receiving Social Security and Unemployment at the Same Time

Unemployment insurance benefits are not counted under the Social Security annual earnings test and therefore do not affect your receipt of Social Security benefits.

However, the unemployment benefit amount of an individual may be reduced by the receipt of a pension or other retirement income, including Social Security  benefits.

7. Receiving Social Security Benefits When Living Overseas

As long as you are a U.S. citizen, you may receive your Social Security benefits outside the United States. So you can retire abroad.

8. Receiving Credit for Military Service

Earnings for active duty military service or active duty training have been covered under Social Security since 1957. Under certain circumstances, special earnings can be credited to your military pay record for Social Security purposes.

The extra earnings are for periods of active duty or active duty for training. These extra earnings may help you qualify for Social Security or increase the amount of your Social Security benefit.

9. Couples Have Extra Options

Spouses are entitled to Social Security benefits of up to 50 percent of the higher earner's check if that amount is higher than the payments based on his or her own working record.

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Additionally, dual-earner couples who have reached their full retirement age can even claim twice by first signing up for a spousal payment, then claiming again later based on their own work record (which will then be higher due to delayed claiming).

10. Social Security Numbers Have Significance

The first three digits of your Social Security number are assigned based on geographical region, with the lowest numbers being assigned in the Northeast and increasingly higher numbers assigned to residents in the West.

The middle two digits, called the group number, are allocated in a precise but nonconsecutive order between 01 and 99. The last four digits are issued in a sequential order. Over 420 million unique numbers have been issued and they are not reused after a person's death.

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