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Do you really understand Social Security?

Mary Kane, Associate Editor, Kiplinger's Retirement Report
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Gaining a better understanding of how Social Security works is one of the most important things you can do to prepare for retirement. After all, on average, Social Security benefits will replace about 40% of your preretirement income, according to the Social Security Administration. But there is a lot more to Social Security than simply filing a claim and collecting your monthly checks. To make the most of your retirement benefits, it's helpful to become familiar with Social Security's unique acronyms and terms. Think you already know the difference between your FICA and your COLA? How about spousal benefits versus survivor benefits? Take our Social Security lingo quiz to prove it.

1: Your full retirement age (FRA) is the same as your normal retirement age (NRA).

  1. True.
  2. False

The correct answer is A. True.

NRA and FRA are one and the same, and both are used interchangeably by the Social Security Administration. Your NRA/FRA is the age at which you are first entitled to your full and unreduced benefits, and your NRA/FRA is determined by the year you were born. For example, if you were born between 1943 and 1954, full retirement age is 66. It gradually climbs toward 67 if you were born between 1955 and 1959. If you were born in 1960 or later, your full retirement age is 67. Regardless of birth year, you can collect Social Security as soon as you turn 62--but it will cost you. Taking benefits before full retirement age results in a permanent reduction, up to 30% of your benefit if your full retirement age is 67.

2: The Social Security Administration uses your 10 highest years of earnings, known as your computation years, to calculate your retirement benefits.

  1. True
  2. False

The correct answer is B. False

Computation years are your years of highest earnings. The Social Security Administration uses your 35 highest years of earnings to calculate your retirement benefits. Basically, the Social Security Administration adds your total earnings in the computation years and divides it by the number of months in those years to help figure your retirement benefits.

3: Sharpen your No. 2 pencils: The retirement earnings test is an actual exam administered to retirees before they can receive their first checks.

  1. True
  2. False

The correct answer is B. False

The retirement earnings test is a measure the government applies if you claim benefits early and are still working. The agency temporarily withholds benefits if your earnings exceed a certain level and you are under your full retirement age (FRA). The tricky part is that exemptions are lower in the years before your FRA, and higher in the year you hit your FRA. It works this way: For people who hit their FRA after 2018, the annual exemption in 2018 is $17,040 and the agency will withhold $1 in benefits for every $2 of earnings in excess of that amount. For people who turn their FRA during 2018, the annual exemption is $45,360 and the agency withholds $1 in benefits for every $3 of earnings in excess of that amount. Starting the month you hit your FRA, you are free and clear of the earnings test. And any benefits withheld while you continue to work don't just disappear. Once you turn your full retirement age, your monthly benefit will be increased permanently to account for the months in which benefits were withheld.

4: COLA is the acronym for a little-known office within the Social Security Administration that handles labor administration.

  1. True
  2. False

The correct answer is B. False

COLA refers to cost-of-living adjustment. Social Security benefits are sometimes, but not always, increased each year to keep pace with increases in inflation. If inflation rises year over year, beneficiaries will see a hike in benefits. There was a 0.3% increase in 2017 benefits, for example, but no increase at all in 2016

5: Delayed retirement credits are credits you receive for waiting past your full retirement age to collect Social Security.

  1. True
  2. False

The correct answer is A. True

Your benefits are increased if you delay taking retirement benefits beyond full retirement age (FRA). Benefits can't earn delayed credits after age 70, so there's no point to wait past that age to claim. Waiting can pay off. Your benefits increase by 8% a year for each year you delay beyond full retirement age.

6: Your earnings record refers to your single-highest year of earnings during your lifetime.

  1. True
  2. False

The correct answer is B. False

Your earnings record is a chronological history of the amount of money you earned each year you were employed over your lifetime. Your yearly earnings remain on your Social Security record even if you switch jobs or stop working. These earnings are used to help calculate your retirement benefits, so you should check regularly to be sure your earnings record is accurate. It's up to you to correct any errors.

7: FICA is the tax you pay on the monthly retirement benefits you receive from Social Security.

  1. True
  2. False

The correct answer is B. False

FICA, short for the Federal Insurance Contributions Act, is the payroll tax withheld from your salary or self-employment income that's used to fund the Social Security and Medicare programs.

8: Spousal benefits and survivor benefits are the same thing.

  1. True
  2. False

The correct answer is B. False

A spousal benefit is just like it sounds--a benefit paid to the spouse of a beneficiary receiving Social Security. It's worth up to 50% of the other spouse's benefit. It can be reduced, however, if a spouse claims a benefit early. Survivor benefits can only be collected by a widow or widower. As long as a surviving spouse claims a survivor benefit after he or she reaches full retirement age, he or she will receive the full amount that the late spouse had been receiving.

9: Your primary insurance amount (PIA) is a type of optional insurance that guarantees benefits will be paid even if the government runs out of money.

  1. True
  2. False

The correct answer is B. False

PIA is the monthly amount payable to a beneficiary who starts benefits at full retirement age. The agency figures out the size of your monthly check using calculations based on your highest 35 years of earnings--your computation years--and the PIA is the basis for the benefits that are paid to you upon your full retirement age.

10: Most people need to earn at least 10 Social Security credits to be eligible for retirement benefits.

  1. True
  2. False

The correct answer is B. False

As you work and pay Social Security taxes, you earn credits that count toward your eligibility for future Social Security benefits. You can earn a maximum of four credits each year. Most people need 40 credits to qualify for benefits, or about 10 years of work.

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