On Social Security and Medicare (Part II)
3/15/2004
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As shown in the previous tip, FICA taxes funded workers’ retirement benefits, disability benefits, survivor benefits, and Medicare benefits. We now will further divide our discussion into multiple pieces to simplify everyone’s life.
First, the retirement benefits. To qualify for the benefits, one must be “fully insured.” Generally, it means you need to have at least 40 credits. That’s about 10 years of work recorded in the government system.
The retirement benefit amount you will receive depends on your career average earnings covered by Social Security and your age when you start the benefits.
If you begin the entitlement at your “full retirement age” (FRA), you will receive a full benefit amount. If you were born in 1938, your FRA is 65 and 2 months. The FRA gradually increases to 66 if you were born in 1943-1954. For those born in 1960 or later, the FRA will be 67.
If one chooses to draw the benefit before reaching FRA, he/she can start the benefit as early as age 62. However, the monthly benefit will be permanently reduced by as much as 30% of the full benefits.
Here are some numbers about the retirement benefits to give you a general picture about the program. (All amounts here are in today’s dollars without accounting inflation).
If you are 40 in 2004 and your present annual earnings are $35,000, your monthly retirement benefits at your FRA will be approximately $1,269. If your annual earnings are $50,000, your monthly benefits will be $1,587. When your annual earnings are $87,900 or more, the monthly benefits will be $2,044. (Recall that OASDI’s limit is $87,900 for 2004).
If you are 50 in 2004, the monthly benefits at FRA for you with annual earnings of $35,000, $50,000, and $87,900 will be $1,247, $1,572, and $2,010, respectively. If you are 55 in 2004, the monthly benefits will be $1,237, $1,566, and $1,981, respectively.
Now you’ve got the picture.
Unfortunately, it’s not pretty - no matter what are your career average earnings.
So, what to do?
Generally, utilizing tax-advantaged savings plans to fund retirement should be the first choice for the vast majority. After reaching the tax-law allowed limit, one can look into other alternatives that could be effective and powerful as well, depending on one’s income, tax bracket, time to retire and other factors.
We offer one-hour free consulting on your retirement planning. Please feel free to contact us at your convenience. We will make ourselves available at a time of your choice.
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