When you reach retirement age, you’ll receive benefits based on a complex calculation using the number of years you worked, the income you earned during those years, and your age when you applied for the benefits. You can request a Social Security Benefits Statement by setting up a “my Social Security” account at www.ssa.gov. There, you’ll find records of your earnings history by year (any earnings that you paid Social Security taxes on, which includes self-employment taxes), along with an estimate of the benefits you can expect to receive depending on whether you take early retirement age (from sixty-two to your full retirement age), full retirement age (sixty-seven for those born in 1960 or later), or delayed retirement age (seventy).
Millions of retirees rely on Social Security as their largest source of retirement income. Collecting Social Security retirement benefits sounds simple, but it’s more complicated than just signing up. To get the most out of Social Security, you’ll need to do some careful planning and make some strategic decisions. Knowing how your benefits are calculated and what you can do to maximize them will help you make the best decisions for your situation.
The Social Security Administration (SSA) makes it very easy to apply for benefits online through their website www.ssa.gov. The application is easy to deal with, and it typically takes less than thirty minutes to fill out. Before you apply for benefits, you’ll need to have a “my Social Security” account set up.
Once you’re ready to apply, go to the SSA website at www.ssa.gov and click on “Retirement.” Then, all it takes is three easy steps to apply for Social Security benefits.
Once you’re done, you’ll get a receipt that you can print or save for your records. You’ll be able to check the application status when it’s one month until you’ll start collecting benefits.
What You Pay In
If you earn income—meaning if you work for yourself or for an employer—you are paying into Social Security. All workers pay 6.2 percent of their salaries or wages (up to a set annual limit) toward Social Security every year. Employers pay an additional 6.2 percent of each worker’s earnings. Self-employed people pay both parts, sending 12.4 percent of their earnings to Social Security.
If you have health insurance, you’re most likely covered under a group plan provided by your employer or your spouse’s employer, or you are covered through the Affordable Care Act (ACA). No matter how old you are, you need health insurance to protect yourself against financial disaster if you become seriously ill or have an accident. If you don’t have access to employer-sponsored health insurance and can’t afford the premiums, you may qualify for ACA subsidies.
Good Credit Means Lower Premiums
When insurance companies price your policies, they take a lot of factors into account, and that includes your credit history. A high score and strong credit history make you eligible for lower premiums, partly because insurance company research shows that people with better credit tend to file fewer claims.
When it comes to health insurance, find a policy that covers what you need—even if it’s not the cheapest policy. You won’t end up saving money if your policy doesn’t match the way you use medical care. For example, healthy people with no children do fine with low-cost, high-deductible policies, but families with young children may fare better with a higher-cost policy that will save them money on co-pays and wellness visits. You can find health insurance in a few different ways:
An HMO is an association of healthcare professionals and medical facilities that sell a fixed package of healthcare services for a fixed price. Each patient has a primary care physician, who is often referred to as a gatekeeper because services provided by a specialist are not covered unless the gatekeeper determines that the specialist is necessary.
The advantages of HMOs are lower and more predictable out-of-pocket costs and no claim forms. The major disadvantage is that services provided by healthcare professionals outside the network of your HMO aren’t covered. If your network is small, your choices of doctors and other health professionals will be very limited, and services provided by specialists will be dependent on a referral from your primary physician.
PPOs combine the managed-care aspects of an HMO with the flexibility of a fee-for-service plan. When you use doctors in your approved network, more of your medical costs are covered, but you can go outside the network of healthcare professionals and facilities to any healthcare provider of your choice when you feel it’s necessary. The main advantage of a PPO is the flexibility and a wide choice of doctors and facilities. The only disadvantages are that it’s more difficult to predict your out-of-pocket costs, and you’ll pay more for your healthcare if you go out of network.
Virtually everyone will need to pay for medical care at some point, and those costs can be outrageously high. Funding an HSA as part of your overall financial planning means that you can use tax-free earnings to pay for your healthcare expenses, saving you at least a little money. The catch is that these accounts are only available to people with high-deductible health plans.
HSAs offer a trio of solid tax benefits that boost your finances now and later:
No other type of tax-advantaged account offers all three of these benefits in one. If your employer offers an HSA plan, take advantage of it. When you make contributions this way, you’re funding the account with pretax dollars. That means your contribution does not count toward taxable income, and you don’t pay tax on it; your withholding taxes are reduced.
You get the same benefit if you DIY your HSA by opening and funding an account on your own. Contributions are tax-deductible, reducing your current taxable income and your tax bill.
As long as you use the money in your HSA to pay for qualified medical expenses, your withdrawals will be 100 percent tax-free. But if you use the money for anything else, you could face tax penalties of up to 20 percent plus regular income taxes on the withdrawal amount.
And there’s a beneficial twist. Once you turn sixty-five, you can use this money for anything without facing any taxes or penalties.
Be aware: HSAs come with a lot of rules. If you don’t follow them to the letter, you could get hit with fines, penalties, and a bigger tax bill. Luckily (unlike many IRS rules), the guidelines for HSAs are straightforward and easy to understand. Since the rules are subject to change, check in with the IRS website (www.irs.gov) for the most current guidelines.
Short- and long-term disability insurance protect your income-producing ability when you’re unable to work due to illness or injury. Many employers provide group short-term disability insurance as a benefit at little (or no) cost to employees, with your portion paid with pretax dollars and much less than you’d pay for an individual policy. When you have both long- and short-term coverages through your employer, the policies often dovetail so that your long-term coverage would pick up as soon as your short-term coverage expires (if your disability lasts that long).
Although the likelihood of becoming disabled is greater than the likelihood of dying during any given period of time, more people buy life insurance than disability insurance. Before purchasing an individual disability policy, be sure you understand the terms used and read the policy carefully to make sure you know what benefits you’re getting. Find out what, if any, exclusions there are, what the elimination period is, what the benefit period is, and what the definition of total disability is.
With both types of disability insurance, there’s an elimination period, which is the period of time after you become unable to work before you can begin receiving benefits under the policy. A short-term disability policy may have an elimination period of one to two weeks for illness or a shorter time for accidents. Long-term disability elimination periods are typically at least thirty days and more commonly ninety days.
If you become disabled, you’ll receive benefits until you recover or reach the maximum benefit provided by your policy. Short-term disability policies pay benefits for a shorter period of time, from six weeks to two years. Long-term disability policies may pay benefits for several years or until the age of sixty-five (or longer). The shorter the elimination period and the longer the benefit period, the higher the premium will be. Most policies replace between 60 and 80 percent of your income, up to the maximum monthly benefit according to your policy.
The best policies will have a definition of disability that includes the inability to perform the major duties of your own occupation. Under these policies, if you’re unable to perform your major duties, you can go to work in a different occupation that you are able to perform and still collect your disability pay. Less expensive or lower-quality policies won’t pay benefits unless you’re unable to do any work you’re reasonably suited to do, or they’ll offset your monthly benefit check against any income you’re earning elsewhere. There are three types of long-term disability policies:
Obviously, noncancelable and guaranteed renewable is the best type, but it will also be the most expensive. Avoid conditionally renewable policies. You want to have the assurance that your coverage will be there when you need it. Buy residual disability benefits. This means if you aren’t totally disabled but can’t work full-time, you’ll be paid partial benefits. Expect to pay between 1 and 3 percent of your annual income for a long-term disability policy, so if you’re earning $30,000, a policy will probably cost you between $300 and $900 a year. Your cost will depend on your age and the policy features you choose. The average period of disability is about three years.