Skip to main content

Saver’s Digest 4th Quarter, 2011

Social Security: What’s in It for You?

In 2011, nearly 55 million Americans—including nine out of ten people age 65 and older—received Social Security benefits.

Despite providing the single largest source of income for America’s senior citizens, Social Security is widely misunderstood.

Social Security is not a retirement savings plan in which the contributions you make through your payroll deductions are held in a private account (similar to a 401(k) plan). Rather, the amount of the benefit you can expect to receive is determined through a complex formula that takes into account your earnings history and the age at which you decide to retire. Prior to 2011, the Social Security Administration (SSA) sent out an annual statement reporting your earnings and projected level of benefits at retirement or upon incurring a disability.

A recent federal cost-cutting measure discontinued this service, but you can still obtain an estimate of your projected benefits by visiting the SSA website at or by contacting your local Social Security office.

Calculate Your Benefits

The easiest way to get an estimate of your future Social Security benefits is to use the online calculator at It’s listed as one of the “Top Services” on the site’s home page, or you can “click” or “select” on the “Retirement” tab at the top of the home page. Using the calculator requires you to log in using your personal information.

As an alternative, you can download a “detailed calculator” application that allows you to estimate your retirement benefit, as well as survivor and disability benefits. The advantage to using the online version is that it automatically incorporates your earnings history from the SSA database. With the downloaded version, you’ll need to manually enter your annual earnings year by year. You could refer to your old tax returns, but the process is much easier if you have saved the last Social Security statement that was mailed to you.

A Method to the Madness

To be eligible for an SSA retirement benefit, you must earn 40 credits over your working lifetime, at a maximum of four credits per year. The amount of income required to earn a credit is minimal—$1,120 for 2011—so most people who have worked 10 years or more have likely earned at least 40 credits.

If you have enough credits, Social Security computes your benefit based on your average monthly earnings from your 35 highest-earning years. (If you’re interested in the formula, read SSA Publication No. 05-10070.)

The other variable is the age at which you intend to retire. “Full retirement age” ranges from 65 for people born in 1937 or earlier, and increases to age 67 for people born in 1960 or later.

You can begin collecting retirement benefits as early as age 62, but your monthly benefit will be reduced (and remain at that level for life) for the period of time you elected to begin receiving benefits prior to your full retirement age. On the other hand, if you retire after your full retirement age, your projected benefit increases with the length of time you wait beyond your full retirement age — up until age 70.
The benefit calculators allow you to do “what-if” scenarios to see the effects of varying your retirement age and projecting your income level for the years leading up to your retirement date. Keep in mind that you can continue working after you begin collecting Social Security benefits, but your benefit may be reduced if you haven’t yet reached your full retirement age and your income exceeds a certain level ($14,160 in 2011).

Your Social Security benefits estimate will help you solve a major piece of your retirement-income planning puzzle.

The next step is to look at how the other pieces (such as your personal savings and your employer sponsored retirement plans) can fit into place and provide you with the retirement income you need. For more information about estimating your Social Security benefits, visit

Get Your Retirement Savings in Shape

Tracking your spending habits can help you identify ways to boost your retirement savings. The federal government figured out a long time ago that the best way to get people to pay their taxes on time was through direct payroll tax withholding.

After all, you can’t spend what you don’t receive.