Social Security in the United States is a Government-operated retirement plan that provides monthly income to retirees. It is funded through dedicated payroll taxes called FICA (Federal Insurance Contributions Act), which are withheld from each paycheck and sent together with the employer's matching contribution to the IRS.

Social Security Benefits

The 'credits' that go toward the Social Security benefits are earned through work and taxes; in order to be eligible, the participant must have at least 40 credits (i.e. they must have worked 10 years or 40 calendar quarters).

The retirement income you will receive from Social Security will be based you your average earnings; the more you earn, the more you will receive. The earliest age at which benefits are payable is 62. However, full benefits are not available until you reach what is known as Normal Retirement Age. For people born in 1940, this is 65 and 6 months; for those born in 1950, it is 66. Anybody born in 1960 or later will be eligible at age 67. Those delaying payment Normal Retirement Age will have their benefits increase by about 7% for every year of delay.

Working and Social Security

Although you can work during retirement, if you earn over a certain amount from age 62 up to your Normal Retirement Age, it will reduce the size of the benefits you are receiving. In 2006, the limits on such earnings were $12,480. Benefits are reduced by $1 for every $2 that you earn over this amount. However, once you reach Normal Retirement Age, you can work as much as you want with no reduction in benefits, although they may become taxable over a certain amount.

How to Claim Social Security

Social Security benefits are not automatic; they must be applied for. The best way to do this is to arrange an appointment with your local Social Security office or call 1-800-772-1213.

Your Social Security Record

You can get an official statement of all the earnings recorded in your Social Security account, an estimate of future retirement benefits, along with an estimate of your current disability and death benefits. You can do this by completing a Request for Social Security Statement (Form #7004), which you can get at your local Social Security office.

It is important to remember that any errors in your Social Security record become part of your permanent record after 3 years, so it's a good idea to check your record every 2 years or so in order find and correct them in time.

Social Security and Financial Planning

It is not a good idea to rely too heavily on Social Security in your financial planning. The majority of people need 70-80% of their pre-retirement income to maintain the same standard of living, and Social Security income is much lower than that. In addition, if you're not yet close to retirement, there is the worry that by the time you do retire, the system simply won't be able to support the sheer number of retirees at current benefit amounts.

The majority of financial planners suggest that anyone planning their retirement leave the Social Security benefit figures out of their plans all together. While they might receive some benefits when they retire, if they don't rely on them, they will be like icing on the cake.