Evaluating Your Financial Resources

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Social Security Benefits

Social Security benefits are based on three factors:

1. Length of employment.
2. Your age at retirement.
3. Your total earnings.

Currently, to receive the full benefit, you must wait until age 65 and 2 months before taking Social Security. Because of longer life expectancies, the full retirement age is increasing in gradual steps and is scheduled to increase to age 67 by 2027.

You can, however, take Social Security benefits as early as age 62. If your full retirement age is 66 and you retire at age 62, your benefits will be reduced by 25 percent. Individuals whose full retirement age will be 66 or 67 can still take early retirement at age 62, but their benefits will be further reduced.

Early retirement will usually result in an equivalent amount of Social Security benefits, paid in smaller monthly payments over an extended period of time, if you live to your life expectancy.

You can also choose to delay receiving Social Security payments up to age 70, which will increase your benefit annually for each year you wait.

If you begin receiving Social Security benefits before you reach your full retirement age and you continue to work, your benefits may be reduced. Once you reach your full retirement age, your earnings will not affect your Social Security benefits.

Some or all of your Social Security benefits may be subject to federal and state income tax depending upon the amount of your benefits and other income. See IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Visit www.irs.gov/formspubs. Consult your tax accountant for your specific situation.

If you are over age 25, have been employed in a job covered by Social Security and are not already receiving Social Security benefits, you will receive an annual Social Security Statement approximately 3 months before your birth month. This statement is a concise record of the earnings on which you have paid Social Security taxes and a summary of estimated benefits you and your family may receive.

You can request a statement at any time by calling (800) 772-1213 or visiting www.ssa.gov.

Employer-Sponsored Retirement Plans

Defined benefit plans provide an employer-guaranteed benefit at retirement, commonly referred to as a pension plan.

• An employer must contribute enough money to the plan to ensure the guaranteed benefit will be paid.
• Employees usually become vested, or eligible for full benefits, after a certain number of years of service with the employer.
• Benefits are generally based on age at retirement and for that employer, the number of years worked, and average earnings in the years just before retirement.

A defined contribution plan is a tax-deferred savings account funded mainly by a combination of employee and employer contributions up to certain limits.

• Employers may match some, all, or none of the employee’s contributions.
• Contributions to the plan are made before federal income tax and calculated for the year of contribution.
• Some plans allow you to also contribute after-tax dollars.
• Investment earnings accrue tax-deferred until they are withdrawn.
• The retirement benefit depends on how much was contributed and how much those contributions earned.

There are many defined contribution plans available that allow you to accumulate earnings with federal income taxes deferred until withdrawal. Some also can reduce current federal income taxes.

These plans include:

• SEP-IRAs
• 401(k) plans
• 403(b)
• TSP plans
• SIMPLEs

The investments used in retirement plans may be mutual funds, stocks, bonds, certificates of deposit or other investments. If your plan is sponsored by your employer, your investment choices may be limited; most corporate plans offer a variety of mutual funds, each with a different investment goal. Some employers offer a Roth 401(k) contribution option. See the section Researching Investments for more information about choosing investments.