How Social Security Works 

DATE: Aug 29, 2018
AUTHOR: Leah Ingram

You worked hard for a long time, and you are looking forward to your Golden Years. However, not knowing exactly how Social Security works may be making you a little uneasy about your retirement. CNBC reports that a Nationwide Retirement Institute found that 29 percent of retirees said that their benefit was less than they had expected. Don't worry though! There are many procedures in place that are designed to help keep the program funded, so that there should be Social Security waiting for you when it is time to stop working.

Check out these basics so you can get a better idea of how it works and how it may affect your retirement and financial goals.

Where Social Security Money Goes

For starters, money deducted from your paycheck under the heading of FICA (FICA stands for the Federal Insurance Contribution Act tax, explains The Motley Fool), is placed in a Social Security trust fund, where it is invested and earns interest. It works in a similar way as your bank savings account. The money you deposit at the bank is "loaned" to other bank customers, but as soon as you need it, it's there for the withdrawing.

Where you do have to worry with Social Security is assuming it will take the place of retirement savings. If you simply rely on Social Security to get you through retirement, you will be sorely disappointed and perhaps left in a bind. Instead, think of Social Security as a bonus to help you live your Golden Years to the fullest.

How Social Security Works As You Age

Want to get a short course on how Social Security works as you near retirement age? Well, the longer you work and the longer you push off tapping into your Social Security benefits, the more money you'll get in the end.

Think about it this way. The money you collect when you retire from Social Security is based upon what the Social Security Administration calls your 35 highest earning years. So in order to maximize whatever Social Security benefits you can receive, it's important for you to put in at least 35 years on the job, which may be challenging for those who take time off to raise children. It's one of the reasons experts say you shouldn't rely on Social Security to get you through your retirement. It simply won't be enough money to live on.

That being said, with 35 years working under your belt, you used to be able to retire and start getting your Social Security money at age 62, but there was a catch. You only got a portion of that aforementioned max benefit of $1,360 per month.

Full Retirement Age Explained

The difference today is that full retirement age (FRA), which is determined by the year you were born and your age, has increased and continues to increase. For you to get the FRA benefit you cannot retire before the following:

  • For people born prior to 1954, FRA is age 66.
  • For those born between 1955 and 1960, FRA is between 66 and 67. It goes up by two months each year, so folks born in 1955 have a FRA of 66 and two months, folks born in 1956 have a FRA of 66 and four months, and so on.
  • For everyone born in 1960 or later, FRA is 67.

Even so, remember that when you do eventually retire, Social Security should be seen as a supplement for your living expenses only. That's why it's critical to also start personally saving for retirement as soon as you can.


  • Set aside your worries. Social Security should still be available for you when you retire. (Although, there may be further changes to the program.)
  • Start saving as soon as you can so you can have a comfortable retirement.
  • Know your full retirement age so you can receive the maximum benefit of Social Security.

Why It's Valuable

While it is impossible to predict the future of the program, knowing exactly what the FICA deduction on your paycheck means may help you plan a comfortable retirement. Remember, think of Social Security as your bonus for your decades of dedication to your career and your savings.

This article was brought to you by Colgate-Palmolive Company. The views and opinions expressed by the author do not reflect the position of the Colgate-Palmolive Company.