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How is Social Security calculated?

Unlike many pension plans, which are based on just the top few years of your earnings, Social Security takes your 35 highest-earning years into account when computing your benefit. Each year’s income, up to the maximum taxable Social Security wages, is indexed for inflation, and averaged together. A formula is then applied to arrive at your full Social Security benefit — that is, the monthly amount you are entitled to if you retire at your full retirement age.

Are you eligible for Social Security?

In order to be eligible for Social Security, you need to earn 40 “credits” during your working lifetime. Each $1,260 in earnings you have in 2016 will give you one credit, up to a maximum of four credits per year. This amount changes each year, but if you earn enough to get the four-credit maximum in each of 10 years, you’ll be eligible for Social Security benefits.

What is your full retirement age?

For people born between 1943 and 1954, full retirement age is 66. For those born after that time period, the full (or normal) retirement age gradually increases to 67 for those born in 1960 or later. Filing early or late can make a big difference. You don’t have to wait until full retirement age to start collecting benefits. In fact, you can file for Social Security as early as age 62, or you can choose to delay your benefits until age 70.

If you file early, your benefit will be reduced. Starting with your full benefit amount, your benefit is reduced by 6.7% for each year before full retirement age (up to three years), and 5% for each year beyond that. Conversely, if you choose to delay benefits, your monthly checks will increase by 8% for each year you decide to wait.

Source: Matthew Franke, The Motley Fool USA TODAY January 2, 2016

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