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We’ve seen the deduction in our paychecks all our lives: Social Security and Medicare. Still, when folks begin to approach retirement age, they have one question: “How does Social Security work?”

In truth, it’s a bit of a complex system. You can file early, but you’ll be subject to penalties. You can file at full retirement age, but you can also delay it to accrue more income.

And what about Medicare? Where does that fit in? Allow us to clear up several points that’ll help you begin planning today.

Editor’s note: If you like this article, feel free to join the conversation and leave your comments at the bottom!
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Where Did It All Begin?

In 1935, the federal government made personal retirement savings their concern. In this year, the Social Security Act was instituted. It required everyone legally employed within the workforce to make contributions into the system.

We see these mandatory contributions being deducted from our paychecks in the form of the Federal Insurance Contributions Act (FICA) taxes. Medicare is another program with mandatory contributions. Those taxes are withheld from our paychecks in much the same way, paycheck after paycheck. So, when can you collect?

Early Retirement

As of 2019, the full retirement age is 66. That means at 66 you can collect the full benefit of all those years of Social Security contributions. However, you can also apply for early retirement. You’re eligible to start receiving your benefits as early as 62.

Of course, there’s a catch here. If you go out at 62, you’ll receive significantly lower benefits for the rest of your life. If you have another pension to offset your Social Security income, you might consider early retirement, but it comes with such a significant drop in monthly income that it makes it tough to warrant the move.

Penalties for Early Retirement

The reduction in monthly income isn’t the only point for consideration. If you file at 62, but still plan to work, your annual income will be limited. You’ll only be able to earn $17,640/year.

It doesn’t work to where you can earn, say, $1,200/month from your Social Security check and then $4,000 from your full-time job. You’d be restricted to some form of part-time or contract work once you file. You’re released from this constriction at 66.


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Full Retirement

Full retirement age (FRA), or 66, is the prime time. You’ve come into your full benefit and won’t receive any deductions for going out early. As of 2019, the average FRA earnings are about $1,400/month. That’s not too terrible, right?

Even with that in mind, for many, living off of Social Security alone is not enough. It’s important to contribute to your own IRAs or annuities throughout the years. This brings us to one of the perks of Medicare.


At 65, you will be required to file for Medicare. This begins your life with Medicare as your primary insurance provider. Any other insurance providers will go on to become your secondary forms of insurance.

You don’t have to pay for Medicare (you’ve been paying into it all your life) and it’s a fairly comprehensive form of coverage. With $1,400/month, you can remove health insurance as one of your monthly bills. Just be sure to apply for Medicare a few months before turning 65. It’s a straightforward process online.

Delayed Retirement

If you’re well-set and in no rush to collect your monthly Social Security check, there is another option. You can delay your retirement until age 70. From 66 to 70, your monthly income check will continue to grow.

If longevity runs in your family and you simply don’t need the additional income at 66, then waiting until age 70 is a possibility. You’ll have accrued some pretty nice increases in your monthly income by this age. But, 70 is the cutoff point; so do file a few months before the big 7-0.

Spousal Benefits

Any stay-at-home parents in the crowd? They’ve worked the hardest job throughout the years and never collected a dime. Thankfully, there is a margin of protection in these cases. Spouses are eligible to receive 50% of the other’s benefit.

However, you really don’t want to consider this until full retirement age. At 66, one spouse is eligible to receive 50% of the other spouse’s income. If you go even sooner than this, at 62, you’ll only receive approximately 32% of your spouse’s benefit.

If you look at the average rate of $1,400/month, then $700/month may be something to work with. But, taking spousal benefits at 62 would put you at about $455/month. Of course, if both parties can wait until 70, then you may have a tidy little sum for one person to receive and the other person to receive at a rate of 50%.

How Does Social Security Work?

To the question, “How does Social Security work?” the answer is, “Not easily.” The Social Security Administration considers so many factors to make their calculations that there’s nothing cut and dry about it. But, here at Bonsai Finance, we can help you cut to the chase and create the best plan for your retirement.

In fact, our company was instituted on the grounds that personal finance is tricky! It takes time and dedication to formulate the best plan. We’ve even named ourselves after the Bonsai tree that takes patience and care to shape over time.

So, allow us to provide you with the right tools to shape your finances. We do this through one loan, credit card, and one insurance policy at a time. Feel free to live chat with us today or give us a call at (800) 368-5548 to start mapping out your fiscally secure future!

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