Your Social Security Statement

If you are 25 years of age or older, and have paid into the Social Security system as a wage earner, you should receive a Social Security statement every year. Your statement should arrive about three months before your birth month. It will list your retirement benefits, your earnings record, and information on how your benefits are estimated. This information can help you plan for the future.

How Your Retirement Age Affects Your Retirement Income

Make special note in your Social Security Statement in the difference in your monthly income should you retire at the earliest possible age of 62, compared to retiring at age 66 or 67 (depending on when you were born), or even later. 

This is an important distinction.

Note that if you begin collecting benefits at age 62, you permanently reduce your monthly income. That means you will never be able to collect the full monthly income benefit you are entitled to collect. You can only collect that full income benefit if you retire at age 66 or 67, or later.

How to Request Your Social Security Statement

If you are over 25 years of age or older, and have paid into the Social Security System but are not receiving a statement of benefits every year, contact the Social Security Administration and request a copy of Your Social Security Statement, Form SSA-7004-SM:
Call 1-800-772-1213 (Voice) or 1-800-325-0778 (TTY)
Visit www.socialsecurity.gov/mystatement
Write
Social Security Administration
Office of Earnings Operations
P.O. Box 33026
Baltimore, MD 21290-3026

Information You Will Need to Request Your Social Security Statement 

Have ready the following information to complete a request for Your Social Security Statement:

• Your name as shown on your Social Security Card
• Your Social Security Number
• Your date of birth
• Your place of birth
• Your mother's maiden name (last name only; to help identify you)

If You Need to Correct Information on Your Social Security Statement

If any of your personal information or income listed in your earnings record is incorrect, contact Social Security using the information above and request Form 8822. Complete the form and mail it back to the address specified on the form. You can also correct your information online at www.socialsecurity.gov/mystatement .

Defined Benefits Plans

In years past, many companies paid the costs of pension plans for their workers under a program called a “defined benefit plan.” This retirement plan pays you a fixed amount (the defined benefit) each month during retirement. How much you receive depends on how long you worked for the company and how much you earned before you retired.

Although defined benefit plans are not as common in the private sector any more, many employees who work in the public sector (federal, state, or local governments) still receive “defined benefits” at retirement. However, even those plans are changing for some public sector employees, including newer ones who are being enrolled in defined contribution plans.

Defined Contribution Plans

Today, as part of an employee’s benefit package, many companies offer a “defined contribution” plan instead. For this type of retirement plan, you contribute a fixed amount (the defined contribution), usually a percentage of your income. Employers typically offer retirement plan workshops for employees so they can learn:

• How the plans work
• The tax benefits they offer
• How to transfer funds after a change of jobs
• How to begin withdrawing the funds at retirement

Employers will also inform employees on the types of investments they can make in their defined contribution plans, and the level of risk associated with each investment. Which investment(s) employees choose in their defined contribution plans is left to each employee. That way, employees can choose investments with risk levels they are comfortable with.

Types of Defined Contribution Plans

Three common types of defined contribution plans you may hear references to are:

• 401(k) (For-profit companies)
• 403(b) (Non-profit organizations)
• SIMPLE (Savings Incentive Match Plan for Employees)

Contribution Amounts

Employees may choose what amount they want to contribute to their retirement plans, usually one to six percent of their income. For example, if you earn $60,000 and contribute five percent of your income to a defined contribution plan, you will save $3,000 each year. There are limits to the amount you can contribute each year. For example, with SIMPLE, you can contribute up to $6,000 each year.

Matching Contributions

Some employers provide the employee benefit of matching your retirement plan contributions. While employer matching contributions are regulated by the Employee Retirement Income Security Act of 1974 (ERISA), each employer is able to decide by how much it will match employee retirement plan contributions. Typically, employers base their matching contributions on a certain percentage of your:

• Income. For example, your employer may base matching contributions on 50 percent of your income. From the income example above of $60,000, this means your employer’s matching contributions would be based on $30,000.
• Contributions. For example, your employer may base matching contributions on one percent of your contributions. From the contribution percentage example above of five percent, or $3,000, this means your employer’s matching contribution would be based on one percent, or $600. 

If you take into account that your employer’s matching is based on only 50 percent of your income, this means your employer’s matching contribution would be $300, or one percent of $30,000.

(see Hilary Z. Simpson. “Compensation and Working Conditions--“How Does Your 401(k) Match Up?” Bureau of Labor Statistics. May 26, 2010)

Employers are also able at their discretion to suspend or reduce matching employee retirement plan contributions, for example, in challenging economic times. But for any matching your employer does provide, at any level, consider it a valuable employee benefit. It is like getting free money.

Vesting

When it comes to your retirement plan, vesting means “ownership.” Your contributions to an employee retirement plan are always vested (see IRS.gov. “Retirement Topics—Vesting.” Page last reviewed August 5, 2010. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting on November 19, 2010.), meaning that you always “own” them—you never have to give them back. Should you change jobs, you can transfer the amount of your contributions from your “old” retirement plan to a new one or directly to a rollover IRA.

Sometimes employers’ contributions may become immediately vested. This means that you own them as soon as you start receiving them. In other cases, employer contributions may follow a phased-in vesting period based on your years of service. For example, you may own, or become vested in, a certain percentage of your employer contributions after one year of work, a higher percentage after two years of work, and so on until you own, or become fully vested in, all of your employer’s matching contributions.

Vesting periods for employer contributions vary at each company, but they generally last three to six years (see IRS.gov. “The Fix Is In: Common Plan Mistakes - Vesting Errors in Defined Contribution Plans” Retrieved https://www.irs.gov/retirement-plans/plan-sponsor/fixing-common-plan-mistakes-vesting-errors-in-defined-contribution-plans from on November 19, 2010.) and have a phased-in ownership schedule. If you were to change jobs before the full vesting period is over, you would be able to transfer only the vested employer contributions (the amount you “own”) to a new retirement plan. Check with your employee benefits staff to find out how long your company’s vesting period is.

How Retirement Plan Contributions Affect Your Take-Home Pay

When you contribute to your employee retirement plan, you divert a portion of your income into retirement savings, away from your take-home pay. From the example above, still assuming your annual income is $60,000, your $3,000 contribution to your retirement plan would reduce your gross (before taxes) take-home pay to $57,000.

The Tax Benefits

Lowering your take-home pay may not sound all that appealing, but you get two tax benefits for making the sacrifice:

1. Tax-deferred earnings. The money you contribute to and invest in your defined contribution plan grows tax free until you retire and begin withdrawing money from the plan. At that point, you begin paying income tax on the withdrawals. In other words, your taxes are “deferred” to a later time, when your income tax rate might be lower than when you were working.
2. A lower taxable income. Because your contributions are not taxed now, but later, your taxable income is lowered by the amount of your contributions. For example, if you earn $60,000 and contribute five percent, or $3,000, to your defined contribution plan, your taxable income is $57,000. In other words, you would calculate your annual income tax on $57,000, not $60,000.

Investment Choice

Your employer will provide you with a choice of investments you can make in your defined contribution plan, usually money market, mutual funds, stocks, and bonds.

Penalty for Early Withdrawals

If you withdraw money from your defined contribution plan before 59 years of age, the earliest age you may withdraw, you will pay a 10 percent penalty fee on the amount of the early withdrawal in addition to income tax on the withdrawn amount.

Exceptions: Hardship Withdrawals

Some employer retirement plans allow for hardship withdrawals, penalty-free, for medical expenses not covered by your health care plan. Check with your employer on whether this is the case with your retirement plan. Some pretty strict requirements usually have to me met to qualify for a hardship withdrawal. To avoid a potentially costly error, be clear on what your financial responsibilities are before you make an actual withdrawal. Employers may also allow the hardship withdrawals listed below (see GuideTo401kHardships.com . “Information on 401(k) Hardship Withdrawals.” Retrieved from http://www.guideto401khardships.com/ on September 7, 2010). Again, be clear on what requirements you must meet before you make any withdrawals from your employer retirement plan.

• Un-reimbursed medical expenses
• The purchase of your first home (the one you would live in; not a rental or investment home)
• Payment of college tuition and some related costs, such as room and board
• Payments on your primary residence (not rental or investment property) to prevent eviction or foreclosure
• Funeral expenses
• The repair of your primary residence

Important Considerations for Hardship Withdrawals

Making a hardship withdrawal may have several implications on the long-term financial well-being of you, your family, and your child with ongoing special needs. Consider them carefully (see IRS.gov. “Retirement Topics—Hardship Distributions.” Page last reviewed August 5, 2010. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions on November 19, 2010, and IRS.gov. “Retirement Plans FAQs regarding Hardship Distributions.” Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions on November 19, 2010.).

• You will have to pay income tax on the amount withdrawn from your employee retirement plan.
• You reduce the amount of your retirement savings by the amount withdrawn.
• You may withdraw only your contributions, not your employer’s matched contributions.
• The withdrawal may not be higher than the hardship expense. For example, it may not be more than the actual unreimbursed medical expenses.

If you’re strapped for cash, a hardship withdrawal might seem like the answer to your financial hardship. But consider the long-term consequences.

First, do you want to potentially reduce your retirement income? And second, do you expect your financial situation to improve? If you don’t think it will, what is the possibility of finding yourself strapped for cash again?

If you think your financial situation might improve and you are not contributing the maximum amount allowable to your retirement plan, you may have the opportunity to “pay yourself back” by making higher contributions in the future.

Catch-Up Contributions

The IRS allows individuals age 50 and over to make annual “catch-up” contributions to their employee retirement plans. The IRS limits the amount of catch-up contributions. As of 2010, the annual limit is $5,500. Other restrictions to making catch-up contributions apply. For more information on catch up contributions, take a look at the IRS article Retirement Topics—Catch-Up Contributions. It is very important you fully understand every financial consequence to a hardship withdrawal. If you are considering one, speak to someone at your company knowledgeable about them. Also, visit the IRS Web site and take a look at the article, Retirement Topics—Hardship Distributions.