Social Security is America’s largest source of retirement income.  But most of us have little or no idea how it works.  Worse yet, misinformation causes many to make poor retirement decisions.  Here are the facts you need to know.

First, some background.  Social Security is insurance, paid for by workers and employers.  Only workers and their families benefit from it.  It insures against loss of your work income due to retirement (or age), disability or death.  It has an annual cost of living adjustment (COLA) equal to the inflation rate, to protect your long-term buying power.

Mystery #1: Will Social Security be there for me? Social Security can pay 100% of all promised benefits until 2033.  After 2033 it can pay about 75% of promised benefits.  There are numerous options to extend solvency indefinitely with a mix of tax increases and/or benefit cuts.  If you’re a pessimist, subtract 25% from your SSA benefit estimate.

Mystery #2: Is Social Security a good deal? Social Security is a complete package of worker benefits, including retirement, disability and life insurance.  The average worker earning $43,000, with a non-working spouse, would need to save over $700,000 to duplicate their retirement payments, plus buy additional disability and life insurance.  The Social Security Administration’s administrative overhead is a low 0.8%.  Social Security payments are at least 15% tax-free.

Mystery #3: How does Social Security compute my payment? Your payment is based on three steps:

• First, to be eligible for retirement you need at least 10 years of part-time work (or fewer years for mid-career disability or death).

• Once eligible, your payment is based on averaging your 35 highest-paid work years (or fewer years for mid-career disability or death).

• You get a “100%” payment if you first draw at your Full Retirement Age (or FRA, currently 66 and phasing to 67).  You get lower payments if you start payments earlier, and higher payments if you start later.

Mystery #4: How can I get the most lifetime payments—by filing early, at FRA, or later? It’s an individual and financial-planning decision.  In simple dollars, it’s best to apply later, if you have average life expectancy or above.  But in ”present value” dollars, counting inflation, taxation, withdrawal options and interest rates, it may be best to apply early.  See this post for some considerations and software resources.

Mystery #5: What are good Social Security planning tools? Definitely sign up for a ”My Social Security” account at www.ssa.gov/myaccount/.  See SSA’s suite of calculators at www.ssa.gov/OACT/anypia/index.html.  And see the software products at the link in Mystery #4.

Mystery #6: Will Social Security pay my family members? Yes, in certain circumstances.

• Your spouse or former spouse can get up to 50% of your FRA payment if they are at least FRA; less if they file early (as early as age 62).

• Your spouse can be paid 50% at any age if caring for your child under 16.

• Your unmarried child can be paid 50% if under 18, under 19 and in high school, or at any age if totally disabled since youth.

• In most cases, your family member must first file for any benefits on their own work record.  (An exception is your spouse who is over FRA.)

Mystery #7: Can family members receive Social Security after I die? Yes.  Payments to your survivors are possible whether you die before or after your own Social Security eligibility.

• Your widow(er) or surviving former spouse can be paid up to 100% of your payment if they are at least FRA, or a reduced amount as early as age 60.

• Your widow(er) can be paid 75% at any age, if caring for your child under 16.

• Your unmarried child can be paid 75% if they are under 18, under 19 and in high school, or any age if totally disabled since youth.

• Your parent over 62 can be paid if they were dependent upon you.

Mystery #8: Can I work and still get Social Security? Yes.  If you are over FRA, there is no work limit; you can earn as much as you can and still get full Social Security payments.  Before FRA, some of your Social Security is withheld if your earnings exceed the annual earnings threshold, $15,120 in 2013.  (Higher limits apply the year you turn FRA.) Only work income counts against Social Security; not counted are pensions, interest, dividends, capital gains, etc. Remember, your Social Security does not stop as soon as you reach the threshold; that’s where partial withholding begins.  If you get Social Security disability, different work rules apply.

Mystery #9: How do I file for Social Security? You can file by visiting an office, by calling (800) SSA-1213, or online at www.ssa.gov.  You can file up to 3 months before you want payments to begin.

Mystery #10: When can I enroll in Medicare? Medicare age is 65.  You should file promptly by contacting SSA (see Mystery #9), preferably 2-3 months early.  Late filing causes penalty fees and delayed coverage.  If you are covered by health insurance from current work done by you or your spouse, you can postpone Medicare until that insurance or work ends.  Note that it must be insurance from current work, not a retiree plan or COBRA. Everyone should contact SSA 3 months before their 65th birthday to make sure their Medicare enrollment is on track.

You now have a good start at understanding your retirement’s cornerstone.  For more detail, see my book.  But remember, everything here has individual nuances and exceptions.  Only SSA can make official decisions, so be sure to study their website and consult with them by phone or in-office.

As always, keep on planning.