Social Security benefits play such an instrumental role in your retirement plan.
But with many doomsday news stories about Social Security running out of money, a lot of people have discounted its ability to significantly influence their income plan.
Our team knows that when implemented correctly to fit your goals and vision, Social Security can make a big splash.
Social Security benefits and retirement wellness are directly related, and we’re excited to explore this important connection today.
Social Security and Retirement Are Linked
Social Security plays a crucial role in your retirement income plan.
On average it replaces about 40% of a person’s income but with proper planning, that amount can increase.
According to the Social Security Administration (SSA), nearly 65 million people are expected to enroll totaling over 1 trillion dollars in benefits in 2021. 9 out of 10 people 65 or older are also currently collecting Social Security. Benefits affect nearly all retirees, making it important to know how to understand them.
Social Security is a vast and deep world. Keep in mind that there is a ton of information that we won’t have time to cover but hopefully, after reading, you’ll have a good idea of the following:
- What Social Security is,
- How it works,
- Strategies to consider, and
- How it impacts retirees and beyond.
Brief Recap of The Social Security Basics
The Social Security Act was signed into law on August 14, 1935, by President Roosevelt. Its use has developed over time but still holds Roosevelts basic design concept to provide income to retired workers. Now, it even provides benefits for disabled workers, minor/dependent children, and spouses, and survivors.
How is Social Security funded?
It is primarily funded through payroll tax. This is the tax that you pay each time you receive a paycheck from your employer. Both the employer and employee put in 6.2% up to a taxable maximum of $142,800 for 2021. Self-employed people shoulder the full 12.4% burden, but half is tax-deductible.
A couple of solutions floating around to shore up Social Security are to increase the taxable maximum or retain it and reinstate the payroll tax for income that exceeds $400,000.
How do you qualify?
Qualifying for Social Security comes down to your earned work credits. Typically, you need to amass 40 credits, which translates to 10 years of work. You receive credits for every $1,470 you earn up to 4 credits per year.
You typically need the same number of work credits to qualify for disability benefits, but younger workers can sometimes qualify with fewer.
How is your benefit calculated?
Social Security bases payments on lifetime earnings. The SSA accounts for your 35 highest-earning years, adjusts for inflation, and applies its formula to determine your primary insurance amount (PIA) or your maximum benefit at full retirement age.
What if you don’t have 35 years of work experience? The SSA inputs a “0” in the formula, further reducing your total benefit. If you’re looking to increase your benefit, consider working until you’ve reached 35 years. Even if you have worked the full number of years, if you’re making more money now, working a couple of extra years at your higher-paying job could boost your monthly checks.
When should you collect your benefits?
There are different strategic decisions to make when considering collecting your Social Security benefits. Generally speaking, you have three options: collect at 62, full retirement age, or 70.
The earliest (and most popular) time you can collect is at 62 (there are exceptions for disability benefits, survivors, and qualified dependents). But collecting early will reduce your benefit by as much as 30% over your lifetime. Such a cut could have a dramatic impact on your retirement spending.
You can also collect at your full retirement age (FRA). For those born in 1960 or later that age is 67. Current retirees’ FRA is usually anywhere between 66 and 67. Check out the Social Security Administration’s table to find your FRA. At your FRA, you are eligible for 100% of your benefits.
The longest you should strategically wait to collect benefits is at 70. Any time you collect after your FRA, you earn delayed retirement credits. These credits boost your monthly check, but they stop accruing at 70. Should you wait to collect until then, you could increase your benefit by about 26%. Delayed retirement credits accumulate by anywhere from 3-8% per year depending on the year you were born. The SSA table will help you determine how much you could earn.
Delaying Social Security can increase the amount of your monthly benefit and is a great strategy to consider if you have the funds and cash flow resources to wait. It is especially good for married couples to utilize this strategy. The higher-earner could delay as long as possible to not only increase their retirement benefit but also a survivor benefit for their spouse.
There are advantages and disadvantages to each option. It’s all about your cash flow, income sources, benefit estimation, your health, spouse/dependent needs, retirement goals, and lifestyle.
Top Social Security Questions Answered
Let’s answer three of the most common Social Security questions.
Can you work and still collect benefits?
With so many people delaying retirement or not embarking on a non-traditional retirement path, it’s important to consider how Social Security benefits are impacted if you earn extra income. You can still work and collect benefits, but there could be a catch if you collect before your full retirement age.
Retirees who collect benefits before their full retirement age and earn above a certain threshold could trigger the earnings limit. In 2021, $1 for every $2 you earn over $18,960 is withheld from your benefits. The penalty lessens in the year you reach full retirement age; $1 of every $3 is withheld for any money made over $50,520. Once you reach FRA, the earnings limit goes away.
Keep in mind that this money isn’t taken away from you, rather it’s withheld until you reach your FRA. But don’t expect a big check the moment you turn 67, the SSA slowly adds the money back into your monthly checks.
Is Social Security adjusted for inflation?
While most retirement benefits don’t account for inflation or cost of living fluctuations, Social Security does. It’s called the cost of living adjustment (COLA). Each year the SSA decides if and how much to adjust benefits.
How does this work?
The COLA is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers, CPI-W. This index measures the price workers pay for goods.
2021 beneficiaries will receive a 1.3% COLA increase.
Are Social Security benefits taxable?
Ahh, the tax question. This can be one of the more complex pieces of Social Security. In terms of the federal government, your benefits are taxed if you make over a certain amount each year.
Up to 85% of your benefits can be taxed as ordinary income under the following circumstances.
- File single with income $34,000 and up.
- Married filing jointly with combined income over $44,000.
50% of your benefits are taxable in these circumstances.
- File single with taxable income of $25,000-$34,000.
- Married filing jointly with taxable income of $32,000-$44,000.
Some states also tax Social Security and other retirement benefits, but Washington is not one of them.
Social Security’s Role Beyond Retirement
While retirees make up the largest portion of beneficiaries, they are far from the only population that benefits from Social Security.
- Disabled workers and their dependents amount to about 13.8% of total benefits.
- Survivors of deceased workers receive 12% of total benefits.
Encountering a short or long-term disability is a bigger risk than many Americans realize. The SSA found that 1 in 4 people in their 20s will become disabled before they reach retirement age. Disability benefits assist people when they need it most.
Many women rely on Social Security benefits not only for their own retirement benefit but also for survivor benefits should a spouse pass away.
Longevity in America is increasing and women are expected to live about 5 more years than their male counterparts on average. This makes Social Security critical for women. The sobering reality is that moving from dual monthly checks to one can decrease your total take-home benefits by up to 50%. It’s essential to make a plan for that change.
Women must be empowered to make healthy financial choices to and through retirement. Whether you have always run the family finances or if you are your household’s new CFO, our team is here to support and guide you.
Social Security Matters Today
Social Security is an important program. As it serves so many families, it’s essential to have a plan and strategy around how it will function in your retirement plan.
Alongside providing retirement benefits, the SSA provides benefits to disabled workers and their dependents, widows, ex-spouses, minor children, and other qualifying dependents. It’s a multi-faceted system that can offer depth to your financial plan. Given the good that Social Security brings to millions of people, it’s easy to see why you should care about this program.
Ready to make a Social Security plan that aligns with your financial picture? Set up a call with our team today.