Have you seen the alarming headlines in the news declaring: “The Social Security System Will Run out of Money by 2034.” Click bait or not, these headlines can bring frustration to even the most financially prepared person who has contributed their hard-earned money to Social Security taxes.
You may have thought about this and realize you know the name – social security – probably because it’s often one of the most common retirement income sources people consider. But you might be wondering: how does social security work?
When preparing for retirement, sources of income are one of the 5 key factors you must consider. Like many of our clients, you may have questions about social security like:
Whether you are close to retirement or thinking you won’t reap the benefits of Social Security because you are more than 15 years away from retirement, it is prudent to understand the program and how it can fit into your retirement plan.
Let’s dive in to answer common questions we receive about Social Security to help you understand the intricacies of this program, which is approaching a century old (84 years to be exact). Read on or watch the video below for my explanation.
The amount you contribute and how long you work determines how much you get. Here is how Social Security benefits work:
First, let’s address the elephant in the room. The common thought that Social Security will go broke is a myth.
When the Social Security system was updated in 1983 due to a similar fund depletion crisis, the changes were projected to allow the fund to last until the mid-2030s. A Marketwatch article says, “If nothing is done [by Congress], which experts say is unlikely, all beneficiaries would get 80% of scheduled benefits, according to the Social Security Administration’s trustees report released last week.” Though Social Security does face serious challenges, the program won’t disappear. There are multiple ways Congress could fix the problem, like raising retirement age or increasing the country’s deficit.
Now that you know your retirement years aren’t doomed, how do you find out the current state of your own Social Security and when it’s appropriate to begin your countdown to retirement.
Through a modern and user-friendly website, accessing your Social Security information is straightforward. You can now go to the Social Security Administration's website which is ssa.gov, where you can create a free personal account.
In this account you'll be able to find personalized estimates of future benefits, your latest statement, your entire work record, and accrued benefits that would be paid at your full retirement age and beyond.
When it comes to Social Security retirement benefits, your decisions shouldn’t be based on a “one-size-fits-all” assumption. Your age, marital status, health, and financial needs are important considerations.
First, it’s important to understand what full retirement age is. Many of us think of retirement age as being 65, which it used to be (see Full Retirement Age chart below). For individuals born after 1960 your full retirement age is actually 67.
If you choose to retire early, you won’t receive the full monthly benefit. On the other hand, if you file after age 67, you have the opportunity to earn retirement credits, which would increase your monthly benefit up to age 70. The Social Security system incentivizes people to keep working so they will continue to contribute their income taxes into the fund. Important note: there are nuances to the delayed retirement credit rules, which we will get into later.
This brings us to the next question, which is how much social security benefit will you receive? If you or your spouse have been a physician, executive, or dentist all of your career, your earnings have likely exceeded the maximum amount that is considered for tabulating social security benefits.
As a result, the benefits that you would receive in many cases, or I should say the maximum benefit that can be paid in is almost $4,000 a month, depending on what age you begin collection payments. The maximum possible Social Security benefit in 2020 is:
To get the maximum possible Social Security payment, you need to earn at least the taxable maximum amount each year for 35 years.
This brings us to the next question, which is how much social security benefit will you receive? If you or your spouse have been a physician, executive, or dentist all of your career, your earnings have likely exceeded the maximum amount that is considered for tabulating social security benefits.
What if you retire early? Here is an example:
Let’s say your full retirement age is 67 and you have a benefit that's available of about $3,000. If you file for Social Security benefits at the earliest allowable age, which is 62, you'll actually receive a 30% reduction in that Social Security retirement benefit. This reduction would bring your monthly benefit to about $2,100. That is the floor, meaning this monthly benefit is permanently reduced then adjusted for inflation, the rest of your life.
In contrast, if you wait past your full retirement age, your benefit will increase at a guaranteed 8% a year until you're seven years old and at age 70, the benefits stop growing. Therefore, in general there is no reason to delay filing for Social Security retirement benefits beyond age 70. If you were born before 1943, delayed retirement credits do not apply to you.
Check out the chart to the right for a visual explanation. This chart assumes that your full retirement age is 66 and your full retirement age benefit is $1,000. Let’s look at how that benefit amount can change if you begin collecting.
This “Monthly Benefit” chart show the power of waiting. In this case, the monthly benefit at age 70 will increase from $1,000 to $1,320, a 32% increase.
Now for the final question. What if you file for social security and decide you’ll continue to work?
If you are full retirement age or older, you can file for Social Security retirement benefits and continue to work. You won’t receive a reduction to the benefit, no matter how much you earn.
However, if you file for Social Security benefits before your full retirement age, you are subject to an earnings test. If you earn more than about $18,000 a year your Social Security benefits. The following year will be reduced. That reduction is $1 less of social security benefits for every $2 you earn over the limit of approximately $18,000.
Benefits withheld are not lost. According to the SSA website, when you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn. They will recalculate your benefit amount to offset the earnings they withheld while you worked before retirement age and give you credit for the reduced or withheld benefits.
Hopefully the answers to these common questions will give you a working knowledge of where to get information, how you might receive when your file and the impact of working after you begin to receive Social Security benefits.
When it comes to preparing for retirement, remember Social Security should be only one piece of your income puzzle in a comprehensive financial plan. Therefore, don’t put all of your eggs in one basket when saving for your life after your career. Whether you plan to retire early or stick out until you turn 70, remember retirement income can also come from your 401(k), Roth IRA, and other saving or investing methods. When it comes to planning, we air on the conservative side. We do not know what social security will look like in 30 years, but we're under the impression that it will exist but probably not in the same capacity.
As financial planners, our goal is to plan for your financial future without depending on things that are completely out of our control, like Social Security. That way we can be prepared for the worst case scenario but be pleasantly surprised if there are programs like Social Security available for you down the road. Connect with me to plan your retirement with confidence or click the button below to schedule a call with me.
2 Social Security Administration, “Benefits Planner: Retirement | Full Retirement Age,” www.ssa.gov/planners/retire/retirechart.html.
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CFP® and Partner at Spaugh Dameron Tenny, LLC
