Understanding how Social Security benefits work can be challenging. There are so many rules, the formulas may seem complex, and it is easy to feel like you don't have all the information you need to decide the right path for you and your family.
Making a decision based on inaccurate information can end up costing you. But working with a financial planner can help you develop a retirement planning strategy that includes a plan to help you navigate the complexity of Social Security benefits.
Social Security in the United States is a big and complex system. For those 65 and older, it provides the majority of family income, making it critical to older Americans' financial wellness.
To that point, it is also very popular. According to the Social Security Administration (SSA), nearly 67 million Americans will receive monthly benefits in 2023, equating to more than one trillion dollars paid out during the year. Additionally, an AARP survey in May 2021 found that 85% of older adults strongly oppose cutting benefits to help reduce the federal budget deficit.
Before making decisions about your retirement and claiming your benefits, it is vital to debunk some of the most common Social Security myths and misconceptions.
Until 1984, it was true that you didn't pay taxes on Social Security benefits. However, Social Security was overhauled by Congress in 1983. The provision, signed by President Reagan, made a portion of Social Security benefits taxable, depending on your income level.
At the federal level, you will pay income taxes on up to 50% of your benefits if your annual income is $32,000 to $44,000 for a couple filing jointly and $25,000 to $34,000 for an individual filer. For anything above that threshold, 85% of benefits are taxable.
It is also possible that you might owe state taxes on your Social Security income if you live in:
Rules on taxing benefits vary by state, so reach out to your state tax agency to learn more. It is also essential to speak with your accountant for an accurate depiction of your specific situation.
As long as employees and employers pay payroll taxes, Social Security will not run out of money. It's called a pay-as-you-go system — revenue coming in from the Federal Insurance Contributions Act (FICA) and Self-Employed Contributions Act (SECA) taxes largely cover the benefits going out.
Indeed, Social Security does face funding challenges. For decades it brought in more than it paid out, collecting a surplus of $2.83 trillion by the end of 2022. However, the system is starting to pay out more than it brings in, mainly because the retiree population is growing faster than the working population and living longer lives.
Unfortunately, without any changes in how Social Security is financed, the surplus is projected to run out in 2034, according to the most recent annual report from the program's trustee.
With that said Social Security will not go broke. It is designed to collect tax revenue and pay benefits. But it will only collect enough to pay around 80% of scheduled benefits based on the latest estimate.
To change that outcome, Congress would need to take steps to shore up Social Security's finances, like it did in 1983, the last time the program almost depleted its reserves. The steps it took in the 1980s included:
Even if Social Security receives a massive makeover from Congress, workers in the U.S. should not consider the program a sufficient retirement plan. Even today, Social Security barely covers living expenses for recipients.
According to the Social Security Administration, on average, retirees receive $1,825 per month. Keep in mind that the poverty line is $1,215 a month for a single person in 2023.
On average, Social Security provides about 40% of a beneficiary's preretirement earnings. The formula for calculating benefits is weighed so that they replace a larger percentage of income for lower-wage workers and a lower percentage for upper-income earners.
If you plan to retire in the next 10 years, it is critical to use your remaining time wisely. Consider boosting your retirement savings as much as possible while paying down any debt and keeping spending to a minimum.
Social Security provides benefits to not only retired workers but also to spouses who may not have contributed to the program.
Even if the spouse has never worked under Social Security, they may be eligible if they are at least 62 years old and the working spouse is receiving retirement or disability benefits. These benefits that may extend to spouses are known as "SSA spousal benefits." The non-working spouse can also qualify for Medicare at age 65.
Many families are structured around a single head of household who solely contributes to the Social Security system. If they were to retire, become disabled, or die, the non-working spouse would likely encounter financial hardship with the assistance of spousal Social Security benefits.
Now, for a spouse to receive a monthly benefit from SSA, they must meet certain eligibility requirements. Typically, the working spouse must file their own Social Security benefit before the non-working can claim their spousal benefit. In addition, the spouse must be at least 62 years of age and be currently married to the primary recipient.
To be clear, spousal benefits are capped at half your spouse's benefit at full retirement age.
When a Social Security beneficiary dies, their surviving spouse is eligible for survivor benefits based on the deceased spouse's Social Security earnings record. The amount of survivor benefits depends on the deceased spouse's Social Security benefits and the surviving spouse's age when they start receiving benefits.
If the surviving spouse is at full retirement age, they can receive 100% of the deceased spouse's benefit amount. If the surviving spouse is between age 60 and full retirement age, they can receive a reduced amount of the deceased spouse's benefit. If the surviving spouse is disabled, they can receive survivor benefits as early as age 50.
It is important to note:
Making the decision when to take Social Security varies heavily on your individual circumstance. Depending on when you were born, you may be eligible to start collecting Social Security as early as age 62. Another option is to wait until you've reached full retirement age or age 70 based on your work history.
There is no correct age for claiming Social Security, but there are some things to consider when you think about what makes the most sense for you.
If you decide to take your Social Security retirement benefits early, be aware the benefit is permanently reduced. However, if you retire between FRA and age 70, you typically earn a "delayed retirement" credit. Both instances only apply to your own Social Security benefits, not those of a spouse.
The following factors may help you determine what makes the most sense for you:
To learn more, read our blog about the pros and cons of taking Social Security early.
You may be eligible for Social Security benefits based on your ex-spouse's work record, even if they have remarried, as long as you meet specific requirements. To be eligible, you must:
Additionally, the benefit amount you receive based on your ex-spouse's work record must be higher than the benefit amount you would receive based on your own work record. If your ex-spouse has remarried, it does not affect your eligibility for benefits based on their work record.
It's critical to note that you must apply for these benefits to receive them. You can apply for benefits online, by phone, or in person at your local Social Security office.
Claiming Social Security is an integral part of your retirement income plan, but it takes some time and patience to understand the options and implications.
Many Americans participate in the Social Security system without fully understanding how doing so benefits them. Our team of financial planners is here to help you explore what options are best for you and your unique situation.
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This article was written in collaboration with the financial professionals at Spaugh Dameron Tenny. Our team features CERTIFIED FINANCIAL PLANNER® professionals, Certified Exit Planning Advisors, insurance specialists, investment coordinators, and experienced analysts – all dedicated to addressing the unique financial needs of physicians, dentists, executives, and retirees. With decades of collective experience, we provide clear and comprehensive guidance in all areas of financial planning, wealth management, retirement planning, investment strategies, and practice transitions.
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