Back to Basics: Social Security

Social Security

Back to Basics: Social Security

How does Social Security work? Will it be around when I retire? When should I start collecting my benefits, and how much will I receive?

If you’re like most workers in the United States, you probably have similar questions — and they’re likely not the only ones. From how to become eligible in the first place to how much of your wages are going toward Social Security and how spousal benefits work, it can be confusing. 

But how can you make the most of it when there’s no one-size-fits-all Social Security solution? It’s all about understanding your unique circumstances and creating a plan.

Social Security: The Basics

First, let’s go over what Social Security is — and isn’t — with answers to some frequently asked questions (FAQs):

What is Social Security?

Put simply, it’s government-run citizen-funded financial assistance that replaces a portion of income for individuals after they reach a certain age. But Social Security doesn’t stop there. It also provides benefits to those with disabilities as well as to children and spouses of the retired, disabled, and deceased.

How much am I contributing?

You pay a portion of your working wages into Social Security via taxes. The dollar amount depends on your employment status and how much you make. If you work for an employer, you pay in 6.2% of your gross earnings into Social Security, and your employer also pays in 6.2% of your earnings. If you’re self-employed, you pay both portions for a total of 12.4% of your earnings. 

How do I become eligible?

Social Security eligibility is based around credits. You earn one credit for each $1,360 you earn with the ability to earn four credits per year. That means, if you earn $5,440 this year, you’ll earn your maximum four credits for the year. After you’ve earned 40 credits — that’s at least 10 years of working and earning at least $5,440 per year — you’re eligible for Social Security benefits. 

Will I get my money back when I retire?

No. It doesn’t go into a savings account that’s set aside just for you when you retire. Of the money you pay into Social Security, 85% of every dollar goes into a trust fund that pays benefits to retirees, their families, and beneficiaries of the deceased. The other 15% goes into another trust fund that pays benefits to disabled individuals and their families. That means, when it comes time for you to retire, those who are working at that time will be paying your benefits.

Is it going to be around when I’m ready to retire?

The most likely answer is “yes.” Sure, those trust funds are on track to run out of money by 2035, likely reducing benefits by 20%. However, people will still have to work, a portion of their earnings will still be taxed, and beneficiaries will still receive benefit payments. It’s highly unlikely that a total elimination of the Social Security program will happen during the lifetime of anyone alive today.

What is my retirement age, and when should I start collecting benefits?

The Social Security benefit amount you’ll receive is based around your “full retirement age,” or FRA. While it varies for those born before 1960, FRA for those born after ‘60 is age 67. Eligible individuals can begin taking benefits at age 62, but their benefits will be reduced for each month they take benefits prior to FRA. At FRA, 100% of benefits are available. On the other hand, for every month a retiree is able to wait after FRA to receive benefits, the benefit amount goes up — by a total 8% per year. Those increases stop at age 70 but, if you can wait until age 70 to claim, you’ll receive your highest-possible benefit.

How much will I get?

Your benefit is based on the number of years you worked and how much you contributed to Social Security during those working years. Part of the formula involves averaging your highest income over 35 years. Since the Social Security Administration only looks at 35 years of earnings, if you work more than 35 years, your lowest-earning years are excluded from the equation, increasing your benefit. But if you worked fewer than 35 years, a $0 amount goes into the equation for any years you didn’t work — which can drop the average and reduce your benefits significantly. It’s important to note that Social Security is only designed to replace about 40% of income in retirement, possibly less in the future, making it important to save for retirement through other methods.

Can I still work while receiving Social Security?

Yes — with a caveat for some. If you start taking benefits before your FRA, you can earn up to $17,640 per year with no impact on the Social Security benefits you’re receiving. If you earn more than that, you’ll lose $1 in benefits for every $2 you earn over $17,640. During the year you reach FRA and up until your birth month, the reduction changes to $1 out of your benefits for every $3 you earn over $46,920. Once you reach your FRA, however, there’s no benefit reduction no matter how much you earn.

Interesting Facts and Important Details

Did you know there’s a maximum Social Security benefit — no matter how much you’ve earned and paid in? In 2019, the maximum monthly benefit payment is $2,861 and the average monthly payment is $1,461. Sure, benefits increase slightly each year because of Cost of Living Adjustments (COLA) based on inflation. But those maximum benefits might still seem low. That’s because $2,861 per month only amounts to $34,332 per year while $1,461 adds up to a mere $17,532 annually — making other forms of retirement savings all the more important.

A way to receive more in benefits, if you’ve been married, is to look into marriage-related benefits. These may be available even if you never worked but your spouse did, and three main types exist:

1. If you’re currently married and your spouse is retired, you may be eligible to take restricted spousal benefits equal to half of your spouse’s monthly benefit. That means you can draw benefits from your spouse while waiting until you’re eligible to take your own benefits if you’d receive more per month. Restricted spousal benefits can also allow your own to hold off on taking your own benefits, increasing the amount you’ll receive once you claim.

2. Another type of marriage benefits, known as widow or widower’s benefits, are available to individuals who were married but whose spouses passed away. The benefits are equal to the deceased spouse’s benefit but are not available if the living spouse remarries before age 60. And, again, it’s possible to accept a deceased spouse’s benefits before your own FRA or while you wait and allow your own benefits to grow.

3. A final type of marriage-related benefits is available to divorcees. If you were married to your former spouse for at least 10 years and didn’t remarry, you may be eligible for benefits based on your ex-spouse’s earnings. As with married spouses, divorced individuals who meet the requirements can receive 50% of their ex-spouse’s monthly benefit.

While many types of benefits are available to spouses, widows and widowers, as well as divorced spouses, among others, some people aren’t eligible for Social Security at all. Some local, state, and federal government workers with pensions don’t pay into Social Security and, therefore, aren’t eligible to receive benefits.

Eligible and want to maximize your monthly benefit amount? Remember, after FRA and up to age 70, for every month you wait to take benefits, your benefit amount increases. While a higher monthly benefit might sound great, waiting isn’t always the best option — or even a possibility.

Create Your Social Security Plan

So, if not everyone should wait until age 70 to take benefits, how do you figure out your own best timing? There’s quite a lot to look at, especially considering the difficulty in making changes after you’ve begun accepting benefits. Just some of the factors include: 

  • Other retirement savings
  • Potential retirement expenses
  • FRA
  • Career retirement date
  • Personal and family health history
  • Life expectancy
  • Marriage status
  • Financial needs
  • Goals
  • Ability to earn income
  • “Break-even” age

When taking these into consideration, it’s important to look at each individually and combined with the others to understand your full range of Social Security options and their impacts. For example, how could your retirement picture change if you were to live to 105 as opposed to 95? How much more would you accept in Social Security benefits over that extended time frame? How would the amount compare to the total you would receive if you started taking benefits as early as possible? And how would living 10 years longer impact your other retirement savings? How much less would you receive in benefits if you lived to 85 instead? Do — or could a possibility arise in which — you would need to take benefits before FRA to help make ends meet? 

To better understand these possibilities and more, it can be helpful to create multiple scenarios — including potential dollar amounts — and weigh them against one another. Working with a financial professional who has access to Social Security planning software can help. It can also give you the peace of mind you need to make a choice you feel most confident in.

Even if you’re not ready to start considering your Social Security scenarios, it’s still a good idea to create a my Social Security account. Especially important now that the Administration is no longer sending benefit letters to those under age 60, it can allow you to estimate the benefits you could receive in retirement, check to see if the Social Security Administration has tracked your earnings correctly, and more. 

Since Social Security isn’t a savings account and isn’t meant to be a retiree’s main source of income, it’s important to prepare for retirement through other methods. Whether you save through your employer’s 401(k), your own IRA, or other means, preparing for a comfortable future can help you live your best life — and your best retirement. 

If you have Social Security or financial planning questions, just ask!

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Jason Speciner
Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of fee-only firm Financial Planning Fort Collins. He is also a member of the National Association of Personal Financial Advisors (NAPFA), Financial Planning Association (FPA), and XY Planning Network. Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.