Social Security has become one of the many factors to consider when planning for retirement. Almost everyone is aware of the Social Security program, but few actually understand it. Here are the basics.
Talking about Social Security can feel a bit like getting roped into a conversation about Bitcoin or War and Peace. Almost everyone knows about it, but few people actually understand it. We’re aware of the Social Security program, but what is it really? What are the basics?
Over the past several decades, Social Security has gone from being one of a few main sources of retirement funds to one of many factors to consider when shaping a retirement plan. If you’re looking to calculate what your benefits could be or ready to learn more about the program’s benefits, here are a few basics:
- Social Security benefits are based on your earnings – but it’s not quite that simple. The higher your earnings, the higher your total benefits. For people with lower than average earnings, though, the ratio of benefits they receive from social security relative to the lifetime payroll taxes they pay is higher than the ratio for people with higher average earnings. For people in the bottom fifth of the earnings distribution, for example, the ratio of benefits to taxes is nearly three times as high as the ratio for those in the top fifth.
- The decision on how long to wait depends on a multitude of factors and should be discussed with a financial professional. Understanding the difference between taking Social Security at age 62 vs. age 67 vs. age 70 is crucial to making the best decisions for yourself. Just because your parent/neighbor/spouse started taking Social Security at a certain age, that doesn’t necessarily mean it’s the right decision for you. Your particular healthcare needs, investment portfolios, lifestyle expectations, and other life factors all influence the impact this decision will have on your life.
The earliest you can start claiming Social Security retirement benefits is age 62, but claiming them that early will cause your payout to be permanently reduced. If you delay collecting Social Security past your full retirement age, however, you can collect more than full, or normal, payout. In fact, if you put off claiming until age 70, you could receive a 77 percent higher annual payout than if you started receiving benefits at age 621. Contact your financial professional to help you weigh the pros and cons of delaying.
- Social Security is particularly important for women. Because women tend to live longer than men, they are more likely to benefit from the program’s inflation-protected benefits and the benefits for spouses and survivors. The Social Security Administration estimates that by the year 2050, women will make up 79% of survivor-only beneficiaries aged 60 and older2. In addition, the progressive earnings formula (noted above in the first point) benefits women in particular, because they are more likely to have lower earnings than men.
- Social Security is more than just a retirement income program. About 96 percent of people aged 20–49 who worked in jobs covered by Social Security in 2019 earned life insurance protection through the program3. Social Security also provides disability insurance. The risk of disability is much greater than many people realize, "...more than people realize, and Social Security estimates it could insure a monthly cash payment to about 89 percent of people aged 21-64 who worked in covered employment in 2020 should they suffer a sever disability.4
- Social Security benefits are more modest than most people realize. The average Social Security benefit was $1,503 per month in 20205, retirees enrolled in Medicare are likely to have Part B premiums deducted from their Social Security benefits. Inflation can cause these premiums to take more out of Social Security checks over time as well.
Complementary forms of protected income can supplement modest Social Security payments. As an example, this blog post discusses how investors can coordinate Roth and traditional IRAs, conversions, and Social Security distributions for a tax-effective retirement strategy. Talk to your financial professional today about how you can stretch your nest egg further by reducing your taxes and maximizing lifetime income.
Social Security calculator
Use our Social Security calculator to help guide you in determining when to start collecting monthly benefits and potentially maximize income from Social Security.