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Social Security: What You Need to Know

Social Security: What You Need to Know

October 03, 2022
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When it comes to retirement planning, Social Security is a recurring topic, yet many of us know very little about it. Still, as more and more individuals belonging to the baby boomer generation approach retirement age, it is becoming necessary to address the questions surrounding Social Security. We are here to help you navigate Social Security and avoid making costly decisions.

To begin addressing the topic, here is a straightforward definition: Social Security is inflation-protected income you can’t outlive, and even after your death, your benefit could continue as survivor benefits, as we’ll soon discuss. Your "premium," or tax, is listed on your paycheck receipt under FICA, which stands for Federal Insurance Contribution Act. You and your employers have paid the premium in every paycheck, so you want to be clever about how and when to collect this earned benefit.

Even with this baseline knowledge of Social Security, many people still tend to minimize its value. They generally believe they won’t receive enough (if anything) to count on it in retirement, however, Social Security is far more valuable than most people realize. There are a few common questions that arise as people begin approaching retirement age, and we hope this helps clear up some of your confusion.

Will Social Security be there for me when I retire?

Many American workers are worried that Social Security won't be around when they retire. This has led to numerous misunderstandings and irrational fears about the solvency of the Social Security system. However, a comprehensive report showing the long-range outlook for Social Security indicates that the trust fund retirees get paid from holds of about $2.9 trillion. As baby boomers retire, these trust fund assets will gradually be drawn down. While some reform proposals will impact the Social Security program, the bottom line for baby boomers is that your benefits are not likely to be affected by much. So, worries that Social Security won't be there for you in the future can be laid to rest. 

How much can I expect to receive?

When your Social Security benefit is calculated, it will depend on two factors: how much you earned over your working career and the age at which you apply for benefits. There are many ways to calculate your Social Security benefits; just a few are listed below.

  1. Social Security Formula

The formula for calculating Social Security is complex. Still, the general process goes like this: first, Social Security looks at your annual earnings over your lifetime, indexes them for inflation, and picks the 35 highest years' earnings to be totaled and divided by 35 to come up with an average. If you don't have 35 years of earnings, the missing years will be filled with zeroes. A formula is then applied to your average indexed monthly earnings to determine your primary insurance amount (PIA), which is the amount you will receive when you reach full retirement age. Each year, cost-of-living adjustments (COLAs) are applied to your benefit to help you keep up with the cost of living. Fortunately, you don’t have to figure this out yourself! We are here to do the hard part for you and inform you of your projected Social Security returns.

  1. Refer to Your Annual Social Security Statement

You can also refer to your annual Social Security statement. These are now available online at www.socialsecurity.gov/myaccount, where you can also set up an account by answering several security questions.

  1. Use the Retirement Estimator

Another way to estimate your potential earnings in retirement is the Retirement Estimator on the Social Security website. This calculator taps into your earnings history after entering your personal identifying information, including your birth date, Social Security number, and mother's maiden name.

Please note that the annual statement and the Retirement Estimator do not factor COLAs into your age-70 benefit. This means your actual benefit will likely be higher than they indicate. But our calculators do adjust for COLAs, so if you know your PIA, we can help you project your future benefits. You also might try one of the three calculators on the Social Security website at www.ssa.gov/planners/benefitcalculators.htm

When should I apply for Social Security?

The "when to apply" question really requires a customized analysis, but here are a few points to remember.

  1. If you apply early, your benefit starts at some fraction of your PIA – 75% or 80% or your percentage is calculated at – and remains at that percentage for the rest of your life. It does not go up to 100% when you reach full retirement age.
  2. If you apply for Social Security after full retirement age, you will earn delayed credits of 8% for each year you delay. So if your full retirement age is 66 and you apply at 67, your benefit will be 108% of your PIA. At 68, it will be 116%, and so on. After age 70 you can't earn any more delayed credits, so it doesn't pay to wait until after age 70 to apply for Social Security.
  3. COLAs magnify the impact of early or delayed retirement because the annual cost-of-living adjustment is applied to either the lower or higher amount. This causes the disparity to increase with each passing year.
  4. Your benefits may be taxed and further reduced by Medicare premiums.
  5. Examine your earnings record and consider how you might be able to improve it. This is available at socialsecurity.gov/myaccount.
  6. And finally, delaying benefits may give the surviving spouse more income. 

It is also important to realize that the decision of when to apply for Social Security depends on many factors unique to your situation, including your health status, your life expectancy, your need for income, whether you plan to work, you are a surviving spouse, and if you have other personal resources. It might be hard to pass up Social Security checks when you can start receiving them as early as age 62. But if you live a long life, you will be happy you waited. As you can see, the longer you live, the more income you will have by waiting until age 70 to apply.

Will Social Security be enough to live on in retirement?

For most people, Social Security benefits alone will probably not be enough to live on throughout retirement. The full retirement age is the age at which you can claim full, unreduced benefits. It used to be 65 for everyone, but now we are seeing a higher full retirement age being phased in as a result of the 1983 amendments. For everyone born between 1943 and 1954, full retirement age is 66. For everyone born in 1960 and later, full retirement age is 67. For those born in 1955 through 1959, the full retirement age is 66 plus some number of months. 

It is important to consider Social Security in the context of your other retirement resources, including pensions, IRAs, and 401(k)s; the required minimum distributions you'll need to take at age 72; your overall investment portfolio; and your plans for working in retirement. All these resources should be coordinated to give you the income you need for the rest of your life. We would be glad to help you consider all of your options and assist you in formulating a plan for your unique financial situation. We are here to propel you to pursue your peak.