What Do You Need to Know About Social Security?
08/01/2024
Regarding retirement, Social Security is one option most Americans can count on to provide steady, reliable income for life. But beyond paying into Social Security during your working years and collecting a check in retirement, most people may not realize the opportunities to optimize their benefits.
This article reviews the basics of what Social Security is, who qualifies, and how you can more effectively incorporate benefits into your greater retirement income strategy.
The payroll taxes collected today are used for current retiree benefits, meaning you aren’t paying into your benefits (those will be paid by future workers, assuming you’re not already collecting).
You may also qualify for spousal benefits if you didn’t work but your spouse or ex-spouse did and meets the criteria above.
In addition, your children could qualify for benefits if they are:1
Here’s a quick synopsis of how benefits are calculated:
First, the Social Security Administration (SSA) calculates your “average indexed monthly earnings” (AIME), which incorporates up to 35 years of your indexed earnings. The SSA takes your AIME and applies a formula based on general wage levels. The result is your primary insurance amount (PIA). Your PIA determines your benefit amount.
While this is just a quick summary of how benefits are calculated, you can see the SSA’s full breakdown and explanation here.
Technically, you can begin receiving benefits at age 62 (as long as you qualify for Social Security). However, you won’t reach what the SSA considers your “full retirement age” until around 67.
For every month you collect benefits before full retirement age, the SSA will reduce your benefits by a certain amount. If you were to begin collecting benefits right at age 62, for example, your benefits would be 30% less than your PIA.2
Conversely, you can delay collecting benefits until 70 after retirement. For every month you wait to begin receiving benefits, you’ll earn a delayed retirement credit on top of your PIA. Each year you delay receiving benefits, you’ll get an extra 8% in benefits.3
However, it does offer something special for retirees—a form of fixed, inflation-adjusted income for life.
As you and your advisor develop an income strategy for retirement, you’ll need to consider how all sources of income will work together tax-efficiently.
In addition, it’s essential to address potential hurdles like longevity risk (outlasting your savings), inflation risk, market volatility, and future emergency expenses like long-term care. Again, because Social Security offers inflation-adjusted fixed income for life, it can play an essential role in protecting other areas of your retirement plan (like your portfolio) when faced with these challenges.
According to the SSA, your combined income can be calculated using the following formula:4
Adjusted gross income + nontaxable interests + ½ Social Security benefits
Here’s how your combined income impacts the tax treatment of your Social Security benefits:
Single Filers | Less than $25,000 | $25,000 to $34,000 | More than $34,000
Joint Filers | Less than $32,000 | $32,000 and $44,000 | More than $44,000
% of benefits taxed | 0% | Up to 50% | Up to 85%
First, Congress may intervene (as they have done before) to protect the future of Social Security benefits. And even without reserves or government intervention, the payroll taxes coming into the program could still cover around 80% of benefits.5
That being said, considering your Social Security benefits as just one of many different retirement income forms is still a good idea. It’s not something you want to rely solely on to cover your financial needs, as it won’t be enough to maintain your current quality of life or leave a lasting legacy for loved ones.
If you’d like to talk with our team about your retirement planning questions, don’t hesitate to contact us today.
Sources:
1 Eligibility for Social Security in retirement
2 Social Security Benefit Amounts
3 What is the average monthly benefit for a retired worker?
4 Income Taxes and Your Social Security Benefit
5 Will Social Security Be There for Me?
This material is being provided for general information and educational purposes about Social Security only and should not be construed as investment, tax, accounting, or legal advice, or used as the primary or final determinant of the best strategy on how and when to claim Social Security benefits. It is strongly recommended that each individual meet with a Social Security representative who can address his/her specific situation. A wealth of information, including interactive calculators, can be found at the Social Security Administration’s website: The United States Social Security Administration | SSA
This is provided for informational purposes only and not intended to provide investment, tax, or legal advice. We suggest that you speak with a tax or legal advisor about your individual situation prior to making any investment, tax, or legal decisions. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. All investing involves risk including possible loss of principal. Past performance is no guarantee of future results.
Steward Partners, its affiliates, and Steward Partners Wealth Managers do not provide tax or legal advice.
This article reviews the basics of what Social Security is, who qualifies, and how you can more effectively incorporate benefits into your greater retirement income strategy.
First, What Is Social Security?
Social Security is a social insurance program funded through payroll taxes paid by employees and businesses. While we tend to associate Social Security with retirement, benefits can also be provided to those with qualifying disabilities and surviving loved ones.The payroll taxes collected today are used for current retiree benefits, meaning you aren’t paying into your benefits (those will be paid by future workers, assuming you’re not already collecting).
Who Qualifies for Social Security?
You will likely be eligible for retirement benefits if you’re over 62 and paid Social Security taxes for at least ten years. It’s worth noting that some government workers or other employees don’t pay Social Security taxes, which makes them ineligible for the program.1You may also qualify for spousal benefits if you didn’t work but your spouse or ex-spouse did and meets the criteria above.
In addition, your children could qualify for benefits if they are:1
- Under 18
- 19 or under and attend grade school full-time
- Any age and have a qualifying disability
How Social Security Works
Everyone’s Social Security benefits look a little different.Here’s a quick synopsis of how benefits are calculated:
First, the Social Security Administration (SSA) calculates your “average indexed monthly earnings” (AIME), which incorporates up to 35 years of your indexed earnings. The SSA takes your AIME and applies a formula based on general wage levels. The result is your primary insurance amount (PIA). Your PIA determines your benefit amount.
While this is just a quick summary of how benefits are calculated, you can see the SSA’s full breakdown and explanation here.
When Should You Start Collecting Benefits?
While your monthly amount is based on your PIA, deciding when to begin benefits will further impact your receipt.Technically, you can begin receiving benefits at age 62 (as long as you qualify for Social Security). However, you won’t reach what the SSA considers your “full retirement age” until around 67.
For every month you collect benefits before full retirement age, the SSA will reduce your benefits by a certain amount. If you were to begin collecting benefits right at age 62, for example, your benefits would be 30% less than your PIA.2
Conversely, you can delay collecting benefits until 70 after retirement. For every month you wait to begin receiving benefits, you’ll earn a delayed retirement credit on top of your PIA. Each year you delay receiving benefits, you’ll get an extra 8% in benefits.3
Integrating Social Security into Your Retirement Plan
The average Social Security check is around $1,907, which won’t cover all your retirement financial obligations.3However, it does offer something special for retirees—a form of fixed, inflation-adjusted income for life.
As you and your advisor develop an income strategy for retirement, you’ll need to consider how all sources of income will work together tax-efficiently.
In addition, it’s essential to address potential hurdles like longevity risk (outlasting your savings), inflation risk, market volatility, and future emergency expenses like long-term care. Again, because Social Security offers inflation-adjusted fixed income for life, it can play an essential role in protecting other areas of your retirement plan (like your portfolio) when faced with these challenges.
Are Social Security Benefits Taxed?
You may be required to pay federal income tax on Social Security benefits if your combined income exceeds the threshold. However, you won’t have to pay tax on the entirety of the benefits—only up to 85% in some cases. Depending on where you live, your benefits may also be subject to state income tax (though not every state taxes Social Security).According to the SSA, your combined income can be calculated using the following formula:4
Adjusted gross income + nontaxable interests + ½ Social Security benefits
Here’s how your combined income impacts the tax treatment of your Social Security benefits:
Single Filers | Less than $25,000 | $25,000 to $34,000 | More than $34,000
Joint Filers | Less than $32,000 | $32,000 and $44,000 | More than $44,000
% of benefits taxed | 0% | Up to 50% | Up to 85%
Will Social Security Run Out of Funds?
You may have heard rumblings about Social Security running out of money. These rumors are typically based on the Social Security Trustees Report, created by actuaries to analyze current contributions and project future solvency. Though this is misleading, the 2023 Trustees Report indicated that the trust fund holding all Social Security reserves would be depleted by 2034.5First, Congress may intervene (as they have done before) to protect the future of Social Security benefits. And even without reserves or government intervention, the payroll taxes coming into the program could still cover around 80% of benefits.5
That being said, considering your Social Security benefits as just one of many different retirement income forms is still a good idea. It’s not something you want to rely solely on to cover your financial needs, as it won’t be enough to maintain your current quality of life or leave a lasting legacy for loved ones.
Make the Most of Your Benefits in Retirement
Regarding Social Security benefits, there’s certainly more than meets the eye. With careful planning and professional guidance, you can ensure you optimize your benefits in conjunction with the rest of your retirement income.If you’d like to talk with our team about your retirement planning questions, don’t hesitate to contact us today.
Sources:
1 Eligibility for Social Security in retirement
2 Social Security Benefit Amounts
3 What is the average monthly benefit for a retired worker?
4 Income Taxes and Your Social Security Benefit
5 Will Social Security Be There for Me?
This material is being provided for general information and educational purposes about Social Security only and should not be construed as investment, tax, accounting, or legal advice, or used as the primary or final determinant of the best strategy on how and when to claim Social Security benefits. It is strongly recommended that each individual meet with a Social Security representative who can address his/her specific situation. A wealth of information, including interactive calculators, can be found at the Social Security Administration’s website: The United States Social Security Administration | SSA
This is provided for informational purposes only and not intended to provide investment, tax, or legal advice. We suggest that you speak with a tax or legal advisor about your individual situation prior to making any investment, tax, or legal decisions. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. All investing involves risk including possible loss of principal. Past performance is no guarantee of future results.
Steward Partners, its affiliates, and Steward Partners Wealth Managers do not provide tax or legal advice.