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Understanding Social Security Benefits

2022 Newsletters, Retirement

Retirement means different things to different people. 70% of American’s will retire by age 66, and each one of those individuals has a different idea about how they plan to approach retirement. On the other end 10% of the workforce is still working at age 75 plus, with no plans or ability to comfortably retire.

Older generations expect that much of their retirement funding will come from social security or pension plans while an overwhelming number of people in younger generations place little faith in the social security system and expect to use personal savings and investments for their expenses.

While Social Security is an important social program, it’s designed to replace only 40% of the average salary after retirement. Currently, one in five married retired couples and 45% of single retirees depend on Social Security for more than 90% of their income in retirement.

According to reports, 75% of Americans have less than $100,000 saved when they retire. 25% have no retirement savings at all. Of those people who are saving, the average retirement account of people aged 65+ was only around $150,000—hardly enough to cover a decade or two of expenses.

Complicating matters, 75% of respondents polled in one Charles Schwab survey said they didn’t understand the social security program which kicks in at 62+ or the national Medicare healthcare system for which eligibility starts at age 65. Here is more information on Medicare and Medicare Advantage plans: https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/how-does-medicare-work

Social Security

Most people pay into the Social Security system every time they get a paycheck. A portion of the check is taken to pay for both the Social Security and Medicare programs in addition to any taxes that are taken out. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.

Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on a “three-legged stool” of Social Security, pensions, and savings. American workers, many of whom don’t have a pension plan option should be saving for their retirement on a personal basis and through employer-sponsored, or other retirement plans.

One of the most important decisions you will make in retirement is when to claim Social Security benefits. This decision can make a difference of thousands of dollars for you and your family. There is no one right decision for everyone.

You may claim your Social Security income (SSI), as early as age 62 or as late as 70. Anyone who elects to receive benefits as early as 62 will receive a reduced amount for life. For example, assume your full retirement age is 66 (as it is for people born between 1943 and 1954). If you file for benefits at 62, your SSI would be discounted by 20 percent. So, if you would qualify for SSI of $1,500 a month when retiring at age 66, electing instead to retire at 62 would reduce your monthly SSI to only $1,200 for the rest of your life.

How is it calculated?

Many people wonder how their benefits are figured. Social Security benefits are based on your lifetime earnings and your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. A formula is then applied to these earnings and Social Security arrives at your basic benefit or “primary insurance amount” (PIA). This is how much you would receive at your full retirement age—65 or older, depending on your date of birth.

To find out how much you already qualify for in benefits, you can use the Retirement Estimator at www.ssa.gov/benefits/retirement/estimator.

Workers who are age 18 and older also can go online, create their personal account, and request their Social Security Statement. You can review this statement by going to https://www.ssa.gov/myaccount/ and setting up your personal account.

The Following factors can change the amount of your retirement benefit:

  • You choose to get benefits before your full retirement age. You can begin to receive Social Security benefits as early as age 62, but at a reduced rate. Your basic benefit will be reduced by a certain percentage if you retire before reaching your full retirement age. This chart shows how much the percentage reduction https://www.ssa.gov/OACT/quickcalc/earlyretire.html
  • You are eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you do not get benefits until your full retirement age or even age 70. Cost-of-living increased are added to your benefit planning with the year you reach 62 up to the year you start receiving benefits.
  • If you delay your retirement past your full retirement age. Social Security benefits are increased by a certain percentage (depending on your date of birth) if you delay receiving benefits until after your full retirement age. If you do so, your benefit amount will be increased until you start taking benefits or you reach 70 when the pay-out begins automatically. https://www.ssa.gov/benefits/retirement/planner/delayret.html
  • Specific earning categories can also affect benefits. If you work on a farm, for the railroad, are in the military or work for the government, or are self-employed or working for a non-profit there are additional rules involved. Some pension plans can also affect benefits.

It is increasingly important that you take the time to educate yourself on retirement savings plans and healthcare options, and review your needs moving into retirement. It’s never too soon to make a plan for how much you should be saving. This article from the SSA can help: https://www.ssa.gov/benefits/retirement/learn.html

Get Started Saving

The best way to start saving is just do it. Whether it’s deciding to increase your 401k percentage by 1% per year, making an appointment with a financial counsellor to review your options, looking into a Roth IRA, or even just keeping a dedicated jar of spare change in the corner, it’s important to understand what you will need as retirement gets closer.

Three ways to get on track with your retirement savings:

  1. Make sure you get every single cent out of your employer 401k match.
  2. Invest in low-cost Index funds and contribute consistently without withdrawals no matter what the stock market does.
  3. Don’t wait for life “milestones” like paying off student loans (unless you have private loans with really high interest rates), getting married, or having kids to start saving for retirement. Start saving for retirement as soon as possible.

Here are some additional resources to help in understanding some of the issues surrounding retirement planning:

As always Family Financial Education Foundation is here to help you navigate your financial situation and help you manage a plan that works for you. We also offer Representative Payee Services for those individuals who need more direct bill pay and money management resources.