We get many questions each week about Social Security, and rightly so; it is a very important element of retirement planning. It is one of the most popular government programs in history.  However, it is complicated and there are many strategies to maximize your benefits. Today, we’ll discuss the basics of the program, but you have specific questions, please give Jason or me a call at the office.
Social security is often described as the third rail of American politics – touch it and you die. That sentiment is really a testament to how successful the program has been. President Franklin Roosevelt signed Social Security into law on Aug. 14, 1935. Prior to that, nearly half of American senior citizens lived in poverty. Today, less than 10 percent do. That’s not to say that Social Security is perfect. According to the OASDI Trustee report, in 1950 more than 16 workers were paying into the system for every one person receiving benefits. Today only about three workers are paying for each beneficiary. However, because the program is so popular and successful, it is very likely that it will continue long into the future, but not without changes.
In order to qualify for benefits, you must pay into the system. As an employee, you pay into the system with every paycheck through your FICA tax withholding. In addition, your employer matches your payment. You earn 1 credit for every 3 months you work and pay social security tax. When you have earned 40 credits, (typically 10 years) you qualify for benefits starting as early as age 62.
How much you receive depends on two factors: preretirement earnings and your age. The system counts your highest-paid 35 years of earning. The monthly benefit is then calculated to replace a certain percentage of your earnings. That percentage could be as high as 60% for someone who earned minimum wage or as low as 25% for someone who earned a high salary.
You can begin collecting as early as age 62 and you can wait as long as age 70. Full retirement age was initially set at 65, but is 66 for people born between 1943 and 1954 and gradually increases to 67 for those born after 1960. If you take benefits before full retirement age, your monthly distribution will be permanently less than what it would have been had you waited until full retirement age. The benefit can also be temporarily reduced if you retire early but continue to earn income either from employment or from self-employment. Interest, dividend and pension income will not affect the amount of your benefit. If you retire at or after your full retirement age, your benefit will not be reduced by earned income.
Spouses also qualify for benefits under the Social Security program. A current spouse will receive half of the full benefit if he or she waits until full retirement age. A spouse who also qualifies for his or her own benefits receives the higher of the two. The above also applies to divorced spouses under certain circumstances. Namely, the marriage must have lasted at least 10 years and the divorce must have occurred at least two years ago. The person applying for spousal benefits must be unmarried and at least 62 years old.
Even if you wait until full retirement age, up to 85% of your benefits can be taxable. This is determined based on your total income and your filing status. About 20% of beneficiaries pay some tax on their benefits.
The Social Security Administration recommends applying for benefits three months before you expect to start receiving them. You can apply online, call 1-800-772-1213 or set an appointment to apply in person. You will need the following information: your Social Security number, your birth certificate, your W-2 or self-employment tax returns for the previous year, military discharge papers and proof of citizenship or legal alien status if you were not born in the United States.
Applying is usually the easy part. The more difficult part is often determining how and when to begin taking benefits. There are many options and many variables. Fortunately, most retirement planners will be able to help you to sort through the options. For most people there is not a completely clear answer as to when to start receiving benefits because it may ultimately depend on how long you live. Still, formally looking at all the available options can help you come up with a coherent plan instead of just hoping you make the correct choice.
Despite its shortcomings, Social Security was and continues to be a very popular and successful program. With a little luck and a little care from our elected officials, hopefully it will be around for years to come.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.