Social Security is the one monthly contribution American workers don’t begrudge, and which millions count on each and every year.
In 2021 alone, Social Security paid out more than $1 trillion in benefits to some 65 million recipients, including some 46.7 million retirees and 8.1 million disabled workers. According to the US Social Security Administration (SSA), nearly nine out of 10 people aged 65 and older were receiving a Social Security benefit in December 2020.
However, Social Security is not just about retirement. These payroll tax contributions also afford workers life insurance and disability protection. To put this into context, contributing to Social Security as a worker earning an average salary, with a spouse and two children, was equivalent to having a life insurance policy of more than $725,000 in 2018. And Social Security also covers about 89% of workers in the 21-64 age bracket in the case of severe disability.
Social Security benefits are based on what you put in – up to a maximum taxable amount of $142,800 in 2021. What you receive keeps pace with inflation, unlike private pensions and annuities. Therefore, it makes sense for young, contributing professionals to factor Social Security into their long-term financial and retirement planning and explore ways in which to leverage this long-term protection mechanism.
How Much Social Security Will You Receive?
As with all retirement planning, it’s important to take out all the guesswork by doing calculations up front.
Fortunately, the SSA has a handy calculator which you can access online to estimate your retirement benefits. Just plug in your details and you’ll get an indication of what you might expect in the future. But bear in mind that you’ll need to revisit these estimates from time to time, based on changes in your earnings, policy and law changes, as well as annual cost-of-living adjustments.
What this calculator won’t show is how your benefits will be impacted by three key factors:
- If you have debt – If you owe back taxes, child support or have unpaid student loans, it is possible for the person you owe to make a claim – called an offset – against your benefits. The first $750 of your benefits will be ringfenced for your use and cannot be touched, however. Once the debt is settled, you’ll receive your full benefit.
- If you have a high income – High-income earners pay an additional 0.9% in Medicare taxes on earnings above certain amounts, as well as higher Medicare premiums that are deducted from Social Security benefits. This may reduce how much your benefits go up annually.
- If you take your benefits early.
The final point is central to your retirement planning, so let’s unpack this in a bit more detail.
Social Security and Retirement: What Happens If I Withdraw Early?
While your ability to access your benefits is not impacted by private savings in an individual or 401(k) retirement savings account, it is also essential that you don’t bank entirely on Social Security for your retirement income.
That said, it is also important to get the most out of this retirement option by not sabotaging your benefits by claiming too early.
Depending on when you were born (up to 1959 or from 1960) your retirement age for Social Security purposes will be either 66 or 67. However, you can start taking your retirement benefits from age 62. The problem is, claiming from age 62 will cost you in the long term.
The Congressional Research Service crunched the numbers in 2021 and arrived at this sobering conclusion about claiming before the full retirement age (FRA): “For workers with an FRA of 66, for example, claiming benefits at age 62 results in a 25% reduction in monthly benefits. For workers with an FRA of 67, claiming benefits at age 62 results in a 30% benefit reduction. A majority of retired-worker beneficiaries claim benefits before the FRA.”
Fortunately all is not lost if you do claim Social Security payments early and wish to remedy the situation. You can choose to repay all the benefits within 12 months of first claiming, or you can suspend benefit payments and restart them at a late age, or you can opt to continue working and contributing.
How to Boost Your Benefits
Similarly, the story changes for the better if you delay claiming your benefits to beyond FRA. Say you reach your FRA of 67 but decide to defer claiming until the age of 70. This will result in an increased benefit of 24%.
The other strategy you can use is to look at claiming spousal payments. It is possible to claim up to 50% of your spouse’s full retirement benefit, if your spouse was the higher earner. Using the SSA’s Benefits for Spouses calculator will help you determine what percentage of your spouse’s Social Security benefit you are entitled to claim.
When getting into the fine print of Social Security benefits, it’s also important to discuss the estate implications in the event of your spouse’s death. In such cases, the surviving spouse can inherit the benefit payment of the deceased spouse, if the amount is higher.
For couples where the higher earner is significantly older than the lower earner, another tactic could be for the high earner to delay taking the Social Security benefits, in order to leave a better nest egg to the younger spouse.
All of these considerations, as well as ways in which to minimize Social Security taxes, should factor into retirement discussions with your financial advisor. If you’d like to go through your particular case in more depth and ensure you get the most out of the Social Security safety net, then please get in touch or schedule a meeting today.