If you’re like a lot of Americans, when you think about your retirement, you have some overall concerns about how you’re going to afford not working. You might stress about your “nest egg” in your 401(k). Or maybe the financial burden of paying for long-term care weighs on you. And while these are rational and worthwhile things to plan around, there might be another point of consideration that you’ve forgotten about. You have access to a savings vehicle that you’ve been paying into since your first summer job when you were a teenager, and our bet is that you haven’t given it a whole lot of thought.
Throughout your working life, Social Security has been a negative. A line item on the list of deductions on your paystub. However, now that retirement is in sight, it’s almost time to tap into all of that money that you’ve contributed into the system.
Since your decisions around Social Security are largely irreversible, it pays to plan ahead and get it right. However, the truth is, coming up with a strategy around your Social Security benefits can bring up more questions than answers.
Below, we answer your questions about timing, funding, and how your benefits are calculated, and we share some strategies to get the maximum benefit allowed to you.
Getting Started With Social Security
When can you collect social security?
Between the ages of 62 and 70.
You become eligible upon reaching your Full Retirement Age, which is either 66 or 67 years old, depending on when you were born.
Claiming before your retirement age permanently decreases your total benefit amount.
Delaying your claim up to age 70 will increase the amount of your total benefit over your lifetime.
How is social security calculated?
The Social Security Administration uses your average indexed monthly earnings (AIME) during your 35 highest-earning years and a three-step formula to calculate your benefit.
Getting Started With The Basics
Social Security is designed to steadily supplement your savings. It is not meant to replace your full employment income, but it does offer some financial padding after you retire.
There’s definitely some strategy involved, so it’s helpful to have an understanding of the basics in order to effectively plan for your retirement. The decisions you make now can make sure you aren’t leaving money on the table.
What Is Social Security?
Funded by payroll taxes, Social Security is a federal program that provides a safety net for retirees, disabled persons, and the families of deceased workers.
The amount you’ll receive depends on how much you’ve earned over your lifetime. Your actual benefit is calculated by the Social Security Administration based on the 35 years during which you earned the most.
Social Security was created in the wake of The Great Depression to provide a base-level of income for the elderly. It is meant to provide a safety net to avoid destitution, but it will not cover all of your expenses in retirement. Even though it won’t cover all of your expenses, it is an income stream that will last the rest of your life. The decision of when to claim deserves some intentionality, but it must be considered in tandem with your other assets, expenses, and expectations for longevity.
How Is Social Security Funded?
Through contributions you make every pay period throughout your entire working life, of course! Social Security is funded by The Federal Insurance Contributions Act (FICA) which is, simply put, a federal payroll tax. Call it a deduction or a contribution – either way you pay 6.2% of your wages which is matched by your employer. Self-employed folks, you earn your freedom by paying the full 12.4%.
Social Security is a pay-as-you go deal because it relies on the current workforce to support those receiving their benefits now. Payroll taxes go into the Social Security Trust Funds, and any excess funds are invested in U.S. Treasury securities.
How Is Social Security Calculated?
The Primary Insurance Amount (PIA) is calculated based on your average indexed monthly earnings (AIME) during your 35 highest-earning years. The Social Security Administration uses a formula to calculate what you will receive.
For 2024, the calculation involves three steps:
- 90% of the first $1,174 of your AIME.
- 32% of the AIME between $1,174 and $7,078.
- 15% of the AIME over $7,078.
These amounts are then added together, and the total is rounded down to the next lower multiple of $0.10. The total PIA is the benefit you would receive if you start claiming Social Security at your full retirement age.
Understanding Full Retirement Age For Social Security
You become eligible to begin drawing your Social Security benefits at Full Retirement Age (FRA). Your FRA is determined by the year you were born and you can look it up on this page of the Social Security Administration website.
If you were born before 1960, your FRA is between 66 and 67 years old. For those born in 1960 or later, your eligibility begins at age 67. It is possible to receive Social Security at age 62, but your monthly benefit will be reduced permanently. Even though Social Security uses the term “Full” Retirement Age, it is possible to receive a higher payout if you choose to wait until age 70 to start receiving benefits.
The monthly amount you receive depends on when you choose to start receiving benefits. You can start at age 62 and must claim by age 70. Claiming benefits early will permanently reduce your monthly benefit, and waiting will increase the amount you receive each month.
If you forget to claim benefits by age 70, you can receive up to 6 months’ worth of retroactive pay, but no more. It’s critical that you don’t forget, unless you would like to make a (non-deductible) charitable contribution to Uncle Sam.
Social Security for Married Couples
You and your spouse can coordinate the timing of each other’s benefit claims to maximize the combined benefit amount. In what’s known as a “split strategy” – the spouse with the lower income claims their social security benefits first and the higher earning spouse delays claiming theirs for larger payments later. When planned this way, you end up with a more significant survivor benefit that will defer to the surviving spouse after one of you has passed, regardless of who earned more.
When facing serious illness and the likelihood that one of you will die earlier than expected, it may make more sense not to delay or even to claim early for both of you. Ultimately your strategy should depend on your health, financial needs, and retirement goals.
Social Security Claiming Strategies: Early vs. Late
There are implications for both claiming early benefits and waiting until 70 to start drawing. Let’s dig into some specifics.
Claiming benefits early, between the ages of 62 and your FRA, can permanently reduce your monthly benefit as much as 30%. Not claiming social security until age 70 will increase your monthly payment by roughly 8% each year.
So how do you make the decision? Know your “break-even point” which is the age when the total benefits from delaying exceed what you would have received if you’d claimed early. Generally, the break-even point is around the time you hit your 80s.
If you’re healthy and your family tends to live a long time, you probably expect to live beyond your break-even point. In this case, it’s advantageous to delay benefits, especially for married couples since the higher earner’s benefit would continue for the surviving spouse.
If you have ill health that is likely to limit your life expectancy or immediate financial needs, claiming earlier could suit your situation better.
Final Thoughts
Social Security benefits provide a steady cash flow, but will not cover all of your expenses. Regardless of how much you will rely on your monthly check, it’s important to have a thoughtful Social Security strategy in place as part of your overall retirement plan.
To make the most of your Social Security benefits, understand how the program works, when to claim, and its role alongside your other assets, like savings and investments.
Decisions made about Social Security benefits are personal to you. Your health, financial needs, and retirement goals all play a role in deciding when to claim benefits. For married couples, coordinating your benefit strategies can boost your lifetime income and provide a higher survivor benefit.
There are many emotional, financial, and strategic variables at play in Social Security and retirement planning, so it may be a good idea to work with a trusted financial advisor to help you make sound decisions based on your specific situation. Plan now so you can make the most of your Social Security benefits when you’re ready to draw on them.
For over 25 years, the financial advisors at SK Wealth have been fine-tuning The Integrated Financial Advantage™, our financial planning approach that can ease your transition into retirement by creating a unique financial plan to support your long-term goals.
