Depending on your generation, you may or may not be putting much weight into ever receiving Social Security benefits. However, despite the current system’s projected financial shortfall, it is likely that the many Americans will continue to depend on social security as a key source of income for decades to come. This is especially true given longer life spans, the rising costs of medical care, and inadequate retirement savings for many retirees.
In fact, according to the Social Security Administration (SSA), among elderly Social Security beneficiaries, 48% of married couples and 71% of unmarried persons receive 50% or more of their income from Social Security.
So, let’s review some of the main aspects of Social Security as it pertains to retirement benefits and highlight things to consider as you get closer to retirement age.
What is Social Security?
Funded by payroll taxes, employers and employees have a mandatory participation in this federal government-run program that provides benefits to retired and disabled workers as well as families of retired, disabled, and deceased workers. There are currently 163 million Americans paying Social Security taxes and almost 60 million people that are collecting monthly benefits.
What is the Full Retirement Age?
It’s important to know when you are eligible to start receiving full social security benefits. The SSA refers to this as your Full Retirement Age (FRA) and is determined by the year in which you were born as outlined in the chart below:
While your FRA is dependent on when you were born, you do have some flexibility as to when you start taking benefits. You can start receiving social security at 62; however, you will not receive 100% of your benefits. For each year before FRA, benefits would be reduced by roughly 6%. Conversely, you can delay taking benefits until age 70, and receive a greater amount. Each year that you wait beyond your FRA, your expected benefit grows by 8%. It’s important to keep in mind that your payment grows each year by a Cost-of-Living Adjustment (COLA) based on the annual CPI (Consumer Price Index). So, if you take benefits early, your annual adjustments will be based on a lower starting amount.
How Much Will You Get?
Americans that have worked 10 years or more are entitled to receive some social security retirement benefits (spouses that have never worked may also be entitled to a spousal benefit). In 2016, the average monthly benefit of a retired worker was $1,348 or $16,176 per year. The maximum benefit that an individual can receive at full retirement age in 2017 is $2,687 per month or $32,244 per year.
For those that waited until 70, the monthly benefit will be $3,538 in 2017 or $42,456 a year. A major feature of social security is that the benefit amount increases with the annual rate of inflation or CPI.
The SSA used to send out annual statements detailing your actual earnings record and projections on how much you could expect to receive upon retirement. However, in an effort to save money, in 2014, the SSA began sending paper statements only to workers turning 25, 30, 35, 40, 45, 50, 55, and 60 and over, who aren’t receiving Social Security benefits and do not yet have a My Social Security Account (MySSA).
How are Benefits Calculated?
The calculation to derive your FRA benefit amount is a several step process that involves (i) taking your highest 35 years of earnings, (ii) indexing those earnings to get the value in today’s dollars, (iii) adding all the earnings up and dividing by 420 to get the average indexed monthly earnings, and (iv) adjusting by pre-defined “bend points.” Here is a link to a worksheet that walks through the calculation.
What Can You Do?
Since changing the year of your birth is not an option, there are some things you can do to assure you plan for social security appropriately and maximize your retirement benefits.
First, it is important that the SSA has a correct record of your earnings history. Setting up an account at MySSA and periodically checking the information that the SSA has on file is a good start. If the information is incorrect or incomplete it may result in a lower benefit payment.
Second, since the calculation takes into account the average of 35 years of work history, having zero earning years will have a negative impact. Part-time work may be better than no work and working longer may increase your guaranteed lifetime benefits. You can use various calculators on the MySSA website to project your benefit, determine your life expectancy (I apparently have another 32.8 years to go) among other things related to Social Security benefits.
Third, deciding on whether or not to take benefits before your FRA may depend on several factors including your health, life expectancy, and access to other sources of income. The extra income stream for life can add up in your later years and can more than make up for the first years of forgoing social security. This requires some careful consideration of your particular circumstances.
Fourth, evaluating the best option for maximizing benefits for you and your spouse gets more complicated. Factors such as age, income from other sources, health, whether a spouse is entitled to benefits on their own, survivor needs, and if one or both spouses are working should be considered.
Finally, you NEED TO APPLY for benefits. The SSA recommends applying 3 months before you want your benefits to begin. If you apply for benefits more than 6 months after the month you reach your FRA, the SSA can only pay benefits for the previous 6 months. You can apply online.
At SMS, we can help you plan an effective retirement income strategy, including an analysis of how to maximize your household social security benefits.