Social Security Planning / Your Social Security Advisor

A Beginner’s Guide to Social Security

This article first appeared on Mediaplanet Future of Personal Health

Social Security

For many folks, retirement is a destination. Thoughts of someday kicking back and reflecting on a career well executed, or a history of meeting the challenges of supporting a family, or the simple satisfaction of being a part of a powerful economic engine, all serve to propel us through our working years toward a target: that next life phase. But dreaming about it is one thing; planning for it is quite another.

It’s no secret to anyone in today’s workforce that the landscape is changing. Conventional retirement benefits like defined-benefit pension plans, now estimated to be available to only 15% of the workforce, are disappearing in favor of defined-contribution plans, leaving retirees on their own to ensure adequate finances to cover those golden years. Personal savings also emerges as a key component of retirement financial planning, as does the decision on when to exit the workforce.

In short, retirement has gone from being a destination to being a journey, requiring careful preparation at all stages of life. Fortunately, one component of retirement income — Social Security — remains consistent in its role of replacing a substantial portion of a family’s pre-retirement income. For well over eight decades, Social Security has steadfastly delivered on its pledge to help seniors avoid poverty in their later years, and it remains as a solid piece of the “three-legged stool” on which retirement rests.

This clichéd “three-legged stool” analogy raises a crucial point in retirement planning: Social Security was never intended to completely fund one’s post-career financial need. In fact, the program today replaces just 37% of an average worker’s pre-retirement earnings. As a result, the decision of when to file for Social Security benefits takes on considerable strategic importance for those aging into eligibility, particularly those who will be relying heavily on that benefit.

When to file for benefits

Age 62 is the earliest point at which an eligible worker can begin to draw benefits and, even today, that is by far the most popular age to file. What needs to be clearly understood, though, is that filing for benefits at that age will result in a severely discounted monthly benefit — 30%, in fact, for those born in 1960 or later. Waiting to full retirement age ensures monthly benefits will be 100% of one’s earned benefit, while waiting beyond full retirement age will increase that benefit by about 8% per year up to age 70. Here’s a quick, straightforward mathematical view: A monthly benefit at full retirement age of $2,000 will be reduced to $1,400 if claimed at age 62 or increased to $2,480 if deferred to age 70.

But the impact of early filing for Social Security goes beyond the basic calculation of monthly benefit amounts. For example, in the event of a claimant’s death, a surviving spouse will receive 100% of the claimant’s benefit at time of death. An early claim of benefits would result in the surviving spouse receiving less than the benefit that would be available had the claimant deferred until full retirement age or later.

Another key point in the when-to-file question is whether the claimant will continue to work. If that’s the case, the claimant will be subject to Social Security’s “earnings test,” a provision that limits the amount of earnings allowed before benefits are withheld. This provision goes away when the claimant reaches full retirement age, but it can have a substantial impact on cash flow in the intervening years, particularly if the Social Security benefit is a major part of the claimant’s retirement financial plan.

Will Social Security be enough?

That’s a question relating directly to the point that retirement is a journey. Any journey logically starts with a plan, or a map designed to take one to their destination. That plan, then, should focus on everything needed to ensure that the destination is reached with a financial buffer that will allow for a comfortable retirement, with adequate savings and deferred financial resources to draw on in those later years. If done well, the future retiree will be able to live comfortably, but, if not done well, the issue of when to file for Social Security benefits takes on added significance.

The larger issue here is the long-term future of Social Security and its ability to continue to pay promised benefits in the future. Given the potential for reduced benefits resulting from the much-discussed solvency problem, it becomes even more critical that new Social Security participants take steps to ensure their benefits are maximized for the long haul.


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Larry W.
1 month ago

If our government who said they were looking out for us were doing their job they would have been fixing the problem with SS instead of kicking the can down the road and wasting the money.

MariaRose
1 month ago

Now that I am in retirement, I can say this with deep regret, I am sorry that most employers don’t offer a method of providing a way to start a savings plan in an account of your choice as part of the job package, even if it is a small amount but that savings plan should also be able to transfer with you when switching jobs, so you can continue to contribute and save. I was fortunate that one of my jobs offered a 401 plan with other benefits which remained in my account after I left the company, but the financial company with which my money was in didn’t retain full correspondence with me except for occasionally notices and never made it easy to continue putting money in using a direct deposit system which you can request to do with any job. I didn’t start getting more direct correspondence from them until I was over 60 years old and close to retirement age. The option to open a 401 account should be available in all jobs by all employers, who don’t have to offer matching funds unless they want to. I would have a much large fund saved if I could have continued contributing by filling out a simple form that should have come to me, from the financial institute when I left the job that at least started the 401 account, with instructions on how to directly contribute. This should be standard procedure but no one does it. The only thing that is taken out of your paycheck on regular basis, no matter what job your FICA taxes, is you work a job on the books. Current thinking is to keep most income from being taxed because between federal, state, and local taxes most low-income earners (under 6-figure earners) get 35% of their gross income tax because they can’t “classify” their income into a non-taxable income. Yet it is most of these lower-income earners who need the access and ability to put money away to save and lower their tax liability more than the higher-income earners who have “classifications” to hide their income plus put it away in a retirement account without suffering any deficiencies in their necessity bills. When every penny counts, is where people need to most access to save without choosing to not pay a necessity bill.
Too many people today entering the workforce don’t want to contribute to Social Security because they’re viewing it as an obsolete plan, yet they want to encourage more people to live on government benefits claiming it is an ingrained right (only if you work and pay your taxes). Medicaid was developed in the 1960s as a supplement to the start of rising medical costs as an aid for those retirees whose income was lower than the accepted maximum income. It was not meant to be used as a way for able-bodied individuals to avoid working or not working in a job where you paid taxes out of your income. For example, why is service workers (like waiter/waitress) so popular as a job, despite having low wages because of the potential of undeclared high earnings in tips makes it worth the effort. AOC probably earned more in tips as a bartender than she actually declared on her taxes as earnings.

mike Damfino
1 month ago

I have not done this for quite awhile as decided I DONT DO THIS ANYMORE!!
For physical/mental/sanity. I cannot do anything about it by commenting
The ADMIN is CORRUPT – doing what they damn please – we suffer for it.
As well, nothing is solved by reading all these DEPRESSING articles.
And we obviously cannot do anything to stop or deal with these evil men, women.

FACT// the RIGHTEOUS troubles are not OVER till 2nd coming –
We have to live with all this for now – David certainly was not delivered from his troubles.

Wait till November – see what happens ???? then MAYBE!! I will be back.
2024 is hopefully MAGA time again – IF….
BYE!

mike Damfino
1 month ago
Reply to  mike Damfino

OOPS put this on the wrong page for comment – bumped a button and didnt see it

SO this apples to the usual Articles of depressing news – my human erorr.
good day anyway – i just started with SSEC –

VIRGIL V SNODDY
2 months ago

All great points discussed in comments section, but I would like to point out the elephant in the Washington DC White House.

So while both Republican and Democrat Federal Senate and House have No Term Limits for service, or any limits for that matter they go in mostly working class and “serve” 40 plus years and become literally millionaires from spending our hard earned tax dollars not theirs!

In retrospective We The People need “Statesmen or Stateswoman” Not career politicians becoming rich and the backs of working Americans, hence TERM LIMITS. Our American government (Politicians) both parties has sold our country out Law by Law! In hindsight or reality proof is out in the open now especially with this current Biden administration America’s economy is doomed and CCP along with Russia are fueling the fire so that the American dollar falters and then replaced probably by the Yen…

Inconclusion, We have turned from God In Heaven and now He has turned from America leaving us to our enemies proof is in The Bible telling and warning us of this (King James Version.)

Jesus Christ The Son Of GOD made a way out of this.
King James Version:
The righteous cry, and the LORD heareth, and delivereth them out of all their troubles.

Hal
2 months ago

In most cases, Social Security is not enough…. but this has pretty much been the situation for many decades. And the main force driving it to being “not enough” is INFLATION of the Nations money.

PaulE
2 months ago

Retirement, like any other aspect of life, requires careful planning and execution for the individual or couple to enjoy their later years. Choices matter all along the way and NO ONE is going to bail you out if you make a poor choice. This is NOT something new. it has always been the case. Many people would select fields of employment largely for the type and quality of the retirement plans offered. They understood that Social Security was never meant to be anything more than a suppliment to other sources of retirement income. Not every job back 50, 60 or 70 years ago provided a pension plan for its employees. As a matter of fact, most didn’t provide a pension plan. Especially the smaller companies. So such employees had to find investments that would essentially accomplish the same thing as a pension plan in terms of generating income for retirement. Again, nothing new compared to today, as many companies might not offer a 401K plan at work today.

With the advent of the 401K and IRA replacing the old style pension plans, all that occurred was the individual had to pay a bit more attention to how money that was deducted from their salary was invested to meet their targeted income goals for retirement. Nothing extremely difficult or magical in any way. Just simple math to ensure whatever you were choosing to set aside and invest in was generating a sufficient annual rate of returns high enough to achieve your targeted financial goal for a comfortable retirement.

With the advent of discount brokerages in the 1980s and more recently the complete elimination of brokerage commissions to reduce investment expenses, personal investing has become even easier and allows the individual or couple yet another avenue to generate income for retirement under their direct control.

If the goal is to look at Social Security as your sole means of retirement income, then you will be deeply disappointed by what your retirement looks like. Just like 50, 60, 70 years ago, Social Security is STILL NOT DESIGNED to be one’s sole source of retirement income. It was NEVER DESIGNED to be standalone retirement plan. It is still just designed to be a suppliment to help augment your other sources of retirement income. If the goal is to somehow transform Social Security into a full-blown retirement plan capable of providing for a decent retirement, then the entire Social Security program has to be completely redesigned from the bottom up. At the rate the Social Security program is being treated as a sort of candy store to be raided and divided up between new Democrat constituencies, I don’t see any interest or honestly financial means within the program to accomplish the wholesale redesign.

Smike
2 months ago
Reply to  PaulE

This is good stuff, Thanks PaulE, most of the older generation got the picture but many, way too many didn’t. Too many of my generation lived their entire life paycheck to paycheck with few if any benefits. Good, honest, hardworking people and unfortunately SS is all they have to get by on. Unfortunately, I see today’s generation following the same path – new car, new house, kids – life’s a never-ending party. Barely able to make ends meet and nothing left over. Then one day you wake up and you’re old…and all you have is a student loan, a mortgage and social security.

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