Though we’re all familiar with Social Security numbers, and that little Social Security tax line on our pay stubs, when it comes time to actually make use of the program most of us are in the dark. How does Social Security work? When can you start using it? Who is eligible? How much will you receive? Read on to learn more.
How does Social Security work? Social Security is a social insurance program administered by the United States Social Security Administration (SSA). Originally created as part of President Franklin D. Roosevelt’s New Deal, this program helps provide income to retirees, those with disabilities, and surviving spouses/children. While you’re working, you pay Social Security taxes from your income which are then placed in a trust fund used to provide benefits to the eligible. This provides you with credits for the program when it’s your turn to retire.
When should I start drawing my benefits? While many people believe that you must begin drawing at age 62, that is not the case. 62 is simply the age at which you can first claim. However, if you claim then your benefits will be permanently reduced. Instead, many people choose to wait until their “full retirement age” (or FRA), the time at which they can claim their full benefits. This number varies by date of birth. You can also wait until age 70 and in turn, receive a bonus to your monthly benefits (actual bonus varies by FRA).
While it might seem like waiting for 70 is the right move, you should also consider other factors such as expected longevity, you/your spouse’s plans for filing for spousal benefits (if any), tax implications, investment opportunities, and the overall impact on your health coverage. To determine when to begin drawing, consider working with an advisor well-versed in Social Security to be sure you’re making the right choice for you. Free tools like the Social Security Administration’s Retirement Estimator also offer a useful, basic assessment.
Who is eligible? Contrary to popular belief, Social Security is not just for the retired. The program also provides benefits to folks with disabilities and the survivors of workers who have passed away. Eligible workers include U.S. citizens as well as some resident and nonresident aliens. Non-citizens are eligible based on a number of other factors including where they might live now, and what other foreign benefits or outside income they’re receiving. All claimants are also evaluated based on the length of time they’ve worked and the amount of credits they’ve accrued in jobs where they paid Social Security taxes.
How much will I receive? This number also varies by person. The SSA uses the 35 highest-earning years of your career in which you were paying into Social Security (adjusted for inflation) to calculate your benefit amount if you were to retire at FRA. Income is calculated using a cap on your maximum taxable earnings. In 2020, the cap is $137,700—so if you earned $140,000 or if you earned $3.6 million, it would be calculated the same. The number the SSA comes up with is then adjusted based on your age at retirement and recalculated each year to adjust for inflation and the prior year’s income. In 2020, the maximum amount for someone filing at full retirement age is $3,011 per month, while the average is $1,503 per month.
Your benefits can also be impacted by survivor benefits and divorce. I’ve counseled several seniors who were excited to learn that they could claim off their ex-spouse and receive a spousal benefit, while waiting to claim their own benefits at age 70 when the bonus kicks in. If you’re divorced and over the age of 62 but were married for 10 or more years to someone currently entitled to benefits, and you yourself remain unmarried, speak with an expert to learn more about what you might be able to claim.
Taking the leap and drawing on your Social Security benefits can be a daunting process. Between program changes, uncertainty over program funding, and the complicated nature of the program itself, it’s easy to get overwhelmed by the process. Be sure to weigh all your options and consider any unique factors that might influence your benefits before making a decision.
Local wealth managers Josh Houle and Carl Gravina (Monadnock Capital Group, Steward Partners) debunks some common myths around Social Security.
Steward Partners Global Advisory, LLC and Monadnock Capital Group maintains a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory, LLC. 34 West St Keene NH 03431. (603) 338-0515.