We’ve all heard of it, but hardly anyone seems to know what to make of it.
Even once you think you’ve got it all figured out, the rules of engagement—as well as your own circumstances—are subject to change.
So, how does it work?
When (and how!) can your Social Security benefits be optimized for you and your family?
What major pitfalls should be avoided?
If you take one point from this paper, here it is:
“Once you’ve established the basics, solve the Social Security riddle based on your quality of life. In other words, the best, data-driven answer isn’t always the best quality-of-life answer for you.”
With that in mind, let’s answer the top Social Security questions we frequently get from retirement savers.
Part I: Social Security 101
1. What is Social Security?
When President Franklin D. Roosevelt signed the Social Security Act into law on August 14, 1935, he commented:
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
At least with respect to protection against a “poverty-ridden old age,” the Social Security Administration has aimed to fulfill this protective role ever since, through:
- Social Security retirement benefits
- Social Security survivor benefits
- Social Security disability benefits (Social Security Disability Insurance, or SSDI)
Particularly through the first two, Social Security has become an essential ingredient in most Americans’ retirement planning.
That’s the quick take. Of course, there are reams of fine print describing how the program works … and how it does not.
2. How does Social Security work?
Basically, you and/or your spouse pay into the program during your working years through the “FICA” tax withholding on your paycheck.
Once you retire and begin drawing your Social Security benefits, you should receive some sort of dependable income stream for the rest of your lives.
No matter how much you paid in, Social Security is unlikely to fund a luxurious retirement all by itself. But every little bit helps.
Beyond that, there are a lot of machinations going on behind the scenes to keep the program running. Similar to an insurance policy, there is no direct, 1:1 relationship between the amount you pay into Social Security and the amount you can expect to receive in return.
In other words, your Social Security tax withholding is not an investment. There is no interest-bearing account with your name on it. Instead, you must qualify for any benefits received.
In short, the Social Security Administration (SSA) is tasked with managing a program to protect our collective wellbeing. How effectively it fulfills this mission is a conversation for another day. The point is, the SSA is not responsible for always meeting your highest financial interests as an individual participant.
You and your financial advisor must watch out for this on your own.
3. What will I earn from Social Security?
The short answer is, it depends.
You can start by using the SSA’s online services to find out more. There, you can access the latest estimate on the full Social Security retirement benefits you can expect to receive once you do retire, based on your work history to date.
How long and how much you’ve contributed: While the relationship is not 1:1, the more you’ve put in and the longer you’ve done so, the higher you can expect your monthly benefit to be once you start taking it. Overall, to be eligible for Social Security retirement benefits, you need to have at least 10 years of work over your lifetime (aka, 40 “retirement credits”).
When you begin collecting Social Security: The longer you wait to start drawing monthly benefits, the higher each payment should be—to a point. This makes sense: How many payments you’re likely to receive increases/decreases depending on how young/old you are when you start taking them.
Whether you’re claiming your own (earner) benefits, or spousal benefits: If you are married, each of you may qualify for your own Social Security benefits as individual earners, or a percentage of benefits as the spouse of an earner. (As covered in this article, there are some caveats to bear in mind, especially for a surviving spouse.)
What cost-of-living allowances (COLA) you receive: Beginning in 1975, Congress established automatic annual COLA adjustments based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since 1990, COLAs have usually been around 1–3%, although, during the same period, they’ve been as high as 5.8% (2008) and as low as 0% (2010, 2011, and 2016).
4. When can I apply for Social Security?
The earliest you can apply is age 62. But, again, there’s a catch.
|If you start taking Social Security Retirement Benefits…||Each month, you’ll receive…|
|At age 62 up to full retirement age||Less than 100% of your full retirement benefit|
|At full retirement age||100% of your full retirement benefit|
|After full retirement age, up to age 70||More than 100% of your full retirement benefit|
Of course, this begs the question: What is your full retirement age?
Until 1983, it was 65 for everyone.
With increased age expectancies, Congress has gradually increased the full retirement age for Boomers and beyond. So, now …
|If you were born …||Your full retirement age is …|
|In 1960 or later||Age 67|
|Before 1960||Between age 65 thru 66+10 months|
Confused? Here are two Social Security calculators to help you sort things out:
- Retirement Benefits Calculator: Determine your full retirement age, and how much less you’ll receive monthly if you begin taking your retirement benefits early.
- Delayed Retirement Credits Calculator: Determine your full retirement age, and how much more you’ll receive monthly if you wait to take your retirement benefits until later.
Next, let’s explore the planning questions almost everyone asks as they approach and enter into retirement.
Part II: You, Social Security, and Your Retirement Planning
5. How does Social Security fit into my retirement plan?
For many people, their Social Security “strategy” is to simply turn on the benefits as soon as they retire.
This might work just fine; it may even be your best course of action.
But especially if you’ve been diligently accumulating retirement savings in traditional IRAs, Roth IRAs, 401(k) plans, etc., it’s best to first put all your planning pieces into place before deciding when to start taking your benefits.
This includes your spending goals, tax ramifications, life expectancy, legacy goals, philanthropic interests, and more.
In other words, leading with your Social Security retirement benefits no matter what is like treating this critical retirement income source as if it’s a pawn, rather than one of the more important pieces on your retirement “chessboard.”
For maximum effect, you don’t want to deploy it too soon—or too late—in the game.
6. What is the best Social Security claiming strategy?
To review, you can start taking your Social Security retirement benefits: (1) as early as age 62, (2) when you reach full retirement age, or (3) after full retirement age (basically, up to age 70).
Which is right for you?
Let’s revisit our earlier theme: Remember, your eulogy will say nothing about how amazingly strategic you were with your Social Security benefits!
So, beyond crunching the numbers, be sure to ground your decisions in this greater question:
“How can I create my best possible retirement?”
Then assess your most promising claiming strategy.
For example, in raw dollars, most people will receive the most money by waiting until age 70 to start taking Social Security. But this may also mean living on a tighter budget than necessary in early retirement, when you are probably at your most healthy and mobile stage.
So, does it still make the most sense for you to postpone the payments? Let’s dig in further by answering our next top Social Security question.
7. Is it worth waiting to take my Social Security?
Based on the discussion above, our rule of thumb goes something like this:
To maximize your lifetime benefits, delay taking Social Security as long as possible—UNLESS taking it sooner will significantly enhance how much you’ll enjoy your retirement.
Again, use your quality-of-life decisions as your guide, but here are a few other factors to assess.
Personal spending goals: If an extra income source would end up sitting in a savings account, it’s probably best to wait, and accumulate delayed retirement credits instead. But what if taking it earlier could fund a treasured lifetime dream you’ve long wanted to attain? Why not turn it on?
Personal circumstances: To put it bluntly, what’s your life expectancy? If you’re especially health and you come from long-lived stock, it may make sense to wait. If you feel you’re already living on borrowed time, you may decide to turn on the additional income stream sooner than later.
Market conditions: If markets (and your accounts) are relatively depressed, you might want to start Social Security sooner, so your other investments can remain invested for future recovery.
Economic conditions: Similarly, if you might face inflation or potential benefit cuts (especially if your annual retirement income exceeds $150,000), you may also start taking your benefits sooner, while conditions are relatively favorable.
Taxes: If the income taxes on your Social Security benefits are going to put you over the limit for increased Medicare premiums or other “means-tested” taxes (most recently, think stimulus payments), there may be times it would make sense to hold off on taking them.
8. If I don’t need the money, should I start collecting Social Security anyway and invest it?
It’s tough to make the case for taking Social Security payments for the purpose of investing them. After weighing the financial benefits of delaying payments vs. the potential to score some premium, market returns, it’s basically a matter of luck.
As with any relatively near-term market investment, you may win, you may lose.
Part III: The Nuts and Bolts of Managing & Securing Your Social Security
9. How do I apply for Social Security?
Unless your circumstances are unusual, most of us (like 80% of us) can apply online, with a free Social Security account.
Unusual circumstances may include:
- If you’re juggling earner, spousal and/or survivor benefits
- If you’ve been collecting Social Security disability benefits
- If a complicated divorce is part of the equation
- If you’re taking Social Security while also working
If you cannot use Social Security’s online services, expect a call-in to take a long time—like hours. (Plug in your phone, and have a headset!)
Or you may need to go into an office. Expect an agent to inform you of the benefits to which you’re entitled and to help with the logistics.
As touched on earlier, do NOT expect personalized financial advice or “highest use” recommendations. That said, do share details with them. It may help produce a desirable outcome as you make your choices.
10. Is Social Security taxed?
As touched on above, up to 85% of your Social Security benefits may be taxable. As with any taxable income, you could incur a big bill due in April, potentially with penalties if you’ve underpaid your taxes.
Depending on your other income, you may want or need to make quarterly estimated payments, or have a portion withheld upfront. There are a number of nuances to this conversation, so consulting with a tax professional is warranted.
11. Does Medicare affect Social Security benefits?
Sometimes. Most people have their Medicare premiums taken from their Social Security, which means you’ve started taking your Social Security payments.
If you’re at high, overall income levels in retirement, this could push you over the limits and increase your Medicare premiums.
12. What happens if hackers steal my Social Security Identity?
Unfortunately, hackers do try to trick the SSA into sending your payments to their address or bank account. Sometimes, they succeed. If this were to happen, the SSA should pay you back for any lost benefits once the malfeasance is discovered.
But what if YOU give up your Social Security information or are tricked into redirecting your payments somewhere else?
It’s less clear whether you’ll be able to recover your losses. So, clearly, try not to do that. Always be deeply suspicious of anyone asking you to reveal your Social Security information. This includes strangers, businesses, friends, and family alike.
Especially online, it’s way too easy these days for a thief to pose as a trusted contact. Plus, even if the query is coming from a reputable source, the less your Social Security number is floating around out there just because someone asked you for it, the better.
By the way, the one (and possibly only) upside to having your identity stolen is found here. If someone uses your Social Security number to get a job, any taxes they pay will be credited to you. In fact, one way to detect identity theft is by watching your earnings history to see if it includes more income than you’ve earned.
13. What if the Social Security program goes broke?
Since its inception in 1938, Social Security has always promised more in benefits than it has collected in withholding taxes. This has resulted in several occasions when Social Security started running out of money.
Most recently, in 1986, there were significant tax increases to meet the promises made. The goal, which has largely worked, was to cover expenses for 50 more years.
But now, more than three decades later, Social Security is again running out of money. Worse, the increased level of withholding taxes that would be required to meet current promises are staggering.
The challenge is, everyone wants this “third rail” known as Social Security to deliver on all its promises, but nobody wants to pay more for it. Nor do most politicians want to imperil their career by being the one who significantly raises the costs or reduces the benefits.
How will it end?
It would be best if Congress acted sooner than later. That said, throughout history, our representatives have typically waited until the last minute to make these sorts of painful changes.
We remain cautiously optimistic Congress will once again resolve the issue before Social Security grinds to a halt. But we also expect it will involve “solutions” that will cost more and deliver less—which in turn will require a fresh round of careful retirement planning. So it goes.
Summary: The Top Social Security Questions Answered
We’ve only scratched the surface of the top Social Security questions we’re routinely asked. If we doubled the length of this piece, we could delve into additional nuances, such as:
- What if I continue to work AND I collect Social Security?
- Once I’ve started taking my Social Security benefits, can I stop and restart them?
- How do Social Security spousal benefits and survivor benefits work?
- Can I receive spousal benefits if I’m divorced? What if I remarry?
- What happens to my Social Security benefits when I die?
In short, even as thorough as we’ve been, we’ve left out a ton of details, caveats, exemptions, and exceptions.
Especially as you approach and enter into retirement, it’s worth connecting with a financial advisor to help you think through the many choices you’ll want to make about when and how to make the best use of your Social Security benefits.
While a local Social Security office or its online resources can provide some guidance on how to proceed, there’s basically no substitute for hiring a fiduciary financial advisor.
Our firm is distinctly positioned to tailor our advice and provide you with personalized answers to all your Social Security questions … plus, probably several more you didn’t even know to ask!
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