What is Social Security?
Social Security provides you with a source of income when you retire or can’t work due to a disability. It’s run by the Social Security Administrations (SSA), which is a federal agency. It’s based on collecting taxes from current workers and paying a percentage of benefits to those that already paid into the system who are now retired or eligible for benefits. Workers pay into the program typically through a payroll withholding where they work. 

How Much Will You Get?
Your Social Security payments are calculated based on your lifetime earnings, birth year, and when you decide to start claiming your benefits. The more you have paid into the system the higher your benefits will be. To view your benefit log in here.

Full Retirement Age

If you were born in 1960 or later your full retirement age is 67. If you claim before age 67 your payments will be reduced for life. If your full retirement age is 67, these are the reductions you can expect. 

  • 62 is about 30 percent 
  • 63 is about 25 percent 
  • 64 is about 20 percent 
  • 65 is about 13.3 percent 
  • 66 is about 6.7 percent 

Who Receives It?
To qualify for Social Security, workers need 40 credits. Which is equivalent to about 10 years of work. In 2021, you must earn $1,470 in covered earnings to get one credit or $5,880 to get the maximum four credits for the year.  

Can You Count On It?
Many fear that Social Security will be bankrupt before they can start collecting their benefits. According to the Social Security site, benefits are expected to be payable on a timely basis until 2037. At that point continued taxes that are paid into the system will pay enough to cover 76 percent of scheduled benefits. Thus, congress will need to make changes to fund the program fully in the future. Social Security has been paid on time since its inception in 1935 and it has had to make modifications to the law in the past to fund these payments. 

There is no immediate threat to Social Security. Politicians may make changes in the future but what the changes will be are unknown. If you’re younger and worried you might not collect, I would factor that into your retirement plan. 

What Age Should You Start Claiming?
It may be tempting to take your Social Security at age 62. Your life expectancy, income needs, and spousal benefits are three keys factors that play a role in the decision to claim your benefits. Guaranteed monthly income is great to have, but claiming your benefits too early may cost you in the long run.

Monthly Benefit Amount

An example is Sarah who is 59 and was born after 1960, so her full retirement age is 67. She has made a good living and paid the maximum in Social Security payroll tax for most of her career. She is currently in good health and no reason to believe she won’t live an average life expectancy. 

Monthly and Annual Benefit

 *Est. Lifetime benefit assumes Sarah lives till 92 and a cost of living adjustment of 2.05% per year

 If Sarah were to take her Social Security at age 62 instead of taking at 67 it would cost her $150,000! The point is if you take Social Security too early the reductions add up over time.  In this example, if Sarah waited till her full retirement age (67) to claim Social Security her break even age would be 81. That means if she lives to age 81 or longer, she will collect more money from Social Security than she would if she took it at 62. 

Life expectancy
Your health status should be considered when deciding when to claim your benefits. If you have an underlying health condition or reason to believe you won’t live an average life expectancy it may make sense to begin taking your benefits before your full retirement age. If you live to age 65, the average life expectancy in 2018 was 85.6 years old for women and 83.1 years old for men. 

Spousal Benefits
If you are married, you can explore additional strategies to maximize your benefits.  Upon death of the first spouse, the surviving spouse can keep the larger of their own benefit or their spouses’ benefit. Couples can coordinate how they want to claim their benefits. Normally, the spouse with the lower benefits will claim their benefits first. 

Social Security benefits are subject to federal income taxes above certain levels of “combined income”. The Social Security Administration defines combined income as the total of adjusted gross income + nontaxable interest (for example, municipal bond interest) + half of your Social Security benefits. 

Continuing to Work
If you claim your benefits before your full retirement age and continue to work, your social security benefits will be reduced. In 2021, your benefits will be reduced by $1 of every $2 you earn over $18,960 if you are under your full retirement age. During the year you reach your full retirement age, it will deduct $1 for every $3 you earn over $50,520 until the month you reach your full retirement age. 

Any reduction is only temporary. Once you hit your full retirement age, your benefits are no longer reduced. When you reach your full retirement age, the Social Security Administration will recalculate your benefit amount to give you credit for the reduced months or withheld benefits due to your excess earnings (Read more here).

Invest Your Benefits
Some people claim their benefits early and invest it. The Social Security uses a COLA (cost of living adjustment) to set benefit increases. Lately it has averaged around 1-2% (View history here). If you are able invest it and return excess of the COLA, this strategy may work. This comes with more risk because there is no guarantee when choosing to invest. 

The ability to fully understand your personal situation will allow you to make you an educated decision on when to begin receiving your Social Security benefits. To review your current retirement plan or create a new one, please contact us at to schedule an appointment. We will build a financial plan with an investment strategy that is tailored to your needs and goals. 

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Sources / Disclaimers:
To find your full retirement age click here.
To compute the effect of early or late retirement click here.
Inflation blog post here.
The Future Financial Status of the Social Security Program here.
Social Security Credits here.
Getting Benefits While Working here.
Cost-Of-Living Adjustments here.

Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.