If there’s one lame duck that everyone ignores as part of their retirement planning, it’s Social Security. Over the years, Social Security benefits have been called too small, unfair, a Ponzi Scheme, and worst of all – dead!
Yet for many Americans, their Social Security benefits are all that they have to live off of during retirement. And what’s even more frightening – if people continue to ignore retirement planning by sticking their heads in the sand, then Social Security benefits may be ALL they have to look forward to as well!
So rather than sticking our noses up at it, let’s embrace our government hand-out (after all, we paid our money into it for so many years!). If you understand the basics of Social Security benefits, then you can use them to add approximately 20% to your overall retirement income!
Social Security Benefits Aren’t Dead, but They Do Have a Serious Limp:
Everyone loves to jump on the bandwagon and declare “… why bother even thinking about Social Security benefits – they won’t even be there when I retire!”
There is a small element of truth to this. Social Security’s own website notes that by 2033 the payroll taxes collected will only be enough to pay about 75 cents for each dollar of scheduled benefits. Yes – that means you’re only going to get 75% of what their website tells you to expect. Darn!
While that is both upsetting and depressing, it is fair to say that most of us can expect to at least receive “something” during retirement. It may not be your full Social Secuirty benefits, but 75% is much better than nothing at all.
With the number of elder people who depend on Social Security and the younger people who pay into it each day with their payroll taxes, it would be hard for me to imagine the kind of social uproar and backlash that would come from discontinuing the program entirely. There would have to be a pretty dramatic event or unanimously popular replacement for the program for it to phase out completely.
How Do I Know How Much Social Security Income Can I Expect?
For a number of years now, you used to get a statement from the government that detailed about what you could expect in terms of Social Security benefits. However, in our digital age, the government decided to stop mailing it out, and the information will soon only be available online.
The numbers they forecasted to you were based on a lot of variables. The most significant of them is age. If you were born in 1960 or after, then you don’t qualify for full Social Security benefits until age 67. However, you can start collecting them as early as age 62. It just means they’ll reduce your benefit for starting early. Here’s by how much:
• Age 62 is about 30 percent
• Age 63 is about 25 percent
• Age 64 is about 20 percent
• Age 65 is about 13.3 percent
• Age 66 is about 6.7 percent
How Social Security Benefits Are Calculated – Step 1 – Credits
The first step to even qualifying for Social Security benefits is to accumulate 40 credits. As of 2012, you receive one credit for each $1,130 of earnings, up to the maximum of four credits per year. That means you have to earn $4,520 or more per year to score 4 credits. This number will go up periodically to adjust for inflation.
As you can probably guess, Step 1 is not a major hurdle for most working Americans.
How Social Security Benefits Are Calculated – Step 2 – Income and Age
After getting enough qualifying credits, your Social Security Benefits are estimated based on 3 major factors (there are actually other factors, but these are the most important):
• Your earnings history (as recorded by the Social Security Administration)
• How much money you plan to make in the future (up to the age you stop working)
• The actual age at which you do in fact stop working.
These 3 things can shape a great deal of the Social Security benefits you expect to receive.
For example, if you stop working at age 50, you’re going to get a lot less benefit than if you had worked all the way up to age 62 (because you would have paid in a lot more to the program). Even something like dropping from full-time to part-time can affect how much you’ll expect to receive. Note that your retirement benefit is based on your highest 35 years of earnings.
Good Times on the Social Security Calculator:
It’s pretty easy to hop onto the Social Security website and find out how much retirement income you can expect to receive. Here’s a few random numbers that I crunched on my account using different ages where I stopped working:
Notice how badly your benefits are reduced the earlier you stop working and the sooner you start taking your Social Security benefits?
For fun (or rather a reality check), I also added a column for the expected 75% reduction and 25% income taxes (don’t forget you pay income taxes on your Social Security benefits if your income is greater than $25,000 for an individual and $32,000 for a married couple). This is how much money I would really get!
Hook Me Up Sugar Momma!
If you’re married (or even if you used to be), then you get a bonus – You may be entitled to spousal income!
Basically if you work, you’re entitled to the higher of your own personal benefits or your spousal income; not a combination of them. There are some important rules that accompany this. This most important thing is that the younger you start, the higher percentage your benefits are reduced by.
Interestingly, as I did my research, I came across a strategy where you can use your spousal benefits to really max out how much your Social Security benefits will be! I will cover all of this in an example in a follow-up post. It’s worth knowing!
Readers – Are you still awake? What do you think about your Social Security benefits? Are you going to count on them? How will they play a part in your retirement income planning?
1) Retirement Income Planning with Author Daniel Solin
2) How to Retire on 500K with the Greatest Potential
3) Six Easy Steps to Figuring Out Your Retirement
Photo Credit: Wikipedia
[email protected]&More says
I am not counting on it but if I get it it will be nice fun money! I will not be retiring until the 2050s if I wait until full retirement age and by that point who knows what will be paid out! Maybe 50% or less!
Nurse Frugal says
I agree, definitely NOT counting on social security being there. How else are they ever going to balance the budget if they keep it?? Very interesting information though, sounds like the government wants us to work until we are 80!
Age 62 to 70 is far too late in life for me to work. I’ve got my sights set on 48 to 55! SS is going to be a nice boost so I can afford my meds in my elderly state!
Don’t say 50%! We’ve got to be doing better than that!
I’m kinda using that logic as well. But all the same, I want to maximize my “fun money” as much as possible!
jefferson @seedebtrun says
i am in my mid-30’s, and i just don’t have confidence that the system will still be funded 30 years from now..
i understand why the program was started, but it has to change with the times.. we need to find a better way to help older Americans with their life expenses…
Even SS’s own website admits the system is broken. They’re going to need to do something to fix this or things are going to be very bad! Regardless, I think the program will still be around – just not in great shape.
Justin @ The Family Finances says
I agree with Lance. While I do expect to at least receive something when I retire, I’m not counting on it to fund my retirement. Instead, any social security my wife and I receive will be our entertainment money.
So many doubters! You’ve got good reason to doubt; the website itself admits they are in trouble. I think as long as we take care of our own business by saving for retirement, then SS income will just be icing on the cake! And if we pay a little attention to the rules and maximize our benefits, then we can make a lot of “icing” 🙂
It’s really a pyramid scheme as young workers pay for the benefit of older generation. And, our politicians are robbing it ever since Lyndon Johnson announced that he is taking a loan to fight the war. Well, when government starts taking money, it never stops!
Unfortunately, you are correct. By definition of a pyramid scheme or Ponzi Scheme, SS fits the bill = taking money from new investors and giving it to the older ones. All this despite being a government program. But that’s the way our country works – its okay when the government does it.
It’s bad in Canada too. Here, one of the things we have is Old Age Security (OAS). You receive it as a top-up to your income as long as your annual income is less than $60k. $60k! That’s more than I make right now and the government is giving out free money?!
And if you make over $60k, you still get money, just slightly less. :S It sucks because this money comes out of general revenues, not even money that workers put into the system. Bleh.
Wow. I’m not sure if that sounds any better. Do the higher income earners pay more into it? If so, that would be straight up Socialism! But who am I to name call. Our system is a pyramid scheme / Ponzi scheme! 🙂 Can someone please re-design a new national system??
Matthew Allen says
I think it’s absolute BS that so many young people have the attitude (or opinion or belief) that they’re just not going to get SS because “how else will the gov’t ever balance the budget?” We have been paying into the system our entire working lives!! This would be like contributing to your personal 401k with the attitude that you’ll probably never get to use the money because the government is just going to take it.
That aside, I am one who is really looking forward to your follow-up post on this subject. My mother and father divorced years ago and my mom (who was a stay-at-home mom) has never been able to make a decent income. She is nearing age 62 and we have to start thinking about her retirement and SS scenario. She was told that she could use my fathers income numbers… but we are very confused about how to go forward. If she does collect on his numbers, will that then affect how much he will be able to collect later? Looking forward to an explanation in the follow-up post.
Thank you Matt! Yes, there will be something for us in SS! And if not, there’s going to be hell to pay! I’ll grab my pitch-fork and torch, and march up to Capital Hill myself!
The sad part is how many people also lack faith in 401k’s! My opinion is that if you think a 401k is going to fail you, then you basically lack faith in investing what-so-ever.
Glad to hear someone is looking forward to my follow-up post! After the lack of enthusiasm I received from this post, I wasn’t sure if I should run the second part of this. But I will! I hope you will find it helpful.
I find it best to think if I get any money from social security as a bonus nothing to rely solely on.
I think it can be icing on the cake, but it should still be maximized! It’s amazing how much more you get at full retirement age relative to starting at age 62. I don’t plan on running out of money in my elderly state, but it would be refreshing to suddenly get a $2000 boost at age 70!
Bichon Frise says
Ummm…you have some misnomers in here.
First, there may or may not be a SS benefit penalty for “retiring early”. This is b/c they use your highest 35 years of wages to calculate your PIA. So, if you have driven a truck since you were 18 and your wages are roughly the same throughout (indexed to inflation) and you retire @ 55, it probably only differs 5% or so. So, there are cases where the age when you stop working will impact your benefit, not always though.
Second, your benefit is calculated at full retirement age (FRA), not at age 62. This number is referred to as the primary insurance amount (PIA). Probably for most of the people reading this, that is 67. 62 is early retirement, and benefits are reduced 5/9 of a percent for each month a benefit is taken prior to FRA.
Third, a spouse’s benefit is not equal to the worker’s benefit. At best, it is 50%. A spouse’s benefit is based on their PIA. So, if the worker elect’s to retire early at age 62, their spouse can wait until they are at FRA and collect the entire 50%.
Here is the link to the SS handbook.
Oh great, Bichon Frise is back. How I’ve missed you.
1) I am aware of the 35 year rule and did mention that here in this post. When you sign into the SS website, you can customize what age you stop working and how much money you made up until that point. The calculator will automatically figure out what your top 35 years were and what the benefit will be. That is why most people will make less the earlier they retire. The exception is if you take a lower paying part-time job after you stop working at your career.
2) The benefits I listed here are what the online calculator outputs, and they are reported assuming you start collecting them at age 62. Try the calculator and you will see.
3) Yes, I am fully aware that the spouse’s benefit is 50% of the workers benefit. We are covering this subject in great detail in a whole post next week. You should check it out. You’ll love it.
Here’s the website for Social Security where all this information came from:
Bichon Frise says
I knew you missed me…
Your assertion is that benefits are reduced by no longer working. That is not always true. The difference in your example from 67 to 62 is primarily b/c of the penalty the SSA imposes b/c of taking early retirement, not b/c you stop working. You can work up examples where working would impact this range and I can work up examples where it wouldn’t.
Also, b/c of how PIA is calculated, some will feel the effect of zeros in their 35 years of highest earnings much much more than others.
Finally, it is actuarially the same if you take your benefits @ 62, 67 or 72. While the benefit may be greater the older you are, you’re also taking that amount later on, when you could be doing other things with it. The big question is, when will you die? And if all knew that, we would live life much differently.
When you are no longer working, SS counts those years as $0 among the highest 35 years it takes into account. Unless you have been working longer than 35 years your whole life, than your benefit would be reduced. This is simply a caution not to retire too early. Even if you do acquire 35 years of income history, you’d still be smarter to replace the lower income years with your higher income years during the peak of your career by not retiring too early.
Yes, I read that part about the benefits being the same as well. However, it is BS if you really think about it. All it takes is living one extra year above your life expectancy at the higher benefit rate for you to come out ahead. Plus, to a retiree, a higher cash flow is going to be more favorable.
Bichon Frise says
I certainly disagree with the assertion that one should try to maximize these benefits. Especially through continuing to work longer. There is more to life than maximizing just about anything, and SS benefits definitely fall into that category.
It is not BS that it is acturially the same when you start taking benefits. It is important to know that and how the life expectancy tables are calculated. If you did a poll on your blug asking who thinks they will live longer than what LE tables say or who will live exactly the same or who will die before that number, my “gut” feeling is a huge bias will be exposed and an overwhelming amount of people will expect to live longer. Not seeing the actual distribution or results of such a poll, I’ll go out on a limb and say more people will expect to live longer than the distribution calls for. So, to counter your point if you were to live one more year above your expected date of your death, what if you live one year less? Will you turn over in your grave knowing your screwed your surviving spouse?
The point is, and I may have been implicit and windy in getting to it, you just can’t prescribe one solution to all. Generally speaking, I tend to agree with delaying benefits as long as possible, but I think people shouldn’t put off retiring just to obtain additional SS benefits. Your example above muddles two different questions into one and presents your single case, which may or may not apply to others.
Who is advocating working longer? I know I certainty am not! Nor do I plan to work any longer than I need to. This post is just simply presenting the facts, and the facts are that more years worked and higher income equals more benefit. Plain and simple.
Why do you want to screw over your surviving spouse by taking the early, lesser benefit? That’s a terrible thing to suggest! If there’s one reason to delay SS benefits, its to maximize what your spouse will receive after you’ve passed on. It would be selfish to not consider this.
You’re missing the point completely. People should retire whenever they want to want to retire and are financially ready. In terms of how SS plays into that , they should also know the facts and potential benefits or consequences of their actions. You’d be a fool to not at lease consider these things.
Really interesting! I know a few people who live off of social security alone. It’s really tight, but they’re managing somehow. I think, depending on how long you’ve been married, you can still claim spousal benefits after a divorce, too. So all is not lost for women whose husbands leave them at 62 for a younger woman.
I do believe that’s true about ex-spouses (which I found to be very interesting). Though let’s hope we’re the men aren’t leaving the gals for younger hotties! 🙂
It’s sad, but I do think a lot more people live on JUST SS than we think.
Ron @ Running From Debt says
Like many comments, I am not going to rely on Social Security Income. It would be nice to have it, but I am hoping that I can save enough so that I do not have to wait until age 67 to retire. If, and IF we still have some little Social Security Income, I can maybe pass it on to my children’s children in a form of a trust.
You’re smart to not rely on Social Security only, and to build up other funds. I like your strategy to use it for your kids or some other good cause. I say why not!
S. B. says
Social Security is not a binary option. It’s not going to just “go away”, but the likelihood of cuts seems very, very high. Personally, I’m figuring I’ll get 70% of promised benefits, which should bring things into balance.
I fully don’t think it will just go away. There would have to be something very dramatic for that to happen (or some big substitution). Otherwise there would be a lot of backlash! But even still – I’ll take 70% over 0%.