Having Security in Social Security

“The hardest choices in life aren’t between what’s right and what’s wrong, but between what’s right and what’s best.” – Jamie Ford

Unfortunately, we are all getting older and as we creep closer to the sixth decade of our lives, Social Security benefits begin to enter our financial conversations.  We have had many conversations with our clients about Social Security and have become quite familiar with this government entitlement program.  Ninety six percent of American workers are covered under Social Security, so it is a program that affects nearly every one of us.  In this blog, we will attempt to describe how the system works and what benefits you should receive from Social Security when you retire. 

When to take Social Security 

Social Security is an ever-changing, complex program that can significantly affect your retirement income.  Social Security was never meant to be the only source of income for people when they retire.  On average, it replaces about 40% of an average wage earner’s income in retirement. 

Before you can choose when to retire with Social Security benefits, you first must become eligible to receive benefits.  As you work and pay taxes, you earn Social Security “credits”.  In 2020, you earn one credit for each $1,410 in earnings – up to a maximum of four credits per year.  Most people need 40 credits (typically 10 years of work) to qualify for benefits.  

After you become eligible, you must choose when to begin taking benefits.  In addition to considering your financial situation, your health and your family’s health can play a role in your decision-making process.  Financially, there are three time frames to consider when deciding when to start taking Social Security benefits: early retirement, full retirement age and delayed retirement.   

If you choose to take early retirement, you may start receiving benefits as early as age 62.  Choosing to receive your benefits at early retirement may seem appealing, but the tradeoff is a reduction in the amount of benefits you receive compared to your full retirement age benefit.  If you choose to wait until your full retirement age, you will receive full benefits for the rest of your life rather than the lower benefit amount you receive when taking early retirement.  Full retirement age isn’t the same for everyone.  The following chart shows your full retirement age: 

The last option is to delay your retirement benefits.  You can delay your benefits until age 70.  For every year you defer taking benefits, your annual benefit amount will grow by approximately 8%.  A breakeven analysis can be done to determine how long you must live to recoup the delayed retirement benefits vs. the early retirement benefits.  For example, an individual that receives $1,000/month at full retirement age (age 66) will only receive $750/month at early retirement (age 62).  Total benefits not collected from ages 62-66 are $36,000 ($750 x 48 months).  If you take the monthly difference between the full retirement age benefit ($1,000) and the early retirement benefit ($750), you get $250.  If we divide the $36,000 by the monthly difference in benefits ($250), you get a break-even point of 144 months or 12 years.  What this means is that if you wait to begin receiving benefits until 66, you will have to live until age 78 to recoup the same amount of Social Security benefits you would have received if you began benefits at 62.  You can do the same analysis comparing benefits received beginning at age 66 vs. benefits at age 70.  In the example above, you would be entitled to receive $1,320/month by delaying payments until age 70.  The break-even point between 66 and 70 is 150 months or 12.5 years to recoup the $48,000 of benefits not collected between ages 66-70.     

Spousal benefits 

Spouses may also be entitled to Social Security benefits, even if the spouse has never earned Social Security credits.  These benefits would be based on the working spouse’s credits and can start as early as 62.  The amount of the benefit is usually about 50% of the working spouse’s benefit at the time of election. 

Creating an online account 

We recommend that everyone create their own Social Security account with “my Social Security” which can be found here.  Setting up an account can provide an individual with valuable information about their own Social Security benefits.  If you have already begun receiving benefits, it will enable you to get your benefit verification letter, check your benefit and payment information and your earnings record, change your address and phone number, and start or change direct deposit of your benefit payment.  If you haven’t already started receiving benefits, it is still useful in that it will provide you with estimates of your retirement, disability, and survivor benefits, your earnings record, and the Social Security and Medicare taxes you’ve paid.  If you need help with setting up an account, please contact us and we would be happy to assist you in the process.