Social Security

Social Security

March 04, 2024

Social Security is a controversial topic but worth spending a minute discussing today because it is an important piece of the retirement puzzle for most people. There are constantly headlines in the news about Social Security, how it works, ought to work and whether or not it will even be solvent in the future. The purpose of this post is to explain how it works at a high level while avoiding anything that could be considered political or controversial.

Each year when a person works and earns income, a portion of their earnings (up to a certain amount) is taxed and put into the Social Security Trust. That amount is based on how much that person earns each year (think simply, the more money you earn in wages, the more you pay in taxes and thus earn more in future “credits”). The intention behind the contribution is for everyone who works they are eligible to receive benefits in the future.

The amount that you are ultimately eligible to receive is based on several things. First, the credits you earn in your 10 highest earning working years (40 working quarters). There is a limit that is reached where you have maximized the number of credits you can earn in retirement and thus are not eligible to earn more. Next, the timing of when you file your request to begin receiving the monthly benefit has a big effect on how much you ultimately earn. Full retirement age varies by the year in which you were born, but generally that age is between 66 and 67 years old. If you file Social Security benefit at your full retirement age, you will receive the full benefit. Technically, you are eligible to file for benefits “early” before your Full Retirement age as young as age 62. The downside to doing this is that your benefit gets cut to an amount smaller than if you waited until your Full Retirement Age. Conversely, you are also able to wait to file at an older age than your Full Retirement Age. If you do this, your benefit actually increases as time goes on up until age 70, at which time it reaches the maximum amount you can receive. There can be a lot of strategy involved regarding when you file for Social Security and I believe a good Advisor can help provide guidance with that decision.

Lastly, it is important to note that Social Security benefits are eligible to receive a cost of living increase each year. These increases are meant to help offset the effects of inflation and keep your real Social Security income relatively equal.