Social Security 101

Social security can be critical to understand as you approach retirement.

Often viewed as a “financial safety net,” it provides monetary benefits based on the money you earn and length of time spent working. Originally introduced after the stock market crash of 1929, your social security will work alongside other retirement pots (such as a 401k or IRA) to provide an income after you finish working. Both yourself and your employer contribute, but those who are self-employed might be the sole contributors to their social security. However, there are some common pitfalls that many run into when setting up or claiming their social security benefits. We’re discussing how to maximize your social security benefits and avoid mistakes that might set you back. 

Qualifying 

How do you qualify for social security benefits? 

It’s a credit-based system that relies on you hitting a certain income threshold within a calendar quarter. Each quarter you receive one credit, and you need 40 total credits to qualify for social security benefits. This takes the typical working individual around 10 years. 
At the age of 62, you can qualify to begin receiving social security benefits. However, if you decide to start receiving benefits at this age, you could get a significantly lower payout than if you choose to wait until “full retirement age” or FRA. Full Retirement Age depends on the year you were born.

See the table below to determine your own full retirement age. 

Pros and Pitfalls 

If you choose to take your social security benefits at the age of 62, you might not be eligible to receive the full amount you could otherwise get if you choose to get your payments later. Receiving payments at 62 means you will get 75% of the payments you would receive if you wait until your full retirement age. 

However, if you can wait until full retirement age to begin collecting payments, your payments will be significantly higher. You receive full benefits at your retirement age, but you can receive up to an 8% increase in social security benefits each year you wait until age 70. If your FRA is 66 and you wait until 70 to take your benefits that could be a 32% increase in the benefit amount.

It is recommended that you plan your retirement in order to maximize the funding you will receive later in life. If you have other accounts, it might be useful to begin receiving income from those accounts earlier so that you can delay getting payments from your social security.

The Social Security Break-Even Point

Another strategy that some people choose is to calculate the break-even point. For an individual, the breakeven point is the age at which you need to live to to make up for taking benefits later. Here’s an example of someone waiting one extra year from FRA.

John decided to wait until 67 to take benefits. Assuming he would earn a flat $1000 at FRA, at 67, he would earn $1080 (8% increase for waiting one year). He “lost” $12,000 during the year he could have initially started benefits. To find out his breakeven point, you divide the total lost by the amount gained with the delay.

=$12,000/$80 = 150 (months)

The 150 equals months so divide by 12 = 12.5 years

If John delays benefits by one year, it will take him 12.5 years to break even. If John believes he will live more than 12.5 years or to at least age 78.5 delaying benefits may be in his best interest. 

Determining breakeven points and spousal benefits is also helpful for couples to consider. You may be able to have enough income to cover expenses with just one spouse taking benefits and letting the other spouse’s benefits grow (assuming close in age). 

If you don’t have a long life expectancy past retirement, then taking payments as soon as possible might be the best option. 

If you’re looking to discuss social security or planning for retirement, let’s talk today.