What comes to mind when you hear the words “social security benefits”? Maybe you’re curious about the future of Social Security or worried about its availability when you start claiming it. Some of my clients wonder why we bother to incorporate this into their financial plans. While there have been some disturbing headlines, I’m here to help you disentangle the facts from the myths and explain why Social Security should stay in your retirement plan.
How does Social Security work?
During your working years, part of your payroll taxes funds the social security system. In turn, these taxes pay benefits to Social Security recipients. Even the self-employed contribute. Working taxpayers will provide you with Social Security benefits when you retire.
The amount of your Social Security benefits depends on your year of birth, your lifetime earnings, and the age at which you start receiving payments – up to the amount of the “Basic Social Security Earnings”. The higher your income, the greater your allowance, but you must wait until “full retirement age” to receive 100% of your allowance. Your full retirement age depends on your date of birth – for example, if you were born in 1960 or later, your full retirement age is 67. change but not disappear
Social Security is unlikely to disappear completely, but adjustments are likely:
Congress made adjustments in 1983 to prepare for a future population of retired baby boomers.
The government can raise payroll taxes, delay the age you can start collecting, or change the amount you pay in taxes on Social Security benefits.
The chances of cutting benefits for future generations are slim, but Congress has been reluctant to cut benefits because of the potential political fallout.
The icing, not the cake
Regardless of its potential changes, Social Security still has a role to play in sound financial planning. Since its inception, Social Security has been intended to supplement retirement savings, not to replace primary sources of income like pensions or 401(k) plans. Think of it as extra leverage when you need income to cover sporadic or smaller expenses. You can also use it to reduce the burden of long-term withdrawals from your portfolio, so you can leave more of your portfolio assets to your heirs or to charity.
My younger clients are often the most skeptical about incorporating Social Security into their financial plans. I start their plan by helping them create an account with ssa.gov and calculate their Social Security benefits at full retirement age. Then we could consider calculating only a certain percentage of winnings – in case they end up being reduced. Of course, if benefits do not decrease upon retirement, the remaining balance becomes an additional bonus. Therefore, your plan should be designed so that your retirement savings (such as a 401(k)) cover most of your expenses.
If you can do that, Social Security can be the icing on the cake.
you are in control
The sooner you start planning, the better you can maximize your financial resources and prepare for the unexpected. Once you have identified your goals and made a plan, review it regularly, at least every 5 years. If you are approaching retirement, do an annual review. Tracking your plan’s progress can give you more options and help you make better decisions. You are always free to adjust your goals if necessary. If you’re still unsure, an advisor can answer questions about your particular situation.
When to reap the benefits is also in your control. You can start receiving Social Security benefits as early as age 62, but this can sometimes increase your monthly payment. Or maybe you started receiving benefits first and your spouse delayed for a while. Benefits are available even after death. A client recently came to see me for advice on her social security benefits. We researched her options and found that it would be best to defer her husband’s benefits until she reaches full retirement age, even if he died. She hadn’t realized that taking her survivor benefits until full retirement would reduce her benefits.
understand the big picture
We provide resources and tools to maximize your Social Security benefits. You can also visit the Social Security Administration’s Retirement Overview page to estimate your benefit amount and learn more about your options. Caution :
Accuracy depends on proximity to retreat.
Social Security is less likely to disappear. Continue to make Social Security part of your retirement plan, not your primary source of income. Like the proverbial icing on the cake, this could be the best way for you to score some well-deserved treats.
