6 Best Social Security Money Lessons Gen Z and Millennials Should Learn Before Retirement

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As Gen Z and millennials approach the age where retirement planning becomes more essential, it’s important to start thinking about how Social Security factors into your plans.

Even though many people think of Social Security as a complex topic or a source of income that may not be available, taking the time to understand how these payments work can lead to much greater savings.

In this article, we’ll discuss six Social Security money lessons Gen Z and millennials should learn before retirement.

There’s a Cap on How Much You Can Earn

Social Security benefits are calculated based on two things: how much you earned and contributed to Social Security during your 35 highest-earning years and how old you are when you begin receiving your benefits.

On average, if you’re taking out Social Security retirement benefits, it could cover about 40% of your pre-retirement salary.

But there’s a cap on how much you can receive. In 2023, the highest monthly Social Security benefits an individual can receive are $2,572 per month if you are retiring — and claiming benefits — at 62 years old. If you’re retiring at age 65, the cap is $3,279, $3,808 per month if you are retiring at 67, and $4,555 per month if you’re retiring at 70.

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To qualify for these maximum Social Security retirement benefits, you must earn the maximum taxable wage per year — currently $160,200 — for at least 35 years.

You’ll Receive More Money If You Wait To Collect Social Security

You can start receiving Social Security benefits as early as age 62, but there is an advantage to waiting longer. The longer you wait to start receiving Social Security, the larger your monthly benefit will be — up to a point.

If you start receiving Social Security retirement benefits at full retirement age — 67 if you were born after 1960 — you can receive 100% of your monthly retirement benefit. However, if you take Social Security benefits at age 62,  you will lose 30% of your full Social Security benefits. If you file at 64, you will only lose 20% of the full benefits. This continues until age 67.

Additionally, if you wait until 68, you will receive 108% of your Social Security benefits. This increases by 8% each year until the age of 70.

You Can Find Out Your Estimated Monthly Payments Now

Even if you are not close to retirement age, you can find your estimated monthly Social Security benefits now. If you go to the SSA website, you can estimate future benefits by providing your information. This information can help you project how much money you will have at retirement from Social Security, so you can plan accordingly.

Future Benefits May Change

Social Security is constantly changing, from how benefits are determined to retirement age. Today’s Social Security will probably be different from the Social Security in 20 or 30 years. While we can’t predict what Social Security will look like in the future, we can prepare as best as we can based on the current situation.

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“Many young investors don’t think about Social Security, and some think the entire system will implode by the time they reach retirement,” said Joe Allaria, partner at CarsonAllaria Wealth Management and founder of The Retirement Power Hour Podcast. “While it’s likely for Gen Z and millennials to receive some benefit from Social Security, it may be less, relatively speaking, than our parents and grandparents’ generation.”

Benefits Probably Won’t Go Away

Despite all the talk about Social Security running out of money in the future, it’s unlikely to go away. Social Security is mostly funded by payroll taxes, which won’t disappear. So when you retire, the taxpayers still working will fund your Social Security benefits.

However, it’s also important to have other sources of retirement income available to supplement Social Security. Make sure you’re contributing to other retirement accounts, like 401(k)s, IRAs and Roth IRAs, to ensure you have enough money to live comfortably during retirement.

“You need to put yourself in control of your destiny by investing enough into growth-oriented retirement accounts during your working years and constantly work to increase the amount you are investing,” said Allaria. “This will put less reliance on Social Security and protect you from any unforeseen events that could negatively impact Social Security’s future.”

You Will Likely Have To Pay Taxes on Your Social Security Benefits

Social Security benefits are taxable based on your combined income. The combined income includes adjusted gross income — including earnings, investment income and retirement plan withdrawals — tax-exempt interest — including municipal bonds — and half of your Social Security benefit. No beneficiary is taxed on more than 85% of their benefits.

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Most Social Security recipients earn more than the minimum threshold for paying taxes on their benefits. Therefore, it is important to consider taxes when thinking about your future Social Security benefits.

The Bottom Line

Even though millennials and Gen Z are far from retirement age, they should start thinking about Social Security and their retirement. Although Social Security is not likely to be going away anytime soon, it won’t fully support you in retirement. It is important to have other sources of income ready.

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