Given that a recent GOBankingRates survey found that 23% of Americans have nothing saved for retirement, it’s clear that many will be relying on Social Security to fund their golden years. And even if you do have retirement savings, you’ll want to be strategic about taking your benefits in a way that’s optimal for you.
To help you best understand Social Security and clear up any misconceptions about the benefits system, GOBankingRates spoke with financial experts and asked them what they want everyone to know about Social Security.
You Shouldn’t Rely on Social Security To Fund Your Whole Retirement
If you’re expecting Social Security to fully fund your retirement, you could be in for a rude awakening. The average monthly benefit is $1,691.53 as of January 2023.
“Social Security today only covers a portion of the average American’s expected income needs in retirement,” said Henry Yoshida, CFP and CEO of Rocket Dollar, an investment platform that allows individual investors to use tax-advantaged funds for alternative investing.
If you’re in that 23% of Americans who have nothing saved, start saving ASAP so that you’ll be in better financial standing when you reach retirement age.
Delaying Taking Your Benefits Can Pay Off
You can start to collect Social Security benefits at age 62, but it may pay off for you to wait.
“If you are able to delay taking Social Security after eligibility, you can significantly increase the income [compared to] that minimum amount at the earliest possible access date,” Yoshida said. “For example, if you take Social Security at 62 and your income is $2,364, if you can wait to access Social Security until age 70, the income is $4,194.”
However, Waiting Until Age 70 Isn’t Always the Best Option
It’s true that if you delay taking Social Security until age 70, the amount you receive will be larger than if you start receiving your benefits before, but this doesn’t mean this is always the best option.
“You need to evaluate how that decision impacts your asset balances over time,” said Emily Casey Rassam, senior financial planner at Archer Investment Management. “If you look at the complete picture, which includes a projection of your investment portfolio balance over time, it may make more sense for you to take Social Security earlier. Often, if you delay Social Security until age 70, you are drawing down assets significantly, and that can hurt your long-term asset trajectory. Like all financial decisions, a comprehensive financial plan can tell the whole story and help you make decisions with all of the relevant data organized.”
65 Isn’t the Full Retirement Age for Everyone
When deciding when to collect Social Security, it’s important to understand what you’ll receive at what age.
“Age 62 is the earliest you can take benefits. For every year an individual delays taking benefits beyond their full retirement age — which varies depending on when you were born — through age 70, the annual benefit increases by 8%,” said Richard Freeman, CFP, principal at Cerity Partners. “Conversely, for every year an individual takes benefits earlier than their full retirement age, their annual benefit is decreased 8%.”
Freeman said that his clients often assume their full retirement age is 65, but this is not always the case. If you were born in 1943 or later, your full retirement age ranges from 66 to 67.
Your Benefits Are Calculated Based on Your 35 Highest-Earning Years
It’s important to understand how the Social Security Administration calculates your benefit amount.
“The primary insurance amount — or amount you get based on your own record — is based on the worker’s highest 35 years of earnings,” said Herman “Tommy” Thompson, Jr., a certified financial planner with Innovative Financial Group in Atlanta. “Most people think it’s based on your last five years. I’ve been talking about Social Security for 18 years and every time I say this, someone is surprised!”
Your Spouse (or Former Spouse) Can Impact Your Benefit Amount
Thompson said it’s important to understand how benefits are calculated when you are the surviving spouse.
“When a spouse dies, the higher Social Security amount remains for the [surviving] spouse, assuming they were married for at least nine months,” he said. “Not half. Not both. The higher remains. Widows and widowers can claim as early as age 60.”
And if you are divorced, you may be able to claim your ex-spouse’s benefits.
“A divorcee can still claim on an ex-spouse’s record if: (1) The individual is at least 62, (2) they were married for at least 10 years, (3) the individual is currently unmarried and (4) the ex-spouse is receiving a benefit or has been divorced for at least two years,” Thompson said.
Social Security (Probably) Won’t Run Out
You’ve likely seen headlines about Social Security running out by 2035 — but this is a worst-case scenario and not something that should cause you to panic. However, you may need to adjust your retirement plans depending on how the gap in funding will be bridged.
“The death of Social Security has been greatly exaggerated,” said Paul Tyler of Nassau Financial Group in Hartford, Connecticut. “If Congress doesn’t add additional funds to the trust, payroll taxes on current workers will continue to support the program. However, the taxes would not fund 100% of the expected benefits. The gap could be closed by imposing means testing, deferring full retirement ages beyond 67 or increasing taxes on benefits. Any of these modifications would require many people to adjust their retirement plans.”
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