We all know something about social security. Namely, that we pay into it and we will get something out of it in retirement. But understanding how it works beyond that most basic level is important for retirement planning. For reasons I explain below, social security shouldn’t be the only thing you count on for retirement. Furthermore, when you start claiming social security benefits also matters. Here are the basics of social security claiming strategies.
What is social security?
This might seem like too basic of a question, but it is important to understand. “Social Security provides retirement income for almost every American worker,” according to the Social Security Administration. “Almost” is a key word in that sentence. To be eligible for social security income, you need at least ten years of eligible work (i.e., that you have paid into the system). Furthermore, certain types of work, including jobs with government pensions, self-employment, and military service, have additional rules when it comes to social security. Understanding what your social security payments look like well before you retire will help with your retirement planning.
What is Full Retirement Age and how does it impact your social security?
“‘Full Retirement Age’ is a point in time between age 66 and 67, which we use to determine your benefit amount,” writes the SSA. FRA is dependent on your birth year, and the SSA has a calculator to determine what your FRA is. However, you can start taking your social security benefits before you reach full retirement age, after age 62. But, the longer you wait between 62 and FRA, the higher your benefit amount will be. Although when to start taking benefits depends on your unique situation, it is often better to take these benefits later.
How much is social security?
Your social security payments not only depend on when you start taking them (before or after FRA), but what you have earned during your work history. This means that the amount you get from social security is unique to you. The average retirement benefit as of February 2023 was $1,781.63 a month. For many individuals, this is not an amount that will provide them with the retirement lifestyle they want. Many people also rely on retirement income from 401(k)s, IRAs, or other retirement accounts.
How does employment impact social security claiming?
If you decide to start taking social security payments before your Full Retirement Age, the SSA imposes an earning limit and may decrease your benefit payments if you earn more than that limit. For example, if you are born on December 30 1961, your earning limit is $21,240 annually and the SSA will “deduct $1 from your benefit payments for every $2 in wages you earn above the annual limit.” However, you can earn as much as you like after you reach your FRA without reducing benefit payments.
Social security is important to understand as one of your sources of income in retirement. As always, please contact us if you have any questions about your investments, retirement, financial plans, or social security claiming.
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