What is Social Security & Social Security Tax

 

What is Social Security?

Social Security is a critical part of most people's retirement plan. The Social Security Administration says that about 40% of your pre retirement income will get replaced with your Social Security benefits. 

So it's really important to understand how this works. Now, there's a nice checklist that goes over the basics of Social Security, and we're going to walk through that in the next couple of minutes, I'm not just going to read it to you, but I'll try to provide some additional context, and we'll drill down into some numbers that hopefully help paint the picture of what is Social Security might do for you in retirement. 

By the way, I'm Muhammad Asim, and I help people plan for retirement. Be sure to check my whole website and subscribe to me on YouTube, as well as a link to the document we're walking through right now. 

One thing, this is not just a set program that you get... Yes, there are certain rules and restrictions, but you get to make some choices and that includes when you take benefits, that might include How long you keep working, which helps to build up your benefit to the extent you have control over that, and then the type of benefit you choose is also possibly in your control. 

One of the main things to understand is the full retirement age, now, this doesn't mean when you're allowed to retire, you can retire at any point, but when you reach your full retirement age, that means that your benefits don't necessarily get reduced for early claiming or for certain earnings that you get if you continue to work after you take benefits. 

For most people approaching retirement these days, the full retirement age is age 67, but it's always smart to check with the Social Security Administration and find out exactly when your FRA or your full retirement age is. 

You can actually take benefits anytime between age 62 and age 70 for most people, now claiming early at age 62 means you'd get a reduced benefit that's also called Early claiming, and that can make sense in some cases, but in a lot of cases, it helps to... Wait until your full retirement age or even to delay taking your benefits. 

Example of FRA (Early & Delayed claiming)

So they provide an example here, we use $1,000 as your benefit at full retirement age of 66, $1,000 is a nice round number to work with, if you were to claim at age 62, your monthly benefit would be $750, that's a reduction of 25% and that payment for the rest of your life. 

So instead of getting a thousand bucks a month, you get $750, on the other hand, if you were to wait until age 70 to claim, you would get $1,320 per month. That's a 32% increase. Roughly 8% per year for four years. 

In this example... And that certainly helps. One of the reasons those delayed retirement credits[or those increases that come when you wait beyond your full retirement age] are so important is that they can go on to your surviving spouse, they get to take that increased benefit for the rest of their life if you die first. 

So it's significant to consider who else might be relying on you when you take your benefit... Again, this is just an example, so check your own statement and log in to the Social Security's website, SSA.gov, to look at your own individualized numbers, and work with a financial planner if you want to get some projections on how things might unfold in the future. 

The amount you actually get is going to depend on your work record, so that includes how many years you worked and what your earnings were during those years to hire your earnings, typically the higher your Social Security benefit, at some point you get capped out, and those earnings don't count, but for many people, it's the 35 years that you learn the most that go into your calculation. 

LifeTime Income

So a higher number can help bump up what you get each month in your Social Security benefits, and Social Security is a lifetime income. So if you're concerned about running out of money, perhaps spending down the assets you have saved up for retirement, Social Security can help mitigate that risk, that's because the payments continue to come to you, that's why your claiming age is so important. 

It's a decision that you might make in your 60s, but that's going to affect you for the rest of your life, which could be several more decades, so it can be tempting to take that income early, and sometimes... Again, that makes sense, but if you delay, you get a bigger payment for the rest of your life. 

Speaking of the rest of your life, there may be some inflation over the years and prices may rise over time, and your Social Security benefit is adjusted for inflation. 

You get cost of living adjustment COLA or "COLAs" that can increase your benefit along with inflation, those adjustments don't always keep up with every type of inflation such as health care in your later years, but they do help you keep your purchasing power over time, and it's one of the few places you can get an inflation adjusted payout that lasts for the rest of your life, it's hard to find that with privately purchased annuities, for example, they get very expensive, if they're even available.

What is Social Security Tax?

Like many other forms of income, your Social Security benefits might be taxable. Now, if it's your only source of income, you just get Social Security, it's not likely that you would pay taxes, but if you have other sources of income, including withdrawals from pre tax retirement account, like an IRA, a traditional IRA or a 401k. 

For example, those can cause your Social Security benefits to become at least partially taxable, so you want to plan for that as you look at your income, and it might make sense to arrange for other types of income that don't cause your benefits to become taxable. 

For example, if you take withdrawals from a Roth IRA, those would generally not under current law, cause your Social Security benefits to become taxable, so that's a good reason to look at Roth accounts for your future planning, you don't necessarily have to stop working when you take your benefits. 

However, you want to be careful in the years before you reach your retirement age. Social security may hold the portion of those earnings and you might get those back later, but that can be a surprise to some people in the year you reach full retirement age gets a bit more forgiving and after you reach full retirement age, you can continue to get your benefits and earn income without any reduction in your benefits, but be aware of taxes, in fact, working might help you secure a bigger benefit. 

Again, they look at your highest 35 years of income, and so if you are later in life in your higher earning years and you continue to work and earn a good income, that can potentially bump up the numbers that go into the calculation for your earnings, if you're going to use Medicare as most people do around age 65, it's important to stay on top of the enrollment date, that's because the penalty for enrolling late is steep and at lasts for the rest of your life, especially if you're going to take Social Security benefits after age 65, it's critical to sign up for Medicare. 

Start that process three months before your 65th birthday again for most people, and that way you can avoid those penalties if you get it done on time. For many people, Social Security is just a retirement benefit, but there are also benefits for other family members and for those with a disability, qualifying for Social Security Disability benefits is difficult, it's not necessarily the same as qualifying under your private policy that you might have purchased on your own or that you have through a job, but there are benefits for those who are unable to do any kind of substantial work, and if that disability is expected to last for more than a year. 

So if you have a disability that affects your work, be sure to speak with an expert... Possibly an attorney who can help you with the process of applying for benefits. When it comes to retirement planning, Social Security is a big deal for married couples, that's because spouses get a benefit, it goes off the other spouses work record, and in some cases, both spouses work and they have a nice benefit, and you can make some decisions about when each of you claims based on what's best for your household. 

But even if one spouse never worked, that person can typically get half of the working spouse's benefit based on the working spouse's work history, and if one of the spouses dies, the surviving spouse typically gets to step into whatever the bigger benefit was for the household, and that can provide some financial relief, and that's why once again, it's really important to think about any surviving spouse, if you die first will you leave them with a reduced benefit or will you leave them with an enhanced benefit that has been bumped up with the late retirement credits? 

Government Pensions

For many people, Social Security is the primary or the only source of guaranteed retirement income, but if you worked for a government body you might have a different system, for example, if you were a teacher in a local school district, perhaps you didn't pay into Social Security, but you have a pension instead, or you might have a pension plus Social Security, if you did indeed pay into Social Security during those years, it's important to understand what benefits are available to you and what types of payments you've been making into different pension systems, in some cases, your Social Security benefit could be adjusted or eliminated entirely based on income you get from a pension, from your government jobs. 

So be sure to ask your employer, your former employer, how that works, do you need to be concerned about those types of adjustments and what can you expect when it comes to retirement income? 

The Social Security Administration stresses that your benefits shouldn't be your only source of income, you typically need assets to draw from to help supplement those benefits, and with the benefits you get plus the withdrawals from your retirement savings. 

For example, then you can have an income that supports the standard of living that you want in retirement, so it's important to make smart decisions about your Social Security, but it's important to look at other aspects of your retirement plan such as how much you're saving, how you're investing it, and how you might turn that into an income that can support you during your retirement year. A financial planner can help you with that, or you can do more research on your own.

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