How to factor social security into retirement planning
Retire
Key Takeaways:
- Social Security is mostly funded by income taxes, which guarantees revenue for the program.
- Social Security had a reserve of $2.9 Billion in 2019. As the Baby Boomer generation retires, more workers are collecting benefits, and the program is tapping into those funds. If the reserve is fully depleted, payouts to retirees won’t stop, but they may be reduced.
- Because Americans are living longer and healthier lives, the retirement age to collect full benefits was raised from 65 to 67.
- Social Security benefits may be taxable, depending on your income and if you have alternate savings accounts – such as a pension, IRA or capital gains.
As you prepare for your future retirement, include Social Security benefits in your planning and budgeting. No matter how distant retirement feels, Social Security will still be around when you stop working, although it may look different than it does now. Understanding how the program works will help in your retirement decision-making.
Here are some key things to know about Social Security as you plan for retirement.
1. You’ll have Social Security when you retire
There are three main funding sources for Social Security. Income taxes are the biggest one, which make up 89% of the program’s total funding.1 This means that as long as people are working and paying their taxes, Social Security will have a reliable influx of money to keep the program running – and you should include it in your estimated retirement income.
2. Benefits are based on a 35-year span
Social Security benefits are based on your lifetime earnings and are adjusted to account for changes in average wages. To estimate what you may receive, the program bases your benefits on your 35 highest-earning working years.2 Even though retirement may feel far off, you can review your status and make sure your earnings are correct at the Social Security Administration’s website.3
3. Your payout may be reduced
Social Security is not going away.4 For decades the program usually took in more money than it paid out, and as of 2019, had a reserve of $2.9 trillion. With more people (including the baby boomer generation) retiring, those reserves are now being tapped.5 The number of retired workers receiving Social Security benefits increased from 33.5 million in 2009 to 45.1 million in 2019 – with growth holding steady year over year.6
At the current pace, reserves may be used up by 2035, but Social Security won’t end.7 The program will still pay out benefits from the money it receives from annual tax revenue. Those payments would be about 80% of what beneficiaries would normally collect if the reserves hadn’t been used.8 A financial planner can help you explore ways to supplement retire income from Social Security.
4. You’ll have to wait a bit longer for full payout
Since people are living longer and are generally healthier in older age,9 the Social Security Administration raised the full retirement age to 67 for people born in 1960 or later, up from 65.10 You can apply for benefits as early at 62, although your benefit would be reduced by 30%. On the other hand, if you can wait until age 70, you will get 124% of the monthly benefit because you delayed getting benefits for 36 months.11 Consider how each scenario might impact your retirement planning. Preparing for different outcomes now is the best way to help protect your savings – and peace of mind – down the line.
5. Account for taxes
Depending on your income in retirement, your Social Security benefits may be taxable. If Social Security is your only source of income, you may not have to pay taxes.12 However, if you receive income in addition to your benefits, such as receiving income from a traditional individual retirement account, capital gains or job earnings, your benefits may be taxed.13 If you file a federal tax return as an individual and your combined income is more than $34,000, up to 85% of your benefits may be taxable.14 One of the few income sources not considered taxable for Social Security purposes are qualified distributions from a Roth IRA.15
Having a strategy that makes the most of your Social Security benefits can help give you confidence for the years ahead. For further tips and financial advice about how to develop a plan for the future, connect with a certified financial planner today.
Citations:
1, 5, 7, 8 AARP: “How is Social Security funded?” February 11, 2021 https://www.aarp.org/retirement/social-security/questions-answers/how-is-social-security-funded/
2 SSA: “Your Retirement Benefit: How It’s Figured” by Social Security Agency, January 2021 https://www.ssa.gov/pubs/EN-05-10070.pdf
3 SocialSecurity.gov: “My Account” information collected from www.socialsecurity.gov/myaccount
4 AARP: “How much longer will Social Security be around?” September 22, 2020 https://www.aarp.org/retirement/social-security/questions-answers/how-much-longer-will-social-security-be-around/
6 Statista: “Number of retired workers receiving Social Security in the United States from 2010 to 2020” by Statista Research Department, January 19, 2021 https://www.statista.com/statistics/194295/number-of-us-retired-workers-who-receive-social-security/
9 SSA: “Retirement Benefits: Retirement Age Calculator” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/ageincrease.html
10 SSA: “Retirement Benefits: Starting Your Retirement Benefits Early” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/agereduction.html
11 SSA: “Retirement Benefits: How Delayed Retirement Affects Your Social Security Benefits” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/1960-delay.html
12 IRS.gov: “Are Social Security Benefits Taxable?” February 13, 2017 https://www.irs.gov/newsroom/are-social-security-benefits-taxable
13, 14 SSA: “Retirement Benefits: Income Taxes And Your Social Security Benefit” by Social Security Agency https://www.ssa.gov/benefits/retirement/planner/taxes.html
15 Investopedia: “Do Earnings from a Roth IRA Count Toward Income?” By Denise Appleby, April 8, 2021 https://www.investopedia.com/ask/answers/05/iraearningsmagi.asp
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