What is Social Security and how do I make it work for me?
What Is Social Security, And How Do I Make It Work For Me?
Social Security is such an important, but confusing, pillar of personal finance, that prompted me to write about in an educational, non-jargony way. Please note, while I refer to various sources, I did not use AI to write this.
1️⃣ So What IS “Social Security” Exactly?
2️⃣ What Do I Need To Know NOW?
3️⃣ How Do I Make It Work For Me To Maximize My Potential Social Security Benefit?
1️⃣ So What IS "Social Security?"
What we call “Social Security”, is more precisely known as OASDI, or rather, Old-Age, Survivors, and Disability Insurance. It is a federal insurance program that provides benefits to retired people and to those who are disabled.
According to the Social Security Administration, “Social Security has provided financial protection for our nation's people for over 80 years. Chances are, you either receive Social Security benefits or know someone who does. With retirement, disability, and survivors benefits, Social Security is one of the most successful anti-poverty programs in our nation's history.”
The Administration goes on to say, “We are passionate about supporting our customers by delivering financial support, providing superior customer service, and ensuring the safety and security of your information — helping you secure today and tomorrow.”
And if you’d like even more information regarding the structure and organization of the Social Security Administration, refer to this document.
2️⃣ What Do I Need To Know Now?
Let’s get back to deciphering what this all means, what I need to know now, and how it impacts me (and your family if you’re married with children).
When we start working in the US, we typically pay employment taxes, also known as payroll taxes, or FICA taxes. Even young workers, such as your teenager who lifeguards at the pool or works in a café, may see these taxes withheld from their paychecks.
Let’s start with FICA which stands for the Federal Insurance Contributions Act.
FICA is actually a federal payroll tax – so sometimes you’ll hear people refer to FICA as the FICA tax. Our employer pays half of the FICA tax, and we pay half . In other words, we pay 6.2% (each) or 12.4% total.
More precisely, this means, that 12.4% of our wages is subtracted directly from our paychecks and sent to the government to fund two buckets. It is important to note, that if we’re self-employed, we are responsible for both halves of the 12.4% FICA tax – or the 12.4% total. We do get to deduct one half of this tax from our adjusted gross income at tax time.
Returning to the ‘buckets’ mentioned above -- these 2 buckets are called “Trust Funds” and are explained below:
OASI = Old Age and Survivors Insurance; this bucket, or trust fund, pays benefits to retirees, family members, and survivors.
DI = Disability Insurance; this bucket pays benefits to workers with disabilities, and their families and survivors.
There is a third part of our FICA which is also known as a Medicare tax. Both employer and employee pay 1.45% towards the Medicare system – which offers retirees medical coverage starting at age 65. Same thing applies here for self-employed – we pay both parts, so the full 2.9%.
Another thing to note, is that we pay the 12.4% FICA tax only on wages up to a certain amount each year. For the tax year 2024, that limit is $168,600. Once our wages go beyond that, we no longer owe the 12.4% for the income earned above $168,600. This limit is raised each year based on inflation data. As a reference, for 2023 the earnings base was $160,200.
This does NOT hold true for the 2.9% Medicare tax, however. We continue to pay that 2.9% on every penny of our net earnings.
Let’s take a break and talk about the Social Security trust funds – will they run out? Should young earners worry? There are so many ways to prolong the solvency of the trust funds – we just need politicians to act. This doc does a great job explaining the pros and cons of removing the cap, or upper limit, on the earnings that get taxed.
When my clients are conservative about their social security income they will receive in decades, I do not believe we should be removing them completely from their plan. If we don’t increase the limit on income that gets taxed, then perhaps we’ll see a lowering of benefits being paid out, but those benefits will certainly not be eliminated completely.
So young workers, and self-employed workers, SHOULD be aware of the income they earn that gets taxed. They will receive a benefit down the road.
Self-employed people often get steered towards minimizing current income now, to avoid paying these taxes. There are some benefits to that, but it also minimizes what you’ve paid into the system, and you’ll see lower income benefits paid out in retirement. Accountants and tax prep professionals are most often reporting on what has happened in the past, and not projecting or strategizing regarding how your TODAY choices may impact your TOMORROW outcomes. That is why I love bridging the gap. As a financial planner and enrolled agent (tax preparer) I help my clients evaluate the best options for TODAY and TOMORROW.
Ok, so now we know how we’re taxed, and how the Trusts are funded from the taxes we pay.
3️⃣ How Do I Make It Work For Me To Maximize My Potential Social Security Benefit?
When thinking about how I can maximize my potential Social Security benefit, there are 3 main points to consider:
I must work for at least 10 full years – accumulating 40 quarters of income history.
The highest 35 years of earnings are used to calculate my benefit.
If you’d like to receive the MAXIMUM amount of Social Security Income benefit in retirement, then you should aim for earning more than the contribution and benefit base for 35 years.
⭐️ It Is SO Important To Note That People Typically Underestimate The Potential Positive Impact That Social Security Income Can Make On Their Long-Term Financial Planning Success.
I’ve been financial planning for many years, and it is quite common for clients to underestimate the potential positive impact that Social Security can make on the success of their financial planning goals.
Many people are not aware of how much income they may potentially earn in retirement, from Social Security. Check out these figures – in text and in a chart below:
In 2024, if you had earned the max each of 35 years, and waited until age 70, your monthly benefit would be $4,873, or $58,476 annually! And even if you started at age 62, which is the earliest age you can start receiving your Social Security income, your monthly benefit would be $2,710 monthly, or $32,520 annually. I don’t know anyone would balk at receiving $32k - $58k/year in retirement, for perpetuity, and with inflation raises!
Sometimes visuals are easier to comprehend – so I ran a chart showing the annual incomes from Social Security, if we maxed out our earnings record, and started taking income in 2024, at the various options for our ages. You can see that by waiting until age 70, we can almost double what we will receive for life, over what we would receive if we took at the earliest claiming age possible.
🤔 So When Should I Start Taking My Social Security Income?
As we mentioned above, the earliest you can ‘claim’ or start receiving your Social Security benefit is when you’re 62.
In 2022, 22.9% of men and 24.5% of women who qualified for Social Security retirement benefits chose to start collecting at age 62, the earliest possible age. This number has decreased, however, over the past decade. For example, in 2014, 34.5% of men and 39.7% of women began receiving benefits at age 62.
I think a large reason is that people have increased their knowledge about the importance of waiting to start claiming, which is great.
You can claim anywhere from age 62, to age 70 (it doesn’t make any sense to wait longer than age 70 to claim, as your benefit stops increasing). This is a VERY important decision to make, that you want to go into with your eyes wide open.
There are many factors that should be considered when deciding at what age to claim your benefit. These include:
Your health and family history of longevity
Your other income and assets
Your continued income-earning potential and desire
All of the above for your spouse, or ex-spouse if you were married 10 years and not remarried
📊 If you work with me, I can help you decipher your options considering your thoughts on the 4 topics above. You should have your current estimate. If you don’t already have an account at the Social Security Administration, you can create one here.
Once you have your estimate and your spouse’s estimate, I have the data to analyze. I create a report that looks like this sample.
Many studies suggest waiting until age 70 may provide you with the highest lifetime benefit. But every client is different, and there may be good reasons to claim earlier.
🙋🏻What IS important, however, to make your decision based on sound reasoning, and knowledge around the impact of your choice. I always recommend working with an advisor who can help educate you on the pros/cons of your various options.
If you'd like to discuss your own 🐝 financial beehive and/or Social Security 📲 Schedule time with me here.
Wishing you peace, love and a FUN SUMMER!🌻
🧠 Please note, this is original content written by ME, not AI.
Sources:
https://www.ssa.gov/people/materials/pdfs/EN-05-10297.pdf