Social Security isn’t talked about much in the FIRE community, and even Millennials/Gen Xers who plan to retire at a traditional age generally distrust the notion that it will even exist to provide benefits when they retire.
But even if you think your benefit will be small, you should be informed about the program to ensure you get any and all benefits owed to you.
I also have a personal interest in this, as my mom is approaching an age where she needs to shore up her strategy for taking benefits. It’s essential for her to make the right decision as Social Security will be a significant part of her retirement income.
I recently read the book Get What’s Yours to better inform myself about Social Security. Here are some of the biggest takeaways.
Only 1 to 3 percent of people wait until age 70 to take their Social Security benefit. For most (but not all) retirees, waiting until age 70 generates the largest benefit. The age 70 benefit is 76% larger than at 62 and 32% larger than at 66. Delayed retirement credits of 8% are added to your benefit for every year you wait to take benefits past your full retirement age (FRA). For reference, people starting to take benefits now generally have a FRA around 66. Delaying benefits from a FRA of 66 to age 70 in this case results in a guaranteed 8% annual return for 4 years!
Interestingly enough, a recent study by Stanford economists suggests that most of the rich do what everyone else does – take their benefits as soon as they get them.
Social Security benefits are based on your top 35 earnings years. Earnings up to age 60 are indexed to reflect the rise in average wages each year. In other words, that $20,000 salary you made 35 years ago, after being indexed, would look more like $50,000 – 60,000 in current dollars.
For early retirees with less than 35 years of earnings, the remaining years would clock in at zero. So while an early retiree’s benefit would be lower, they WILL still see a benefit.
The benefit formula is progressive. Social Security provides a higher income replacement percentage for lower income earners. In 2016, the ‘bend curves’ were as follows:
- 90% of first $856 of monthly earnings base
- 32% for monthly earnings from $856 to $5,157, and
- 15% of the monthly earnings base over $5,157
So in a simplified example, someone with an average annual income of $40,000 could expect to get a monthly benefit of $1563 (a 47% income replacement ratio), while a person with average annual earnings of $80,000 could expect a monthly benefit of $2373 (a 36% replacement ratio).
Social Security provides a wide array of benefits. You may be able to get benefits that aren’t based on your own earnings record. Benefits may be available to spouses, ex-spouses (if married 10 years or more), children, surviving spouses, and divorced surviving spouses. Your parents may even be eligible for a survivors benefit, should they be your dependents at the time of your death.
Social Security also pays out benefits to qualified workers who have been determined to be disabled. A disabled individual taking Social Security may also be eligible for benefits for his or her family.
Deeming is no longer allowed. Some Social Security rules were changed in 2015. If you are eligible to take both your own benefit and a spousal benefit, if you now take your spousal benefit you are also “deemed” to be taking your own retirement benefit. Social Security will pay out the larger of the two values; unless you were grandfathered in, you can’t take a spousal benefit and let your own benefit grow. This does not apply to survivor or divorced survivor benefits. (This is the strategy my mom plans to use – she will take her survivor benefit and let her own benefit grow until age 70).
A portion of your benefit may be taxable, if your combined income exceeds certain thresholds. The thresholds are not very high, so many retirees are paying taxes on at least a portion of their benefit. However, you will never pay federal income tax on more than 85% of your benefit.
Protect yourself from mistakes. When filing for your benefit, the authors recommend putting notes in the Remarks section of the application to indicate the specific date you want to have your benefit begin and which benefit you are taking. If you don’t specify, and you are filing after FRA, they will automatically provide you with retroactive benefits up to 6 months, which could impact your delayed retirement credits (and thus the amount of your benefit). Make sure to get a copy of the signed and dated application.
Social Security will still be there for Millennials. Even the most pessimistic forecast indicates that at least 75% of the benefit should still be available.
Statements can be found online. Social Security stopped mailing annual statements in 2011. You can create an account at http://socialsecurity.gov/myaccount. Check your earnings history to make sure it’s accurate!
What are your thoughts on Social Security? Is it part of your retirement plan? Or are you excluding it from your retirement planning considerations?