In this article, we will try to answer some of the big questions you have concerning Social Security, including our thoughts on whether it will be available for you in the future. Joe Beckford, CFP® Professional, and Lead Wealth Manager at Goodwin Investment Advisory exclaims, “Yes! Social Security will be there, however, there is uncertainty as to whether it will be there to the extent that everybody thinks and wants it to be.”
According to CNBC in an article titled, Will Social Security run out of money? Here’s what could happen to your benefits if Congress doesn’t act, “the recent 2022 Social Security Trustees report finds that in 2034, retirees will start receiving a reduced benefit if Congress doesn’t fix funding issues for the social program. In other words, Social Security will exist after 2034, but retirees will only receive 77% of their full benefit starting then.” This is alarming and disturbing for many Americans that have paid into social security for years and have planned for this money as part of their retirement plan.
Social Security’s role in your retirement
We encourage everyone reading this article to go to the Social Security website and establish your account and see what your benefits are anticipated to be. In the old days, the Social Security Administration used to mail out statements, but they’re saving money and they don’t do that anymore – so you have to establish an account online. When you do this, you will notice a disclaimer within your Social Security statement, and the topic is titled, Social Security Will Be There When You Retire. So that’s good to know that ssa.gov believes it will be there. But the disclaimer states, “Social Security taxes you pay go into the Social Security trust fund that is used to pay benefits to current beneficiaries.” This means that when it comes to receiving Social Security, you are relying on the next generation. The statement continues to say, “The Social Security board of trustees estimates that based on current law and underlying current trust funds we will be able to pay benefits in full and on time until 2034.” That’s in 11 years! So, what happens in 2034? The disclosure goes on to say, “In 2034 Social Security would still be able to pay about $780 for every thousand dollars in benefits scheduled.” To learn more check out the social security website at ssa.gov/thereforme.
So it seems that under the current law, if we don’t change the way we are doing Social Security or reform it in some way, retirees could receive about 22% less than expected. As America’s population is aging we have a larger percentage of people retiring now than we ever have which means more Americans are relying on Social Security. So something will have to change to ensure that full benefits will be available for you when you retire. Will Social Security in the US collapse? Joe Beckford believes that something will be done to make this better so that social security will last for all of us moving forward, but this is just an opinion and it is not currently guaranteed.
Due to the long-term uncertainty of Social Security and the fact that the average Social Security payment across the nation is $1500 (which is not necessarily enough to live on in the USA), Social Security can only be part of your retirement plan. $1500 a month is only $18,000 annually and this is not typically the amount of money you most likely planned for to have your dream retirement. For higher income earners who make an average of $150,000 per year, your Social Security benefits might be closer to $36,000 per year, but this will likely still not enable the lifestyle you dreamed of in your retirement years – especially if you enjoyed the lifestyle that came with the $150,000 level of income.
How do they determine how much you will collect from Social Security? When can you begin taking it?
The Social Security benefit payment that you will receive in retirement from the SSA is based on an indexed average of the income you earned during the highest paying 35 years of work – (This is called Average Indexed Monthly Earnings, or AIME) They use a calculation by taking your highest 35 years of salary and they determine a factor that you would be eligible to receive if you take it at your full retirement age which is currently 67. You can take it as early as 62, but then you’ll have a reduction in benefits that remains for as long as you take Social Security. Another option is to wait until you are 70 and then receive a bonus. (Technically the full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born in 1960 or later, full retirement benefits are payable at age 67.)
To begin receiving your Social Security you must meet specific qualifications. You must work 40 quarters. This means you need to work 10 years before you should expect to draw anything out of Social Security. If you don’t work and don’t pay into Social Security for 40 quarters, you, unfortunately, won’t qualify for Social Security retirement benefits. Even if you fall just one-quarter short, the SSA will not pay you retirement benefits. There are some exceptions to this rule. (see below in the FAQ section)
Is it a bad idea to take Social Security early at 62?
If you claim Social Security at age 62, rather than wait until your full retirement age, you can expect a 30% reduction in monthly benefits. This could be a huge loss for you especially if you do not have a large IRA, 401k, or other income streams. You will need to factor in this loss and determine if it is worth it. For every year you delay claiming Social Security past your full retirement age (67) up to age 70, you get an 8% increase in your benefit. This might be a great conversation to have with your advisor so they can take all of your retirement planning and goals into account.
Will Social Security be enough to live on?
The simple answer for most people is “NO.” The truth is that it was never intended to be. It was always intended to be an adjunct. It’s a safety net and another way of aiding in your retirement plan, so at Goodwin Investment Advisory, our advisors encourage clients to have diversified income streams in retirement.
Some ways to plan for retirement:
One way of creating an income stream is to have a rental property. Not all of you might want to be a landlord but there are a lot of ways to invest in real estate that don’t require you to be the one fixing the water heater. Consider all your options when it comes to real estate if you want to collect passive income in retirement.
Another way to plan for retirement is to make sure to max out your 401(k), your 403b, or any type of employer-sponsored plan.
Contribute to a traditional IRA and/or a Roth IRA.
In planning for your retirement you want to make sure you have a multi-prong approach. Therefore, as financial advisors, our excellent service goes beyond managing investments. Our value also lies in the ongoing and personal conversations that we have with our clients – to support, guide, and provide a personal and unique service to each individual client.
Some other FAQs you might be asking about Social Security:
What if you are a stay-at-home parent? Do you still get Social Security benefits?
If you are married and are a stay-at-home mom or dad, or you have little to no earnings history, you may still be eligible to receive a benefit up to half of your spouse’s Social Security.
What if I am self-employed?
If you are self-employed, you are likely going to have to pay a self-employment tax where Social Security is withheld from your paycheck.
What if I don’t pay into Social Security?
Some of you don’t pay into Social Security because of your profession. Typically you get a pension in lieu of Social Security so you have to be cognizant of that. For instance, there are some government jobs that don’t actually pay into Social Security. In such cases, you may not be eligible for Social Security.
Is passive income subject to self-employment tax?
Passive income is usually not subject to self-employment tax, so that kind of income falls into the same category as rental income. E.g. If you have a rental property, then that income doesn’t count towards your benefits, because it doesn’t factor into your income for those 35 years.
These perspectives are NOT intended to be a complete analysis of Social Security, and our comments are based on our experience and expectations. Goodwin Investment Advisory cannot guarantee any specific returns on investments or benefits from Social Security. Where we reference other sources, we do so in good faith, but GIA cannot guarantee the accuracy of those sources. GIA does not offer tax advice, and you should consult with your CPA regarding anything related to taxes. Each individual’s situation is unique, and therefore you should consult with your advisor to review your specific situation. Please contact us if you have any questions about this.