How does Social Security work, and will it be enough to support me in retirement?
If you’ve asked yourself these questions, you’re not alone. Social Security benefits have been a cornerstone of retirement planning for millions of Americans, but the details can be more complex than they seem.
Since Social Security started in 1935, it’s provided a financial foundation for retirees across the U.S. However, truly understanding how Social Security retirement benefits work can greatly impact how confidently you set yourself up financially for your future.
Whether retirement is right around the corner or still years away, here are five important facts about Social Security benefits that can help you make smarter retirement decisions.
1. The Social Security Benefits Trust Fund is Huge
The Social Security trust fund holds over $2.7 trillion in total asset reserves, making it one of the largest government-managed funds in the world. 1
But the key takeaway for your retirement planning is this:
Even with such a massive fund, Social Security benefits weren’t designed to cover all your retirement expenses.
Social Security Wasn’t Meant to Cover Everything
Try to think of Social Security as the foundation of your house, not the full structure. Therefore, building additional savings and investments is vital if you want the long-term financial security you deserve in your retirement.
2. Social Security Coverage Has Changed Over Time
Today, most workers qualify for Social Security benefits, but that hasn’t always been the case. When Social Security was established, many workers were excluded. Over time, however, coverage expanded. Although, even today, some federal employees hired before 1984 were part of the Civil Service Retirement System (CSRS) and paid into a different retirement system.2
Understanding your coverage affects your retirement planning
Your Social Security benefits depend on your work history and contributions. So, if you’ve worked in both private and public sectors, for example, your benefits may be impacted. That’s why it’s important to regularly review your Social Security statement and understand where you stand. This way, you can adjust your retirement strategy accordingly.
3. You Only Need 10 Years of Work to Qualify
Perhaps one of the most surprising answers to “how does Social Security work?” is that you don’t need to have worked a full career to qualify for Social Security benefits. Eligibility is based on a credit system. You typically need 40 Social Security credits (about 10 years of work) to qualify for Social Security retirement benefits.3
Your benefits claiming strategy impacts your financial picture
While 10 years of work qualifies you, your Social Security benefits are calculated using your highest 35 years of earnings.3 Generally the more years you work and the higher your earnings, the higher your potential monthly benefit amount. This can play a big role in deciding at what age you plan to retire.
4. Your Social Security Benefits May Be Taxable
A common question we often get asked is: “Are Social Security benefits taxable?”
The answer is, yes, they can be, but they weren’t always.
Social Security benefits became taxable after amendments to the Social Security Act passed in 1983. They took effect with the 1984 tax year.4 Since then, retirement benefits may be subject to federal income taxes depending on your total income. This includes your adjusted gross income, non-taxable interest, and half your benefits. At higher income levels, up to 85% of your Social Security benefits may be taxable. 4
How your benefits withdrawal strategy influences your tax situation
Understanding if your Social Security benefits are taxable, and how much, can help you greatly aid with retirement planning. Your withdrawal strategy, income sources, and even the age you claim benefits can all impact your tax situation.
5. Cost-of-Living Adjustments (COLA) Help Offset Inflation
Today, Social Security benefits include automatic cost-of-living adjustments (COLA) to help keep up with inflation. However, before 1975, increases weren’t automatic but required Congressional approval. Each year, the Social Security Administration reviews changes in the Consumer Price Index (CPI) and determines whether a COLA increase is necessary.5
What cost-of-living adjustments mean for your financial future
While cost-of-living adjustments help offset inflation, it may not fully cover rising expenses like healthcare costs. These costs often increase more rapidly than general inflation. For this reason, it’s important to view Social Security as just one part of your overall retirement planning strategy. You’ll likely want to augment your funds with savings, investments, or other income sources to help you maintain your lifestyle throughout retirement.
Social Security Benefits are a Key Source of Retirement Income
For many Americans, Social Security benefits are a major source of retirement income. In fact, according to results from Bankrate’s Social Security and Retirement Savings surveys, about 78% of retired Americans are reliant on Social Security benefits to pay their necessary expenses.6
Nevertheless, Social Security alone typically isn’t enough to cover all living expenses in retirement. The key to confident retirement planning is first, understanding how Social Security works. Then, you can begin using the insights you’ve gained to create a well-rounded retirement plan. A sustainable retirement plan may not only help maximize your benefits but also support a comfortable lifestyle.
Smarter Retirement Planning Starts Now
The more you understand your Social Security benefits, the better prepared and more confident you’ll be to make informed decisions about your future.
If you’re not as prepared for retirement as you’d like to be, or you’re unsure where to start, our Financial Consultants are here to help! Together, they’ll work with you to build a personalized retirement strategy that aligns your Social Security benefits with your long-term goals and sets you up for success.
Citations:
1 https://www.ssa.gov/OACT/STATS/table4a3.html
2 https://www.fedweek.com/ask/federal-retirement/
3 https://www.ncoa.org/article/navigating-social-security-when-and-how-to-apply-for-benefits/
4 https://www.congress.gov/crs-product/RL32552
5 https://www.ssa.gov/OACT/COLA/colasummary.html
6 https://www.bankrate.com/retirement/retirement-savings-report/?mf_ct_campaign=graytv-syndication
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
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