As you save for retirement over the course of your career, you will probably wonder how Social Security benefits will help to supplement your retirement income.

Knowing the consequences of collecting Social Security at different moments throughout your life can help you plan your finances and ensure that you save enough for the retirement lifestyle you imagine.

How does Social Security work?

Social Security numbers are one of the most common forms of identification used in the U.S., but you may not understand the actual program behind these numbers. Social Security is a program that benefits U.S. workers who contribute to the fund throughout their working lives.

Did you know that the Social Security program was created by President Franklin D. Roosevelt in 1935? Since then, it has helped to provide workers and their families with retirement, disability, and survivors insurance benefits.

Have you ever noticed a tax on your pay stub labeled as Social Security or Federal Insurance Contributions Act (FICA)? This tax is how Social Security operates. Every time you get paid, a certain percentage of your paycheck goes towards Social Security benefits for people who are eligible.

However, money for Social Security doesn’t only come from you – your employer matches your contribution to Social Security as well. In 2019, the tax rate on earnings for Social Security is 6.2% for employees and 6.2% for employers, a total of 12.4%. This money goes to the Social Security fund, where it is used to pay out benefits for people who are eligible. The idea is that by the time you are ready to retire, other taxpayers will continue to fund Social Security so that you are also able to collect benefits.

If you are an independent contractor, you won’t have Social Security taken out on your pay stubs. Rather, you will calculate a “Self-employment tax,” which includes Social Security when you file your taxes.

When should I collect Social Security?

Choosing when to retire is an important and personal decision, partly because it can affect how much Social Security you receive in retirement. You can take out Social Security before or after reaching your Full Retirement Age (FRA). 

Retiring at the same age as your FRA entitles you to full Social Security benefits. The year in which you were born provides a rough estimate of your FRA.  

Taking out Social Security before your FRA will most likely decrease your monthly payments, whereas waiting until after your FRA will increase them. While this is a rough estimate, it can help you plan for retirement. 

  • 1942 or earlier: Age 65
  • 1943-1954: Age 66
  • 1955: Age 66 and 2 months
  • 1956: Age 66 and 4 months
  • 1957: Age 66 and 6 months
  • 1958: Age 66 and 8 months
  • 1959: Age 66 and 10 months
  • 1960 or after: Age 67

Can I rely on Social Security as my retirement plan?

You might be wondering if you can use Social Security alone as your retirement plan. The short answer is no. Why not?

Let’s look at a hypothetical scenario.

Let’s say you earn $55,000 per year. Experts recommend saving 80% of your current annual income for retirement. That comes out to about $3,666 per month before taxes. Let’s see how much your Social Security benefits will cover using the average Social Security benefit of $1,503. Social Security will only cover approximately one third or $2,163 of your monthly income goals.

Many of today’s seniors use Social Security to pay for retirement expenses. However, Social Security was only designed to supplement retirement income, not to replace it.

The Social Security Administration predicts that benefits will drop by 20% after 2035. If you plan to retire after that date, do not worry. There is still time to build savings towards your retirement.

How much do I need to save for retirement?

Assume you’ll need 80% of your current annual income each year that you are retired, and that you will be retired for 30 years. You can estimate your retirement needs in a few simple steps. 

Let’s say you earn $55,000 per year. Your retirement savings goal would be $1,320,000.

Knowing your retirement savings goal is an important step in planning for your future. Checking if you are on track to reach that savings goal will help you find and make financial decisions that fit your needs.

Can I work and still get Social Security?

You can work while you collect Social Security. Many people do this to delay retirement and earn more money for it. But doing so may affect your benefits.

  • If you are still working when you receive benefits: Your benefits could decrease. If you are younger than Full Retirement Age and make more than the yearly earnings limit, your earnings may reduce your benefit amount.
  • If you still have a substantial income when you receive benefits: Your benefits could be taxed. You may have to pay income taxes on the benefits you receive if your combined income is more than the yearly limit.
  • If you are still working at or after Full Retirement Age: Your benefits won’t be affected. When you reach Full Retirement Age, your earnings no longer reduce your benefits, no matter how much you earn but your benefits may still be taxed.
  • If you are making good money up to retirement: Your benefits could increase. If your earnings for the prior year are higher than one of the years used to compute your retirement benefits, your benefit amount should increase.

Social Security key points

There are lots of important considerations to think about when collecting Social Security. Here are a few key points to keep in mind.

  1. Collect strategically: You should know that the timing of when you decide to collect your benefit will affect how much money you receive. Waiting until your Full Retirement Age will entitle you to full Social Security benefits.
  2. Plan accordingly: Social Security is not intended to be your sole source of retirement income — rather, it is intended as a supplement. Be sure to save for retirement outside of Social Security, using accounts such as 401(k)s, IRAs, or others.
  3. Plan to collect: If you are planning to collect Social Security soon, consider whether it makes sense to wait for Full Retirement Age so that you can collect your full entitlement or to even delay until after Full Retirement Age.

Next steps

  • Plan carefully: When planning for retirement, Social Security should only be treated as supplemental income and not as your entire retirement savings plan. Make sure you explore other savings options.
  • Estimate your benefits: Consider setting up an account on the governmental Social Security website, which will help you to estimate your expected benefits.
  • Set savings goals: The younger you are, the more you may need to invest in retirement outside of Social Security. To know how much you should be saving, start by determining your total retirement savings goal.

The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.

Article written by EVERFI

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