Social Security will be vital to most Americans at some point in their lives, so it’s worth learning more about it, whether you’re 60 or 36. Indeed, it provides about 30% of the retirement income of those older than 65.
Here, then, are some important things to understand about the program. See how many you know and how many are news to you.
If you’ve heard the term “Social Security” a lot but don’t have a good handle on what it is, know that it’s a program run by the Social Security Administration (SSA) to provide inflation-adjusted income in retirement to those who have worked and paid into the program. The hurdle is rather low, too — almost every retiree in America is collecting Social Security benefits.
Social Security is quite efficient, too, reportedly only spending 0.7% of annual benefits for administrative costs.
When Social Security is referred to as vital, it’s no joke: It literally keeps more than 20 million people out of poverty, per the Center on Budget and Policy Priorities.
According to the SSA, fully 12% of male beneficiaries aged 65 and older get 90% or more of their retirement income from Social Security, and that figure is 15% for female beneficiaries aged 65 and up. In 2020, the National Institute on Retirement Security reported that fully 40% of older Americans are relying solely on Social Security in retirement.
If you’ve been thinking that Social Security will deliver most of your pre-retirement income, think again. It was designed to provide much less than that, and the SSA recently noted that “on average, Social Security will replace about 40% of your annual pre-retirement earnings, although this can vary based on each person’s circumstances.”
The average monthly retirement benefit was recently around $1,841, or about $22,000 over a year.
You may collect much more or less than that $1,841 average, though — in part depending on when you start collecting your benefits.
Each of us has a “full retirement age” — at which we can start collecting the full benefits to which we’re entitled, based on the Social Security Administration’s record of our (inflation-adjusted) earnings during our working life. For most of us, it’s 66 or 67. (It’s 67 for those born in 1960 or later.) But you can start collecting Social Security retirement benefits as early as age 62, or you might delay, up to age 70.
Starting early means your checks will be smaller — though you’ll receive more of them. Delaying means your checks will be bigger — but you’ll receive fewer of them. The decision of when to start collecting Social Security is a big one, so be sure to read up on it before taking any action.
Here’s some good news: There are other ways you can increase your Social Security benefits. An obvious one is to earn more in your working life — because in general, the more you earn, the bigger your Social Security checks will be.
Aim to work for at least 35 years, too, because the formula the SSA uses to calculate your benefits is based on your (inflation-adjusted) earnings from the 35 years in which you earned the most. That means that if you work for 37 years, your two lowest-earning years will no longer count.
It’s worth keeping in mind, too, that Social Security benefits are not a gift from the government that can easily be taken away. All beneficiaries have earned their benefits, by paying Social Security taxes into the system throughout their working life. Check your pay stub right now: If you see a “FICA” deduction, it stands for the Federal Insurance Contributions Act and consists of 6.2% of your gross income going to Social Security and 1.45% going toward Medicare. That’s a total of 7.65% for you — and it’s matched by another 7.65% from your employer, for a total of 15.3%. (Self-employed folks have to pay the full 15.3%.)
Lastly, know that Social Security is facing some challenges, but don’t believe any headlines suggesting that it’s about to disappear, or that future retirees will get nothing. Remember that as long as there are workers, they will be sending taxes into Social Security’s coffers. In a worst-case scenario, there won’t be enough to pay full benefits to retirees, but there are lots of ways to shore up the program.
Also remember that Social Security will only provide some of the retirement income you’ll want and need, so be sure to save and invest for your future.
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