Planning for retirement has to start with Social Security. With rare exceptions — including railroad workers and certain local and state government employees — this federal system is the baseline retirement income guarantee for virtually all U.S. citizens.
But while it’s essentially universal, Social Security isn’t necessarily well understood. That means it’s wise to understand both the basics and some of the trickier wrinkles in how the system works. (In this article, I won’t touch on the disability income program that’s also run by the Social Security Administration; that has too many of its own complications to address here.)
What every retiree can expect is a regular monthly payment. Its amount depends on three factors:
- First: how much you and your employer(s) contributed to the system through payroll taxes during your entire working history.
- Second: your age at retirement. Full Social Security benefits now begin at age 67, though you can also opt for reduced benefits if you retire as early as age 62.
- Third: Annual cost-of-living increases, based on inflation and determined by a formula established by law.
One very important thing to understand about how your income history determines your benefit: it’s not a simple dollars-in/dollars-out tradeoff. Instead, a formula adjusts or “indexes” your actual earnings to account for how average wages have risen through your working years. One beneficial factor disregards years in which you might have earned significantly less than others.
Maybe those will include early years in which you might have worked part-time or summers while in college. Or later years if you got laid off or otherwise saw a drop in income. The formula considers only the 35 years in which you earned the most. The bottom line after all these calculations is your basic benefit, called the “primary insurance amount.”
That is what you can expect if you start collecting at “full retirement” age. That is 66 for people born before 1955 and 67 for those born after 1960. For those Baby Boomers born from 1955 to 1960, it’s a sliding scale that adds months between 66 and 67.
Tricky as that may seem, things get even trickier if you’re considering retiring early — or late. The minimum age to collect benefits, as noted already, is 62. But you also have the option to put off collecting benefits as late as age 70. Doing so will increase your monthly benefit amount.
Every five years, the Social Security Administration sends a statement to all workers who are still paying into the system. (It comes more frequently to those approaching retirement age.) This summarizes how much they have contributed through payroll taxes and projects what their benefit amount would be under “full,” early or late retirement scenarios. If you don’t have a recent copy of that statement, you can estimate your benefits using an online calculator at: https://www.ssa.gov/OACT/quickcalc/
This does not use your actual earnings history. Instead, it asks you to enter your most recent annual income and expected retirement date. That means the estimate works best for people with a fairly steady income; it may not accurately reflect the benefit for people whose income has fluctuated significantly or had major gaps, such as from periods of unemployment. One helpful feature, however, is the option to calculate benefits either in current dollars or in future, inflated, dollars. As with any look into the future, of course, predicting inflation is not an exact science.
When is the best time to retire, then? The simplest answer is: the longer you wait, the more money you’ll collect each month. But that hides some important complexities that I’ll address in a moment. Your answer should consider other factors, including other sources of retirement income, your retirement objectives, your health and life expectancy, even your ability to continue working.
The cost-of-living adjustments (COLAs in government-speak) are based on a specific measure of inflation, the Consumer Price Index for Urban Wage Earners and Clerical Workers. Each year’s COLA is calculated in time for adjustments, if any, to take effect with the December payment.
Most recently, that bumped up recipients’ monthly payments by 1.6 percent, effective December 2019. But the year before, with inflation low, there was no COLA.
Back to the question of when to start collecting: No single approach works best for everyone. Some advisors, for example, recommend projecting your life expectancy, based on your current health and your family history, so you can “guesstimate” how many years you might collect benefits. In some cases, collecting a somewhat lower monthly amount for more years may add up to a larger lifetime total. In those cases, starting to collect early may make sense.
Somebody who has been “downsized,” or as we have seen too frequently during the COVID-19 pandemic, lost a job due to business closings or cutbacks, may need the income badly enough that the reduced benefit is an acceptable price to pay.
On the other hand, since employers can’t impose mandatory retirement ages on most workers, it’s possible for many people to continue earning a salary — and paying Social Security taxes — through their sixties. Both the higher age and those additional contributions will mean a bigger monthly payment.
This is where it’s very important to emphasize: because whatever decision you make about this will lock you in for the rest of your life, it’s not something to take lightly. Ideally, you’ll work it out, with both your finances and your personal objectives considered, with help from a well-informed advisor.
A final, important consideration affects people who are married, have been widowed, or have been divorced. A spouse (sometimes even a divorced one) has a legal claim to a portion of the other spouse’s benefits. Here’s how that works.
To protect spouses (usually women) who did not have paid employment, or whose income was significantly lower than the other spouse, Social Security provides for an additional benefit, up to half of the higher-earning spouse’s benefit. To qualify, the lower-earning spouse must be at least 62 or be caring for a child under 16 or a child who’s drawing federal disability benefits. But now for more complexity! That lower-earning spouse may well get a higher benefit based on his or her own earnings.
When a Social Security recipient dies, immediate family members (spouse, minor or disabled children) are eligible for survivor benefits. Some survivor benefits are payable even if the person dies before beginning to collect on his or her own account. And a widowed spouse who remarries after age 60 can continue receiving those survivor benefits.
Finally, divorce does not leave a spouse out in the cold. If you are divorced, your ex-spouse can get benefits based on your earnings record, as long as the marriage lasted ten years or more. That protection for the “ex” applies even after your death or your remarriage.
To help you understand your eligibility and to decide when to start collecting Social Security, the investment and estate-planning experts at Old North State Trust can offer well-informed guidance about the ins and outs of this vital retirement program.
As Marketing Director, Alyce works to develop, budget, and implement marketing plans, which include advertising, coordination of conferences, special events, and development and maintenance of marketing materials. She also oversees the company’s website, in-house articles, and fostering community initiatives within the organization. Alyce received a BS degree in Interior Design from East Carolina University with a concentration in Business Administration and obtained her teaching certification from UNCW. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.