We all pay into social security, but very few of us understand how social security works. In this update, I provide a very quick overview of social security, the basics of social security retirement payments, and provide information on how to access your social security statement.
Eligibility for Social Security
One has to work and pay social security taxes for 40 quarters (10 years) to be eligible for social security payments. There is a cap on the amount of your income that is taxable for social security; in 2022, only the first 147K of your yearly income is subject to social security tax. Everyone will get a different social security payment based on how much they have contributed during their working years.
If you are 60 or older, social security mails you a statement of your account three months before your birthday. Otherwise, everyone has access to their social security statements through a "my Social Security" account.
You can sign up for your account here: https://www.ssa.gov/benefits/retirement/
Your statement will confirm how much you have contributed to social security and confirm your social security payments at full retirement age.
Social Security Payments
The amount of your monthly social security payments in retirement is based on two main criteria:
- your age when you start receiving social security payments
- your total contribution into social security over your working career
There's the normal age to start receiving social security payments, called the full retirement age (FRA), determined with your year of birth. However you can start withdrawing as early as 62 from social security with reduced payments.
For example, someone retiring this year will have the following maximum benefits:
2022 - FRA (Full Retirement Age = 67) - Maximum is $3345
2022- Age 62 - Maximum is $2,364 (~28% less)
2022- Age 70 - Maximum is $4,194 (~28% more)
A good rule of thumb is that for every year that you take your Social Security Benefits (SSB) early, the payments are reduced by 7%. In the above example, if you take your SSB at age 62, which is about 4 years before full retirement age of 67 (FRA), the payments are reduced by 4x7% or approximately 28%.
Also for every year that social security is delayed, you increase your yearly pay by 7%; delaying SSB till age 70 increases payments by 4x7% or approximately 28%.
Food for Thought
Deciding whether to take social security benefits early is a complex analysis taking into account life expectancy, investment rate of return, needs for the funds, availability of other retirement options, medical history, and so on. As explained in this Barron's article, due to an aging US population, younger workers (millennials) face the prospect of a 23% cut in social security benefits unless Congress acts in time. This uncertainly and risk means millennials should take advantage of other retirement saving options like 401ks, 403b, and various IRA accounts to save for retirement.
Let us discuss this further if you would like to explore retirement planning, what to expect and whether to take social security benefits early. However, the first step you take is to open a free account and review what is your FRA (Full Retirement Age) and the expected payment. I say "expected" because there is no guarantee that social security benefits will continue to be fully funded in the future.
All the best.