Understanding Social Security and How You Can Maximize Your Benefit

Our topic on this episode of the Ready for Retirement podcast is about understanding social security and what you can do to maximize your benefit.

Questions discussed: When should I collect Social Security based on my age and work experience? How is Social Security calculated? What % of my income in retirement should be funded by Social Security? What are the pros and cons of collecting Social Security depending on my age?

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Understanding Social Security and How You Can Maximize Your Benefit
  • Social Security funding
    • Social Security is funded through payroll taxes.
    • For 2021, the first $142,800 is taxed at 6.2% to fund Social Security as an employee and the business matches 6.2%. 
      • If you’re self employed, you would double that to 12.4% to pay taxes as both the individual and the business.
  • Calculating your Social Security amount
    • Your eligibility at age 62, your full retirement age (between age 66 and 67), and at age 70 is based off of a calculation where they look at your 35 highest years of earnings, starting at the first day you began working.
      • Wages you earned in 1980 are going to be indexed. 
      • $10,000 of wages in 1980 will go further than $10,000 today.
      • The maximum earnings Social Security is taxed on is $142,800.
      • Above $142,800, there is no additional Social Security tax.
    • Social Security is funded by 6.2% in taxes up to a base amount each year, which changes annually, and is based on your 35 highest years of earnings.
  • Earnings are means-tested
    • Example: If one individual earned $142,800 and another earned $71,400, if every dollar was used for your benefit, the person who earned half the benefit would then receive half of the amount of Social Security in retirement.
      • However, this isn’t how Social Security works.
  • Social Security is means-tested, which means the dollars earned early in your career are weighted more heavily in the calculation than the last dollars you earn.
  • For 2021, the first $996 are most heavily weighted in your Social Security calculation, from $996 – $6,002, 32% is included, and anything above $6,002 has a weight of 15% to your Social Security formula.
    • The dollars you earn earlier in your career carry more weight than dollars earned later in your career.
  • Primary Insurance Amount (PIA)
    • After your earnings are means-tested, you receive your PIA (Primary Insurance Amount) which is the amount you can collect at full retirement age, which is between 66 and 67 years old.
    • Your PIA (Primary Insurance Amount) is the sum of the three separate percentages of the different portions of your average indexed monthly earnings.
  • When can you collect Social Security?
    • You can collect as early as age 62 and as late as age 70.
  • How can you maximize your Social Security benefit?
    • Ensure you work for 35 years
      • If you work for 30 years instead of 35 years, Social Security assumes you  have 5 years of 0 earnings. Every non-year of work you have has a “0” being factored into your equation. 
      • Each additional year of work can greatly increase your Social Security over time, especially since the first $6,002 dollars that you earn will get you more credit in calculating your Social Security benefit.
        • Adding an additional year of work, even part-time, can add a significant impact to the way your Social Security benefit is impacted. 
    • Wait to collect if possible
      • Your Social Security decision should be made within the context of your overall financial plan, taking into consideration investments, savings, etc.
      • Every year you collect before your full retirement age, between age 66 and age 67, your benefit will decrease between 5% and 6.7%.
        • Social Security decreases on a monthly basis, pro-rated. 
    • Delayed retirement credits
      • If you wait after your full retirement age to collect, you receive delayed retirement credits.
      • Every year you delay after full retirement age, you receive an increase of 8%.
      • The longer you delay collecting, the higher your Social Security benefit will be.
    • Spousal Benefit
      • If you’re a married couple, you have the option of collecting 100% of your benefit or you can collect 50% of what your spouses’ full retirement age would have been.
      • For example, if one spouse never worked a day and another spouse worked the full 35 years, the spouse who never worked a day can still collect 50% of their spouse’s retirement.
        • This includes divorced spouses.
        • If you were married for 10 years and not remarried, you’re eligible for a spousal benefit on your divorced spouse (they don’t have to authorize or be informed about).
    • Survivor Benefits
      • If your spouse passed away, you’re eligible for 100% of their Social Security benefit as their survivor.
      • When it comes time to collect Social Security and you’re a surviving spouse, you can collect your surviving spouse’s benefit or your own benefit, and you have the ability to switch at a later time.
        • For example: You can collect your surviving spouse’s benefit at age 67, while your own benefit keeps growing at 8%/year. 
          • This allows you to maximize your benefit so you can switch to collect your benefit at age 70 if it is higher than your surviving spouse’s benefit.
    • Overview
      • Social Security shouldn’t make up the entirety of your retirement income plan, but maximizing your benefit.
      • Understanding how Social Security is calculated gives you the knowledge to make an informed decision when deciding when best to collect Social Security based on your age, working years, and the other benefits available to you.

Timestamps

1:56 – How Social Security Is Taxed

2:55 – Social Security Benefit Calculation

4:05 – How Earnings Impact Your Social Security Benefit

5:47 – What is “Means-Tested”

7:35 – Understanding How To Maximize Your Benefits

9:30 – How Part-Time Work Can Greatly Increase Your Social Security Benefit

14:00 – Delayed Retirement Credits

15:05 – Overview Of Social Security Benefits

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