Social Security

Social security is a central component of many individual’s retirement plans. Understanding how social security works, when you should file for retirement benefits, and how social security functions for spouses is essential for planning your financial future. Although social security can vary, it is important to understand it in the context of your unique financial situation and long-term goals.

How Many Years Until You Are Vested?

One of the first questions people have regarding social security is the time it takes to become fully vested. The Social Security Administration (SSA) refers to being fully vested as “fully insured” which can lead to confusion due to different terminology. The amount of social security you receive is based on the number of “quarters of coverage”, also referred to as a credit, that you have accrued over your working life. An individual can receive up to 4 credits per working year after the age of 21. The number of credits that are required by any individual to be considered fully vested in social security is 40. This means that the minimum number of years required to become fully vested in social security is 10 years.[1]

When Should You File for Social Security?

Although the question of when an individual should file for social security is one of the most common, there is, unfortunately, no simple answer. The decision to file for social security must be made in context with a variety of other factors unique to your situation. Factors that affect when you should file for social security include whether you have additional sources of income, whether you are married, what your current and future tax status is, and what the interest rate environment looks like. Additionally, factors like your life expectancy can play a significant role in determining when you file for social security payments.

The way these factors interact together can help determine when to file for social security. The complexity of how these factors interact necessitates an individualized approach when considering when to file for social security. For example, individuals with strong, passive income streams may choose to delay filing for social security. In contrast to this, some individuals with a less robust retirement portfolio may choose to file for social security earlier in order to reduce the burden that retirement has on their portfolio.

When deciding when to file for social security, it is important to note that filing before your Full Retirement Age (FRA) or after your FRA will each have a measurable impact on the amount of money you receive. Individuals who file before their FRA will experience a reduction in their benefits of 5/9ths of 1% per month, or 6.67% per year, for the 36 months before their FRA. Furthermore, claiming social security benefits more than 3 years before your FRA results in an additional reduction of 5% per year.

Clearly, choosing to claim your social security benefits early must be weighed against the reduction in benefits that will occur. At the other end of the spectrum, if an individual chooses to delay claiming their social security payments it can result in a benefits increase of 8.00% per year. This increase in benefits may be worthwhile to consider for individuals that have additional revenue streams which make claiming social security less of a necessity.

Can I Receive Social Security and Still Work?

While you can continue to work and claim your social security benefits, it isn’t always the ideal choice for your financial future. Social security benefits will be reduced by a fraction of a percentage for each month that you are claiming benefits before your FRA. Additionally, any money made over the yearly earning limit will result in a reduction in your social security benefits. This amount in 2018 is only $17,040 per year.[2]

How Does Social Security Work For My Spouse?

Ensuring your partner is financially secure is an important consideration for many. Eligible spouses may receive up to one-half of your supplemental security income. If your spouse has their own social security benefits, those will be paid to them first. If your social security benefits are greater, the spouse will receive an additional supplement to the benefits they are already receiving.[3]

Do I Pay Taxes on Social Security Income?

Whether or not you have to pay taxes on your social security income depends on your income level. Individuals or families whose income levels exceed those outlined by the Social Security Administration will have to pay social security taxes on up to 85% of the benefits they receive.

Is Social Security In Trouble?

Social security is being challenged foremost by the increased life expectancy of individuals receiving benefits.  According to the St. Louis Federal Reserve, the life expectancy of a person in the United States was 78.6 years in 2016. By contrasting this with a life expectancy of 69.7 years for someone born in 1960, the scope of the challenge facing social security becomes clear.

It is certainly true that social security is not as strong as it once was. According to a 2018 Social Security trustees report, the Social Security Administration (SSA) holds $2.9T in assets. Current estimates suggest these assets will be depleted in 2034. After this time, incoming revenue from social security taxes will be enough to cover 77% of promised retirement benefits.

As a result of the challenges facing social security, the United States Government will be forced to implement changes to remedy the situation. First, the Government may require an older age to begin receiving benefits. As an alternative to this, payroll taxes may be raised to ensure that current coverage levels are maintained. Lastly, individuals may simply be forced to receive only the 77% of retirement benefits covered by tax revenue.

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[1] https://www.ssa.gov/planners/credits.html

[2] https://www.ssa.gov/planners/retire/whileworking.html

[3] https://www.ssa.gov/planners/retire/applying7.html