Path to Robust Retirement! Social Security Primer...

This is the first part of a series of articles on retirement. In this series of "Path toward a More Secure Retirement," the many U.S. government & private programs available to potential retirees are presented. The first part is about the U.S. Social Security program. Its original goal to afford the US workers with 40% of their pre-retirement income is now questionable. The program longevity to provide the US workers with guaranteed monthly retirement, disability, or survivorship benefits is "a growing peril."

What is the Social Security program? The US Social Security program is one of the Net Safety programs that are provided by the U.S. government to its citizens. It affords the U.S. workers with monthly payments for retirement, disability, or survivorship. The program is financed through FICA (the Federal Insurance Contributions Act) taxes, which amount to 12.4% tax on total earnings. "Earmarked" for Social Security benefits, the Social Security Administration deducts 6.2% of your earnings (equally matched by your employer) from your paycheck. For 2017, the maximum taxable earnings limit is $127,200.

According to the Social Security Administration, 85% of Social Security taxes is for paying the monthly benefits to retirees and their families (or surviving spouses or children of eligible recipients). The remaining 15% goes toward benefits for people with disabilities and their families.

How to live off your Social Security benefits? Most if not all of the current & future retirees falsely believe that they can be 100% dependent on Social Security benefits for retirement. However, the SSA reports that Social Security paychecks are only to replace about 40% of one's pre-retirement income. Henceforth, an individual must fill-in the gap of the remaining 60% from other dependable streams of retirement income such as 401(k), IRA, annuities, and so on. Though financial planners advise for 70% to 80% of one's pre-retirement income for comfortable retirement, it is best to max your retirement benefits.

When to collect your Social Security benefits? If qualified, the US workers can collect Social Security benefits, once they reached a certain age, became disabled, or survived an eligible recipient. To qualify for Social Security benefits, the US worker must earn enough "points" or "credits" for a given number of work "units." For those born in 1929 or later, they will need at least 40 credits for a total of 10 years of work. In 2017, one will receive one credit for every $1,300 in earnings, up to a maximum of 4 credits / year. Those credits can be carried over, when switching jobs or being off the workforce. Adjusting for inflation, the total $ earnings for each credit is raised annually. So for 2018,

When to claim your Social Security benefits: You can collect Social Security retirement benefits once you reach age 62. Though most of the US older workers might have enough credits (40 units) to qualify, it is more prudent to wait longer to collect as the payout will become larger. If you wait to claim Social Security until "full retirement age" (as determined by the SSA), you will receive your "primary benefit amount."

The Social Security "full-retirement" monthly $ benefits is based on your pre-retirement earnings. The "full-retirement" benefit age is gradually increasing. For those born in 1955, the "full-retirement" benefit age is 66 years and 2 months, and for those born in 1960 or later, the "full retirement" benefit age is now 67 (NASI, 2018).

Conversely, the earlier you will claim Social Security benefits, the lower your monthly payment will be. For example, if your full retirement age is 67, but you opt to claim benefits at age 62, then you'll get only 70% of your primary monthly payment benefit. But, if you begin collecting at age 65, you'll get 86.7% of your full monthly payment. On the "flip side", you can "defer" credits for delaying your full retirement age. For every "delayed" year to claim your Social Security benefits, your payout will earn an additional 8 percent. At age 70, your Social Security benefits will max out, at which time you must begin to collect.

How much to receive in Social Security Benefits? Your Social Security "full-retirement" benefits will depend on $ earnings during your pre-retirement working years & your age at retirement. These two factors will dictate collectively your life-time post-retirement $ benefits. Yearly, the Social Security Administration will send out annual benefit statements, which estimate how much to collect in Social Security $ benefits at the "full-retirement" age. The Social Security Administration also provides an online benefits calculator that estimates your monthly retirement $ benefits.

Monthly retirement $ benefits projected for younger US workers are less accurate, since time value & future higher earnings are not reflected into the projections. Higher future earnings later in your career will more likely affect your overall payout.

How much to qualify in Social Security Disability Benefits? You can collect Social Security disability benefits once you become disabled (the SSA has a strict definition of "disability." Applicants are vetted through a rigorous disability determination process). You will need fewer "credits" to qualify for Social Security disability benefits, which are based on your "qualified" lifetime average earnings. At "full retirement" age, your Social Security disability benefits will convert to retirement benefits.

If qualified (as the spouse or child) for survivorship benefits, you will collect at least 75% of the recipient's Social Security $ benefits.

Will the Social Security Program Survive Your Retirement Age? According to the Social Security Administration, the funds available for both retirement and disability benefits are likely to be depleted by 2034. At that time, the taxes collected would cover only 79% of total accrued benefits.

With the future of Social Security hanging in the balance, the current and potential retirees alike are more confused about the Social Security program, its benefits, and its inner-workings. While considering all together your interrelated financial decisions, you must commit to your future self by saving aggressively, and invest wisely. The main theme going forward is to maximize your Social Security benefits on your path to a more secured retirement.

References:

Backman, Maurie (TMFBookNerd). (2017, May 10). How Does Social Security Work? Here are the basics you need to know about how Social Security works, and how your FICA taxes fund the program. The Motley Fool. https://www.fool.com/retirement/general/2015/11/22/how-does-social-security-work.aspx

NASI. (2018, July 6). What is the Social Security Retirement Age? National Academy of Social Insurance, https://www.nasi.org/learn/socialsecurity/retirement-age