Understanding Social Security

Social Security, established in 1935, is a U.S. government program providing financial support for retirement, disability, and survivors. This guide focuses on retirement benefits, offering a clear overview of how they work, how they’re calculated, and key factors to consider when claiming.

Eligibility Requirements

To qualify for Social Security retirement benefits, you must have worked and paid Social Security taxes (through payroll) for at least 10 years (or 40 quarters).

You can start your benefits at age 62 (or older).  Waiting until your Full Retirement Age (FRA) maximizes your benefit.

Your Full Retirement Age (FRA) depends upon your birth year:

How Benefits Are Calculated?

The amount you receive is based on your lifetime earnings and the age at which you start receiving benefits. Social Security uses the highest 35 years of your earnings to calculate your Average Indexed Monthly Earnings (AIME).

Your benefit is calculated using an AIME formula that determines your Primary Insurance Amount (PIA).

It Pays to Wait...

Social Security benefits are calculated on the participant’s full retirement age. If you take your benefit early (before FRA), the amount will be reduced.  If you can afford to wait, starting benefits after your FRA can increase the amount by as much as 24%! 

Every year that you can delay benefits beyond full retirement age comes with an 8% annual bump (until age 70). Most investors understand the power of an 8% return.  I assume that most people reading this guide would sign up right now if an 8% return was offered for the next calendar year. The graph below illustrates the differences in annual benefit amounts based upon starting age:

Reasons to Consider Taking Your Benefits Early

In a perfect world, you can wait until age 70 to begin your benefits. However, that's not realistic for most. The average age that retirees typically start their benefit is around 64. Your retirement is the combination of many additional factors, which will impact your timing on when to begin social security.

#1: Your Cash Flow- If you retire before FRA and lack other income (e.g., pensions, investments, & savings), early benefits can bridge the gap. However, if you work while claiming before FRA, the earnings test applies.

For those taking benefits early (before FRA), for every $2dollars of earned income above $25,080, $1 of SS benefit will be withheld.  Assess your liquidity and other income sources before claiming early.  

#2: Your Health/Longevity- If you have health concerns or a family history of shorter lifespans, claiming early may maximize total benefits. For FRA of 67, claiming at 62 vs. 67 breaks even around age 79. If you expect to live past 80, delaying often yields more.

#3: Spousal Coordination- If married, it often makes sense for one spouse to claim early, allowing for at least some household income while the higher earner delays.

Other Social Security Benefits

• Spousal     Benefits: A non-working or lower-earning spouse can receive up to 50% of the worker’s benefit at their FRA, although reduced if claimed early (e.g., 35% at 62 for FRA of 67). Spousal benefits don’t increase past FRA.
• Survivor Benefits: A surviving spouse may be eligible to receive the deceased’s full benefit (or a portion) depending on factors such as age and other benefits.  If the surviving spouse     is already receiving spousal benefits, they may switch to survivor benefits if that amount is higher.‍
• Widowed before FRA? You can claim survivor benefits as early as 60.

Annual Cost-of-Living Adjustments (COLA)

Social Security benefits are adjusted annually to account for inflation, through the Cost-of-Living Adjustment (COLA). This ensures that benefits maintain their purchasing power over time.

COLA varies from year to year; over the past decade, it has averaged about 2.3% annually. The highest level of COLA of the past 10 years was 8.7% in 2023. The lowest was 0%, which occurred 3 times! (2010, 2011 & 2016).

Additional Considerations

Online Tools: Use SSA’s mySocialSecurity account (ssa.gov) to estimate benefits, view earnings records, or apply.

Is Social Security Running Out?  No; the program isn’t “running out” soon, but long-term solvency concerns exist. Per SSA’s 2024 report, benefits are projected to be fully payable until 2035 without reforms.

Consult with an Expert: Determining when it’s best to start your benefits can be a challenge.  Consider working with a financial planner who can tailor claiming strategies to your retirement plan.

‍_{Important Disclaimer: The information provided in this guide is for educational purposes only. Nothing here within should be considered investment or tax advice. Please consult with a financial advisor and/or CPA when considering investment and tax decisions.}