Social Security Benefits

Collecting Social Security.jpg

How old do you have to be to collect Social Security?

We’ve heard it time and time again: Social Security was never intended to be the sole source of income among retired people. Yet according to a recent study conducted by Gallup, the percentage of Americans who rely on Social Security as a major source of retirement income is on the rise—with close to 80 percent of U.S. workers expecting Social Security benefits to play a large role in funding retirement [1].

Social Security was designed to only replace a percentage of your pre-retirement income—based on a variety of factors—to keep seniors out of poverty. And the amount of your benefit can and will change based on how old you are when you begin claiming Social Security benefits—meaning its vitally important for you to know your options.

Important ages for collecting Social Security

Your Social Security benefit will vary based on four important factors: your work history, your earnings, history, your birth year, and your claiming age.

To calculate how much your Social Security benefit will amount to at full retirement age, the Social Security Administration will take your 35 highest-earning employed years into account. If you haven’t accumulated at least 35 working years, fear not; you won’t be required to continue working until you’ve reached 35 years in the workforce. If you decided to take a few years off to spend time at home with the kids, for example, the Social Security Administration will simply average in a $0 earning for each year under 35 years you spent in the workforce.

Your birth year and claiming year will also work hand-in-hand to determine your Social Security benefit when you decide to begin collecting. The most popular full retirement age among today’s employees in the workforce is 67, but those born before 1960 will reach full retirement age at 66 and some change. However, you don’t need to reach full retirement age before you can begin collecting Social Security benefits.

Americans are eligible to begin collecting Social Security benefits at age 62—even while still on the job—though it may not be advisable to do so. Your benefit will be sliced by one-half of one percent for each month you start receiving benefits before you reach full retirement age, which can add up in a big way over time. And if you collect Social Security benefits before reaching full retirement age and you continue working, your Social Security benefit will be reduced by $1 for every $2 you earn over the earned income limit—which for 2018, means you can only earn up to $17,040 before the Social Security benefits are reduced.

Plus, you aren’t required to begin collecting benefits once you reach full retirement age in the first place. You can delay collecting benefits up until you reach the age of 70—and in return, the Social Security Administration will increase your benefit for every month you delayed collecting benefits after your full retirement age.

As you can see, claiming age plays a huge role in determining the amount of your Social Security benefit. But we’ll get to that later.

Should you rely on Social Security to fund your retirement?

Social security was never designed to be a retirement policy; yet here we are.

Just for the record, roughly 14 percent of Americans say they have nothing saved for retirement [1]. The reality facing today's workforce is that Social Security was never intended to be our only source of retirement income, yet 61 percent of all retired workers currently receiving benefits rely on Social Security to provide at least half of their monthly income [2]. This underscores the importance of personal financial responsibility and the role we as individuals need to play in planning for our financial future.

Michael Kiley, CEO of PAi and financial expert, sat down and discussed this issue with Mark Leland of Fox 11 TV in Green Bay. Kiley noted, “We have the Social Security program and people consider that to be part of a retirement program, when in fact, it was never designed to be. It was designed to be a safety net. People tell you the same about a 401(k)—it was never designed to be a retirement plan. It was designed to be supplemental savings, and yet, here we are.”

How many people don’t have access to 401(k) plans?

An alarming number of Americans don’t have access to a 401(k) plan through their employer, which can make it difficult to grow a retirement nest egg. In fact, a recent study reported that a staggering 41 percent of Millennials, 35 percent of Gen Xers, and 30 percent of Baby Boomers do not have access to an employer-sponsored retirement savings plan [3]. And unless there’s a drastic change, millions of Americans may retire relying solely on Social Security income.

And it doesn’t end there. To get the highest benefits from Social Security, retirees can’t even begin claiming benefits until they reach the age of 70, and studies show only 3 percent of elderly recipients wait that long [4]. Why is this important? Because while full retirement age may be 66 or 67, depending on date of birth, collecting Social Security benefits any time before the age of 70 will lead to permanent reductions in monthly payout—meaning retirees will be responsible for funding an even greater portion of their retirement.

So the question becomes: Who pays when nobody saves?

Utilizing Social Security income in retirement

When talking to friends, coworkers, or acquaintances who aren’t particularly retirement ready, you’ll likely hear the same comments over and over. Things like, “I don’t need to worry about saving for retirement. I’m going to work until I die” or “… besides, I will always have Social Security” come up a lot, often spoken with too little thought from those without a retirement plan in place. This mentality reinforces the reasons we need to start thinking about the role Social Security will play in retirement planning early in our careers.

Does retirement age impact social security benefits? 

If you’re like most people you’ll retire before age 65. While it may be a matter of choice for some, for many, it’s not. There are several reasons someone may be pushed into an early retirement, like involuntary layoffs/job loss or illness of themselves or a close family member. In fact, more than half of workers retire earlier than they planned on, and of that group, only 23 percent retired early entirely by choice [6].

With increasing life expectancy rates, many people will find that they are likely to live significantly longer than they are able to work. And by taking their Social Security benefits before reaching full retirement age, limitations on the amount they can collect are put in place. Recent statistics show that 71 percent of retirees receive reduced Social Security benefits because they chose to collect prior to reaching full retirement age [7]. With around 45 percent of eligible beneficiaries taking their benefit at age 62, which is four to five years earlier than full retirement age, a lot of money is being left on the table.

The limitations put in place by claiming Social Security early will make it hard to depend solely on Social Security income for retirement, though it was never even intended to be a full income replacement in retirement in the first place. It was designed to replace about 55 percent of the income for a low wage worker, 40 percent for an average wage worker, and only about 35 percent for a high wage worker, but studies show a staggering one in three retired workers count on their benefits to comprise roughly 90 percent of their monthly income [3]. The differences between the benefit amount and the income actually needed in retirement will have to be made up with funds from a retirement plan or personal savings. The combination of these three retirement fund vehicles is what experts have coined the “three-legged stool” approach, which retirement experts and financial advisors alike recommend utilizing.

What is the best age to retire?

With all these alarming statistics, you may be wondering what the best age to retire actually is. And well, that depends. To understand Social Security, the first thing you need to know is your full retirement age. The full retirement age is gradually moving from age 66 to age 67, beginning with those born in 1960 or later (for purposes here, we will assume 67 is the full retirement age). Once you reach your full retirement age, you are eligible to receive your full retirement benefit.

This amount is important because depending on when you take your benefit (before full retirement age, at full retirement age, or afterwards—up to age 70), the amount you receive will be either discounted or increased from the primary insurance amount. Taking benefits at age 62 with a full retirement age of 67 will result in a 30 percent decrease from the primary insurance amount. However, if you delay taking your benefit past your full retirement age, you will see an 8 percent increase in the benefit amount per year up to age 70. This is a 24 percent increase over the primary insurance amount at age 67.

How putting off claiming Social Security can benefit retirees

As an example, let’s say a person with a primary Social Security benefit of $2,000 per month at age 67 decides to take the benefit at age 62. This individual would see a 30 percent decrease in the amount he/she receives, dropping the benefit to $1,400 per month ($600 less per month than the original benefit). But if the recipient waits to take the $2,000 benefit until age 70, he/she would receive $2,480 per month, or $480 per month more than the original benefit. Remember, these amounts are paid for life, so the claimant who waited to reach age 70 before receiving the benefit would collect an additional $1,080 each month for his/her entire lifetime than the recipient who claimed at age 62. And since Social Security is indexed to inflation (COLA), over time, this discrepancy in benefits will only widen.

How much do retirees get on average from Social Security?

The average benefit paid to a Social Security recipient in 2018 is about $1,404 per month, equating to $16,848 per year [8]. Is that enough income alone to fund the retirement of your dreams? We’re willing to bet that it’s not. Recipients receiving this amount with few or no assets in a retirement plan and limited personal savings are likely going to struggle with their retirement. The maximum amount a recipient can even receive for Social Security at full retirement age for 2018 is about $2,788 per month, or $33,456 per year, and that’s for the highest income worker.

It becomes clear, then, that to achieve the comfortable, stress-free retirement we’ve always envisioned, we need to begin preparing for our financial future by creating a retirement strategy using the three-legged stool approach. To reach financial freedom, we can’t rely on just one means of saving and instead must take advantage of Social Security benefits, personal savings, and retirement fund allocations.