Social Security affects every worker in America before and after retirement, but most people know very little about how it actually operates. After surviving the 2007-2009 credit-led “great recession,” many boomers and “near”-retirees that have experienced the disappearing act of their stocks, jobs, pensions, and home equity – have recently taken a renewed interest in this benefit which can provide guaranteed income for life.
Because of the perpetual savings epidemic in America and lack of retirement preparedness, many workers end up depending on Social Security for a good portion of their retirement income. While knowing your break-even age for benefits is important, it is not the only factor in deciding when to retire. Retirement income needs, health and longevity, pension income, the amount of qualified and non-qualified assets, and lifestyle goals all factor into a client’s individual situation.
The Social Security tax rate collected from workers is 6.2% in 2014 (on income under the $117,000 wage ceiling) plus the Medicare tax rate of 1.45% -for a total of 7.65%. Employers must match these amounts for their employees. Workers defined as “self-employed” must pay 12.4% on income under the wage ceiling and a 2.9% Medicare tax on all income for a total of 15.3%.
Social Security benefits paid to recipients are primarily funded from two sources — payroll taxes collected from workers and the Social Security Trust Fund. Of these two sources, payroll taxes bear most of the burden, making Social Security primarily a pay-as-you-go system. Today, roughly 20% of all Americans are retired and supported by Social Security which would amount to over 60 Million (or 1 out of every 5) people*.
Our aging population combined with all the headlines about the Social Security Trust Fund running out of money in 2033 may light a fire for younger generations to save more aggressively for their retirement. The government may need to reduce Social Security payments by at least 20%, increase payroll taxes and or increase the full retirement age past 70 to make the program sustainable for future generations. Total Social Security expenditures in 2013 for retirement benefits were $1.3 trillion (8.4% of the $16 trillion US GNP and 37% of the Federal expenditures of $3.6 trillion*.)
5 Facts You May Not Know About Social Security:
1. Timing Matters: You can lose about 7% of your annual benefits per year if you elect to take Social Security before your full retirement age (FRA). For example, if your FRA is 66, you would forfeit about 28% in annual benefits if started at age 62. With benefits increasing 7% each year between age 66 and 70, it may make sense for some clients to pull money from their savings accounts (or continue working) and not take Social Security until age 70.
2. Non-Working Spouse: If a non-working spouse applies for her spousal benefits at FRA, her benefit will be 50% of her husband’s PIA (primary insurance amount). If she applies at age 62, her benefit will be 35% of his PIA. If she applies between the ages of 62 and 66, the percentage will be prorated. Spousal benefits are not available until the primary worker has filed.
3. Married Couples: If a spouse has reached full retirement age and is eligible for a spousal benefit and her own benefit, she can choose to receive only the spousal benefit now and delay receiving retirement benefits in order to build up delayed credits on her own benefits. There are other benefit election combinations to consider between spouses.
4. Beneficiary Benefits: A lower-earning spouse could elect to collect Social Security benefits early on at age 62, and the higher-earning spouse could delay claiming benefits for as long as possible, up to age 70. If the higher-earning spouse dies first, the lower-earning spouse will be entitled to 100% of what the higher earning spouse received.
5. Divorcee Benefits: A divorced spouse that was married for at least 10 years can receive Social Security benefits under her former spouse’s earnings if she is 62 or older, is unmarried and she is not eligible for an equal or higher benefit based on her own earnings. It is not necessary for the former husband to apply for benefits as long as he is at least 62 and the couple has been divorced for at least two years.
Note: Consider to visit the Social Security Administration to help get you on your way to making the best decisions for your retirement, disability, survivors and Medicare enrollment options.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.