Demystifying Social Security: A Comprehensive Guide

Matthew Allgood |

 

Demystifying Social Security: A Comprehensive Guide

 

In the world of retirement planning, few topics are as crucial, yet as misunderstood, as Social Security. Allgood Financial has taken the initiative to break down the complexities of Social Security, shedding some light on its nuances so that you can navigate them effectively. This little guide aims to equip you with the knowledge to make informed decisions on when and how to claim benefits.

 

Understanding the Basics

 

Social Security was introduced as a financial safeguard for American workers during the New Deal era when there were no “programs” for Americans, many of whom faced the prospects of poverty brought on by old age, death, and disability. Today, it remains a vital source of income for countless retirees. As experts at Allgood Financial often emphasize, understanding its mechanics is essential for optimizing your retirement strategy.

 

Eligibility and Credits

 

To qualify for Social Security retirement benefits, you generally need 40 “credits”, equivalent to about 10 years of work. In 2021, for instance, you would earn one credit for each $1,470 of earnings, and could earn up to four credits per year.

 

How Your Benefit Amount is Determined

 

The benefit you receive from Social Security is based on your lifetime earnings. The Social Security Administration (SSA) adjusts your actual earnings to account for changes in average wages and then calculates your average indexed monthly earnings during the 35 years in which you earned the most.

 

Claiming Age Matters

 

  • Early Retirement (Age 62): You can begin claiming as early as age 62, but your benefit will be reduced by up to 30%.
  • Full Retirement Age (FRA): Depending on your birth year, this is the age you're entitled to your complete benefit amount. Allgood Financial often assists clients in identifying their FRA and helping clients plan accordingly.
  • Delayed Retirement: For every year you delay claiming past your FRA, up to age 70, your benefit will increase by about 8%.

 

Spousal, Survivors, and Disability Benefits

 

Beyond retirement benefits, Social Security also offers:

 

  • Spousal Benefits: A significant point that Allgood Financial advises couples on is that even non-working spouses might be eligible for benefits based on the working spouse's record.
  • Survivors Benefits: These are for the family members of a deceased worker.
  • Disability Benefits: If a worker becomes disabled before reaching FRA, they and certain family members might be eligible for benefits.

 

Taxes and Social Security

 

A pivotal consideration that Allgood Financial brings to its clients' attention is taxation. Up to 85% of your Social Security benefits could be taxable, contingent on your combined income.

 

And for those retiring ahead of their FRA, there are “claw-back” provisions that can penalize retirees who earn more than the maximum allowed before benefits start getting reduced.  In 2023, the earnings threshold before benefits reductions ($1 for every $2 earned above the limit) kick in, is $21,240, which is adjusted to $56,520 for the year in which your FRA is reached.  It is absolutely possible to earn your way to $0 benefits if one earns enough income during their early retirement, so it is important to take any work plans into account when commencing your claim on your Social Security benefits!

 

Navigating the Maze

 

The decision of when and how to claim Social Security can have lasting implications on your financial well-being in retirement. Factors such as life expectancy, marital status, overall health, and financial needs should all play a role in this critical decision.

 

It's also beneficial to periodically review your Social Security statement, ensuring your earnings record is accurate and getting an updated estimate of your future benefits.

 

While Social Security is intricate, with the right guidance, it doesn't have to be daunting. Armed with this knowledge and the expert assistance from Allgood Financial, you can confidently approach Social Security, maximizing the benefits you've painstakingly earned over your entire working life, and incorporating it into the rest of your financial plans for retirement.