Explaining Social Security and How to Maximize Your Benefit, Episode #35
Social Security can be a confusing topic with a lot of moving parts and options, scary headlines about its future, and generally speaking a great deal of misinformation and misconceptions. In this episode, we provide a comprehensive overview of Social Security. We explain what the system is and how it works, talk about the different claiming options and how to think about which strategy is right for you, and address some of the common misperceptions about the Social Security system and its sustainability.
Outline of this episode
- Background info on Social Security [1:31]
- When to start collecting benefits [4:56]
- The break-even point: maximizing your lifetime payments [6:58]
- Benefits of delaying [8:31]
- Why you might want to take benefits earlier [10:25]
- A summary of claiming strategies [13:47]
- Do I have to retire and stop working to collect my SS? [15:18]
- Do I lose benefits if I work while collecting SS? [16:00]
- Do I really have to pay 85% in taxes on my SS? [17:42]
- Is SS going to run out of money to pay me my benefits? [18:46]
- The recap [22:38]
Social Security is money you receive from the government each month to help cover expenses in retirement. It's a supplement to the other resources that fund your retirement, such as your savings and investments. Social Security can be claimed anytime between age 62 and 70, but there's a benefit to delaying because your monthly payment increases for each year you delay collecting.
Delaying collecting means a higher monthly payment amount but also fewer months of payments received, so there's a break-even period where you have to live to a certain age before the benefit of higher monthly payments outweighs the fact that you waited longer to start collecting those payments. For most people, this breakeven age is somewhere around 80.
When couples collect
As a general rule of thumb, it makes sense for both members of a couple to delay if they both have very good health and expect to live beyond the break-even period. It makes sense for one member to delay and the other to collect early when both members have normal life expectancy or one spouse is expected to live longer than average.
In this case, it's often best for the higher earner to delay and the lower earner to collect as early as possible. If both members of a couple are in poor health and have a low life expectancy, it makes sense for both to collect early, since they don't anticipate reaching the breakeven age. However, these are just general guidelines and it's a very individualized decision based on your unique situation and several different variables. Make sure you consult with a qualified advisor before making your own claiming decision.
Common misconceptions about Social Security
Now, let's clear up some of the most common misperceptions we hear around working and collecting benefits, taxes, and sustainability.
First, you DO NOT have to start collecting Social Security as soon as you retire and you DO NOT have to retire to start collecting. Your benefits are reduced if you're collecting prior to full retirement age and still working, but the reduced benefits are simply delayed rather than lost. Your benefit is adjusted at full retirement age to make up for it.
When it comes to taxes, up to 85% of of your Social Security income is taxable, but you pay taxes on that money at your marginal tax rate, not an 85% tax rate. Lastly, while we hear a lot of concerns about the sustainability of Social Security and it running out of money, this actually isn't a big concern because of the way the system works and the fact that small changes in legislation and taxation are required to extend the sustainability of Social Security by a significant amount. It's extremely likely that these changes will be made at some point.
Resources & People Mentioned
- Downloadable Guide: Setting up a My Social Security Account
- Downloadable Guide: Applying for Social Security
- Podcast Episode #15: How to Minimize Your Tax Bill in Retirement
- Download our guide: The Financial Checkup