How Does Social Security Fit into Your Retirement Plan?

How Does Social Security Fit into Your Retirement Plan?

Throughout your working years and with just about every paycheck, you have paid taxes into Social Security, which go towards helping support other Americans who are eligible to receive Social Security benefits. When you retire (and/or when you reach the age of eligibility), you can begin collecting benefits yourself. As part of your retirement plan, Social Security can contribute to your financial success in retirement, but only if you understand what it is and how to maximize your benefits.

What exactly is Social Security, and how does it work?

Social Security was created in 1935 by President Franklin D. Roosevelt and the U.S. federal government to provide financially for the American people as a response to the Great Depression. Benefits include retirement benefits in the form of a portion of your average pre-retirement income, survivor’s benefits, disability insurance, and Medicare.

Currently, the Social Security Administration is providing benefits to more than 47 million retired workers and their dependents, more than 10 million disabled workers and their dependents, and more than 6 million survivors. One in five Americans is receiving Social Security benefits.

Social Security doesn’t pay out equally to everyone. The amount of income you’ll collect depends on a number of factors, including how old you are when you start collecting and whether or not you will be eligible to receive a spouse’s Social Security benefits. Your benefits are also based on your lifetime earnings: you’ll receive a percentage of your pre-retirement income on the basis of your highest 35 years of earnings.

Social Security benefits eligibility

The age at which you’re eligible to start collecting Social Security is 62, although you don’t have to start receiving benefits then, and if you can afford to, it’s in your best financial interests to wait.

As of 2021, if you were born after 1959, your full retirement age is 67. So if you begin collecting benefits at age 62, the amount you receive each month will be 30 percent less than if you’d waited until 67. On the other hand, if you can wait to start collecting Social Security until your turn 70, your monthly check will be 8 percent higher – not just for now, but for as long as you receive benefits – thanks to delayed retirement credits. (After your 70th birthday, your benefits will no longer increase if you delay claiming, so when you turn 70, you might as well begin collecting.)

Making Social Security part of your retirement plan

Social Security offers benefits you won’t find in your other retirement savings accounts, like promised income you can’t outlive, guaranteed growth (if you delay collecting), protection against inflation, and so on.

The first step in making Social Security part of your retirement plan is to estimate your benefits. The Social Security Administration has an estimating tool you can use to view and verify your earnings history and personalize your retirement benefit estimates at different ages. (Some financial experts advise that you should view your Earnings and Benefit Estimate statement at least every three years, just to make sure the information is accurate.)

Once you have your Social Security benefit estimate and an idea of when you plan to retire, you can include Social Security as an income source in your retirement plan and budget. And, as we mentioned earlier, part of working Social Security into your retirement plan should also include at what age you’ll apply for Social Security benefits, a decision which will affect not only when you’ll start receiving benefits but also how much you receive.

The Social Security Administration estimates that, on average, beneficiaries receive about 40 percent of their pre-retirement income as their Social Security retirement benefits. Knowing about how much that works out to for you will help you figure out where and Social Security will fit with the rest of your retirement plan.

It’s worth mentioning that while Social Security should be part of your retirement plan, it should not be your whole plan. It’s a great supplementary source of income in retirement, but more than likely your Social Security benefits will not be nearly enough to financially sustain you on their own. It’s really intended to just bridge the gap, so to speak, between your other retirement savings and unexpected expenses.

Also of important note is that unfortunately there have been concerns about Social Security’s financial solvency, and discussions about reforming the system. No decisions have been made, of course, but it is estimated that trust fund reserves may become depleted between 2033-35, and the future taxes may be increased or benefits reduced to make up the deficit.

In any case, it would be wise for you to save as much as possible and invest whatever you can into your own retirement savings accounts, regardless of whether or not you can count on Social Security being there for you when you retire. 

At the end of the day, Social Security is a great public assistance program, but it can be complicated and there are many variables. In addition to your financial advisor who can help you formulate your retirement plan and maximize your benefits, there are resources available to help you navigate the Social Security system, like AARP and the government-sponsored These resources help people understand benefit programs, program descriptions, requirements, the application process, whom to contact with questions, and more. And of course, there is, the Social Security Administration’s website. If you are one of those persons who have not yet hired a financial advisor, I encourage you to schedule your complimentary call with an Uncommon Cents Certified Financial Planner so we can answer your questions with the goal of helping you achieve financial independence and peace of mind. 

Sheena Hanson, CFP® - Investment Advisor Representative and CCO

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