In the big picture of funding retirement, most Americans (55 percent of adults ages 50 and older, according
to the Nationwide Retirement Institute) expect social security to be a significant source of their income. Yet,
social security will account for about only 36 percent of a retiree’s total retirement income. With that type of
gap to fill, relying on social security to be the only source of retirement income is risky.
Let’s look at a few basic considerations retirement savers should be aware of when factoring social security
into their retirement picture. Having a clear perspective on how—and why—to save more now (through your
workplace retirement plan or an IRA, for example) can go a long way toward being less dependent on social
security in your retirement years.
A common misperception is that the government is depositing your payroll tax contributions in a personal
account solely for you, to be paid out with interest when you retire. In reality, your social security benefit will
be based on how much money you earned over your working life—not how much you paid into the system.
Your contributions actually fund the benefits for current retirees. When you retire, those still working will fund
So, instead of thinking of social security as a retirement savings account, consider it an earned benefit that the
government pledges to pay in your retirement years.
To be eligible to claim social security benefits, you must meet three requirements:
• You must have earned 40 retirement credits (one credit is earned for every $1,470 in earnings (in 2021);
a maximum of 4 retirement credits can be earned per year.
• You must have paid into social security for at least 10 years.
• You must be at least 62 years old.
Most people are curious how their benefit is figured. The answer is it depends! As mentioned, social security
benefits are based on your lifetime earnings. Your actual earnings are adjusted, or indexed, to account for
changes in average wages since the year the earnings were received. Then, the Social Security Administration
calculates your average indexed monthly earnings for the 35 years in which you earned the most. A formula
is then applied to those earnings to arrive at your basic benefit, called the primary insurance amount (PIA).
This is how much you would receive at your full retirement age (FRA). Your FRA is the age you begin receiving
100 percent of your PIA, and it varies depending on the year you were born. Fortunately, there are several free
online calculators like this one that can provide an estimated projection of your benefits based on personal
factors such as earnings and FRA.
Although you can begin to receive social security benefits at age 62 (provided you meet the two other
requirements previously described), it pays to wait if you can afford to. Of course, your decision of when to file
depends on many personal factors, including necessity, health challenges, and employment changes. That
said, here are two compelling reasons to consider delaying social security benefits, if you can:
• When you file early (before your FRA), you will receive less than 100 percent of your PIA.
• When you delay filing past your FRA, you receive delayed retirement credits (up to age 70), increasing
your PIA above 100 percent, which could increase your annual benefit by as much as 77 percent.
This example* illustrates the significant effect of delaying filing: Jodi turns 62 in 2021. Her FRA is 66 years,
10 months, and her monthly benefit starting at FRA is $1,000. If she starts getting benefits at age 62, social
security will reduce her monthly benefit by 29.2 percent to $708 to account for the longer time she receives
benefits. This decrease is usually permanent. But, if Jodi chooses to delay getting her benefits until age 70,
her monthly benefit will increase to $1,253. This increase is the result of delayed retirement credits she earns
for her decision to postpone receiving benefits past her FRA. The benefit at age 70 in this example is about
77 percent more than the benefit Jodi would receive each month if she started getting benefits at age 62. For
Jodi, the decision to delay her social security filing will earn her an additional $545 each month in retirement!
As you can see, the various factors that weigh into your social security decisions can be confusing. An important
first step is to understand where social security fits in your retirement savings picture. If you’re uncertain how
to save for retirement or what steps to take for your financial future, consult with a retirement planning expert
such as a financial advisor or your company’s retirement plan advisor.
* Source: Social Security Administration, When to Start Receiving Retirement Benefits, 2021
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