Social Security is the country's largest retirement benefit program. It was designed to provide support for individuals who funded it through taxes while they were working.
Social Security was not designed to be an individual's only source of income in retirement.
Financial advisors say you will need about 70% of you pre-retirement income to maintain your lifestyle. But, the aim of Social Security is to replace only about 40% of your pre-retirement income. This percentage will be higher for low-income earners.
In order to maintain your lifestyle in retirement, you will have to supplement your social security income with savings, investments, and/or pension benefits.
You can start collecting Social Security benefits at 62. However, the earlier you start collecting your Social Security benefit, the less you will receive per month.
The amount you collect is based off your Primary Insurance Amount (PIA). The next question explains how PIA is calculated in detail; for now, just think of it as your monthly benefit amount. If you start collecting:
For example, if your PIA is $2,000 and you start drawing at 62 years old, your month Social Security check will be $1,400.
If you start drawing at full-retirement age, your Social Security check will be $2,000**.
But, if you delay until 70 (assuming your full-retirement age is 66), your Social Security check will be $2,640** ($2,000 + 8% x $2,000 x 4 years). That's $1,240 per month more than if you started collecting Social Security at 62!
For those who can afford it because they are still working or because they have other sources of income or savings, most financial advisors recommend delaying collecting Social Security until 70. However, there are exceptions to this rule that are best discussed with a trusted financial advisor.
*Your full-retirement age depends on the year you were born. For those born in or after 1960, it is 67. If you were born before 1960, you can find your full-retirement age here.
**For easy math and a clear example, we did not include adjustments for inflation.
4. How is my Social Security benefit calculated?
The Social Security Administration (SSA) uses a formula to determine your benefit amount also known as your Primary Insurance Amount (PIA). .
First, SSA calculates your average indexed monthly earning (AIME) based off of your 35 highest-earning years. Each year's earnings are adjusted for inflation and summed. That sum is divided by 35 to get your averaged indexed annual earnings. Your average indexed annual earnings are then divided by 12 to get the monthly number-- AIME.
Using AIME, the Social Security Administration will break down your benefit into three parts. For 2020, the three parts will look like this:
Let's take a look at two examples.
If your AIME is $6,000, your PIA would be $2,400
0.90($960) + 0.32($5,785-$960) + 0.15($6,000-$5,785) = $2,440.25
If your AIME is $3,000, your PIA would be $2,400
0.90($960) + 0.32($3,000-$960) = $1,516.8
Finally, the SSA will adjust your PIA up or down depending on the age you start collecting the benefit. As described in the previous question, if you start drawing at 62, you will receive 70% of your PIA. If you start collecting at full-retirement age, you will receive 100% of the PIA. But, if you delay collecting until 70, you will receive 132% of your PIA.
Yes, Social Security is taxable. But, you only have to pay taxes on your Social Security income, if combined with other sources of income, your combined income exceeds a specific limit. For single filer, the limit is $25,000. For couples, the limit is $32,000.
If your combined income is between $25,000 and $34,000, half of your Social Security income will be taxable. If your combined income exceeds $34,000, 85% of your Social Security income will be taxable.