Q: Will I really get any benefit from social security in retirement?

A: Most likely

retirement

 

Many believe that social security is a retirement benefit that is going bankrupt and simply won’t be there by the time they need it.  25% of people surveyed by bankrate expect to receive no benefits from social security.

Social security is something of an enigma – so I decided to dedicate a post to better understanding this oddity, started by Franklin Roosevelt in 1935.  Social security is both a tax and a benefit.

 

Let’s start with the tax piece  since most people reading this post are probably still in their working years and have yet to realize any benefits from this safety net for seasoned citizens.

 

Social security taxes apply to the first $127,200 of your income (2017). The tax rate is a flat 6.2% of your pay, up to a maximum withholding of $7,886 per year. That’s referred to as the employee portion. If you have an employer (self-employed pay the full 12.4%) then your employer pays another 6.2% in addition to your contribution. Many analysts say that you are effectively paying both pieces (employer and employee) because your paycheck would be that much higher, were it not for this “tax”. I am encouraging you to understand this “tax” because it could effectively reduce your salary by up to $15,773 per year – that maximum amount applies to those fortunate enough to be in the top 5% or so of earners.

 

Now let’s talk about the benefits. If you work for at least 10 years, you should be eligible for monthly benefits in retirement. The average benefit in 2017 is $1,360 per month.  The more income you earn (over a 35 year period), the bigger your benefit at retirement; full retirement is at age 67.  You can receive 70% of your full benefit starting at age 62 and you can increase that benefit by about 8% per year by deferring when you elect to receive benefits; but you can’t defer past age 70.

 

The benefit formula/calculation can be fairly complex and vary based on your individual work history. There are numerous options and strategies that can be used to maximize your lifetime benefit. I’m not really going to cover any strategies or options, other than to state that it’s essentially means tested/regressive in the following 3 sharply graduated brackets:

 

  1. 90% replacement of eligible income up to about $9,500 annually

 

  1. 32% replacement of eligible income up to about $58,500 annually

 

  1. 15% replacement of remaining eligible income, up to the maximum/ceiling

 

In 2017, the maximum monthly benefit is $2,687 (full retirement). For very low income seniors, social security replaces up to 90% of eligible earnings. For more average seniors, it is more likely to replace approximately 40% of eligible earnings (i.e. pre-retirement wages); a lower replacement percentage (approximately 28%) if you are a “high” earner.

 

Up to 85% of social security benefits can be subject to income tax (at a rate of up to 35%).  About 30% of retirees pay some tax on their benefits. I believe these taxes essentially wipe out the 3rd bracket but I’m not a social security benefit expert (I didn’t even stay at a holiday inn express last night). I am a CPA, but not competent enough to do my own taxes, my wife fired me years ago.   .     .

 

I think I have already told you more than I know about social security taxes and retirement benefits. And remember, knowing is the half the battle – I don’t know what the other half is – but that’s what GI Joe said, so it must be true!

 

GI Joe

 

Some projections indicate future funding problems with social security, with the program only being able to pay about 75% of promised benefits, beginning as early as 2033. I believe, through congressional-action (I know that’s an oxymoron, but work with me), that some additional steps will be taken (e.g., raising the full retirement age) to make sure the program continues – its simply too popular (about 43 million retired workers currently) not to.   .     .

2 thoughts on “Q: Will I really get any benefit from social security in retirement?

  1. Pingback: Looking back on 2017 | Jimmysmoneytips

  2. Pingback: Answer these 6 questions to see how you’re doing. . . | Jimmysmoneytips

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