Social Security: Planning for it (or not) in your future

No matter when you retire, you want to know what role Social Security will play in your financial future.

• Will it go away?
• How much can you expect?
• When should you start benefits?

When Social Security started in 1935, it was created to provide support for workers (and their families) who could no longer work due to age, disability, or death.

It's comprised of the Old-Age and Survivors Insurance (OASI) program for retired workers, their families, and survivors of deceased workers, and the Disability Insurance (DI) program for disabled workers and their families.

Today, it remains a primary source of income for many retirees and aging Americans. Yet, funding issues create some uncertainty about the future of these programs.

In this article, we’ll tackle the questions above so you can determine the role Social Security might play in your financial future.

Will Social Security go away?

Social Security is unlikely to change much in the foreseeable future. But, eventually, it will face challenges and look different than it does today.

Concerns about Social Security's longevity stem from future funding concerns.

For years the programs operated with a surplus; the amount paid to workers and their families was less than it took in. With lower life expectancies and a smaller aging population, trust fund reserves grew for decades.

Now, with lower birth rates (fewer people to pay in) and a growing aging population (more people receiving benefits), reserves in the trust funds are disappearing.

That doesn’t mean Social Security will go away, but future changes to the program are likely.

Those changes will be up to Congress and may include higher taxes on payroll earnings to fund the program, reduction in monthly benefits, increased eligibility ages, means-testing, and more.

The future of Social Security and retirement planning

The Social Security Board of Trustees expects to be able to pay 100% of benefits through 2035.

Around this time, the reserves run out, and the program will rely solely on taxes for funding. Then the government could reduce benefits, increase taxes, or do both.

With changes on the horizon, you might worry about the future of benefits. But even younger folks can likely expect some form of benefits from Social Security.

Still, the younger you are, the better the chance benefits will be different than they are today.

This ambiguity might mean you exercise more caution with retirement planning.

In The Simple Path to Wealth, author JL Collins advises saving for retirement on your own, pretending that Social Security won’t exist. If and when you receive benefits, consider it a bonus.

What you can expect: How to plan for Social Security in retirement

All that talk of uncertainty can be worrying. But it's best not to write off Social Security altogether.

Depending on your age, Social Security could play a significant role in your retirement finances as you grow older. Below we’ll help you determine what you can expect from Social Security to help you plan.

How to find your Social Security estimate

When you pay Social Security payroll taxes, the money goes to current beneficiaries. And any extra money goes into the Social Security trust fund (reserves).

In other words, the money you pay isn’t in an account just for you.

When you work and get paid, you collect credits toward your Social Security benefits. Credits determine if you’re eligible for benefits, not how much you receive.

You need 40 credits to qualify for benefits. If you have less, you don’t qualify. The credits are cumulative, so even if you take a break from work, you will collect more credits if you go back to work.

Your highest 35 years of earnings determine your estimated Social Security benefit amount. But the amount you get also depends on when you start collecting benefits.

To find your benefits estimate, go to the Social Security site, and create an account. Here, you can check records and find out where you stand right now.

How to decide when to start Social Security benefits

You have options on when to start monthly benefits. The benefit amount you receive each month increases as you age, up until the age of 70 when you hit the maximum amount.

And if you keep working beyond the full retirement age, your monthly benefit can continue to go up.

Below are the ages for tiered Social Security benefits:

• Early Retirement Age: At age 62, you can start collecting a reduced benefit amount.
• Full Retirement Age: If you were born between 1943-1954, full retirement is age 66. If you were born after 1955, it’s age 67.
• Delayed Retirement Age: Your benefit continues to rise until age 70 when it’s capped.

Things to consider when deciding whether to start benefits

• Can you afford to wait? The longer you wait to take benefits, the more you will get (up to age 70).
• Are you still working? You might delay starting your Social Security if you aren’t to full retirement age and if you can afford it. Depending on your income, working might even boost your benefit amount.
• Do you have a pension from a government or nonprofit organization? If you have a pension and didn’t pay Social Security taxes, it might lower your available benefits.
• Your spouse’s benefit. Determine how one spouse’s benefits can impact the other spouse’s survivor benefits.

Can you work and get social security?

The short answer is yes. But if you take early retirement benefits and continue working, benefits get reduced if you earn over a specific amount.

If you are full retirement age, income won't affect your benefits. And, benefits will be re-calculated to include extra working years. But, depending on your income, you might owe taxes on a percentage of your benefits.

Are Social Security benefits taxed?

Whether you pay taxes on Social Security benefits depends on your taxable income.* But you never pay taxes on more than 85% of your benefits.

Income levels for taxes on Social Security benefits:

• You will pay taxes on up to 50% of your Social Security benefits if your income is $25,000 – $34,000 for an individual and $32,000 – $44,000 for a couple filing jointly.
• You will pay taxes on up to 85% of your Social Security benefits if your income is over $34,000 for an individual or $44,000 for a couple filing jointly.

*Taxable income = Adjusted gross income (AGI) + nontaxable interest income + 50% of Social Security benefits.

Final thoughts on Social Security and how to plan for it in retirement

The future of Social Security is a bit hazy, but most of us will receive some income.

Whether we'll face a reduction in benefits over time remains to be seen. Still, it's essential to know Congress will need to change the program and it's likely to impact benefits in the future.

A prudent strategy is to save and invest without heavily relying on Social Security benefits in retirement.

But it’s still crucial to know your estimated benefits and their tax implications. All this information will help you when planning for your retirement income.

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