Wednesday, January 20, 2021

Executive Education

The Low Down Social Security Retirement

President Franklin Delano Roosevelt signed the Social Security Act into law on August 14, 1935. This Act was part of President Roosevelt’s New Deal. The new law provided various provisions for the general welfare of U.S. citizens, including an insurance program that would pay retired workers that were 65 or older.

The first taxes to fund Social Security were collected in January 1937; the first regular ongoing monthly benefits began in January 1940 (prior to that, lump sum payments were made). Although Social Security has been around for over eight decades, many people may not fully understand this significant program.

Even the most ardent of planners tend to discount or completely overlook the tremendously powerful tool that is Social Security. Why is this? It may have to do with the ever-changing face of the program or the often negative political rhetoric surrounding the benefit. Since its inception, Social Security has seen 30 major changes to the program.

Most of the changes were done as an expansion, allowing for extended protections. More recent updates to the program included legislation that restored solvency to the trust fund that finances Social Security. Political arguments for and against this mandated safety net are, literally, as old as the program itself.

These are just a few explanations as to why Social Security may be overlooked; it just as easily may be that the annual pamphlet doesn’t arrive in the mailbox as regularly as it once did. The truth is, Social Security is a benefit that current and pre-retirees can rely on to play an important role in financing retirement.

While this article is focused on the retirement benefits Social Security offers, it would be remiss not briefly to mention the other benefits available. Disability benefits are an important part of what the program covers. The Social Security Administration cites studies that show just over one in four of today’s 20-year-olds will become disabled before they’re 67.

This means approximately 25 percent of young adults may need to use this safety net well ahead of retirement age. To protect disabled workers, disability benefits were added in 1956. The Administration also offers Survivors benefits to family members. The Survivors benefit varies based on the type of family member and their age. Lastly, Supplemental Security Income (SSI) will provide assistance to elderly, blind, and disabled people with little or no income.

When it comes to retirement planning, people need to be fully cognizant as to how Social Security fits into their big picture.  When crafting a retirement plan, it’s essential to keep in mind the importance of income replacement.

A common rule of thumb for planning is expecting to replace 80 to 100 percent of pre-retirement income. Thus, an individual that earns $60,000 a year may need between $48,000 and $60,000 annually to fund retirement. This type of planning is called the income replacement ratio, and it’s calculated by dividing post-retirement income by pre-retirement income.

For the most, part post- retirement income is lower since there is no longer saving for retirement, work-related expenses are eliminated, and for many, income taxes are lower. However, since health care costs typically rise as one ages, those costs may offset any savings from not accruing work-related expenses.

Once the income replacement has been determined, the role Social Security will play can be calculated.  Social Security will not cover 100 percent of retirement income for most people, but it will play a part, and for some a significant one.

Using salary threshold of approximately $127,200, the maximum Social Security retirement benefit for 2017, based on retiring at the full retirement age of 66 or 67, with top earnings over a 35-year career is $2,687 per month ($32,244 annually). When talking about an average wage earner, with an average inflation-adjusted salary over his/her best 35 years was $60,000.

This person would have paid 6.2% of his/her salary to Social Security. This person’s employer will have paid an equal amount on his/her behalf. This translates to roughly, $2,100 a month or $25,200 a year.

This amount is only slightly more than half of the lower end of retirement income needs. While this reality may be disappointing, understanding the numbers will allow for planning to account for the income gap that Social Security may leave. Needless to say, the sooner someone understands the income void they may have to fill, the better.

Your age at retirement will also impact the amount of the benefit. Originally, the retirement age to receive full Social Security benefits was 65. In 1983 an amendment was passed, which, via a gradual increase, would increase the full benefits age to 67. Depending on the birth year, full retirement age is between 66 and 67.

Retirement benefits can be paid starting at age 62 or any age after that. However, claiming Social Security before the age of 66 or 67 permanently reduces the benefit amount. Conversely, waiting until 70 years old to retire, will increase the benefit. The decision to take Social Security benefits early or late is a personal one with many factors to consider. One of the biggest factors is the recipient’s health.

If in poor health, it may be necessary to claim benefits early, although it means a reduced benefit. Each year retirement is deferred the payment benefit will increase by approximately eight percent, until age 70. After the age of 70, there is no increase to the benefit.

Knowing your benefits is now a proactive progress since the Social Security Administration no longer sends benefit informational pamphlets. Therefore, it’s up to individuals to visit the Administration’s website at to view benefits. The website is fairly easy to navigate and quite informative; they have many helpful resources, including full earnings records and estimated benefits at different ages.

In conclusion, it’s up to individuals to know their Social Security benefit amount, at what age to take it, and what role the benefit will have in overall retirement funding. While Social Security may not be captain of the retirement income team, it certainly is a valuable player.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation.   

Securities offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Global Retirement Partners (GRP), a registered investment advisor.  GRP, StoneStreet Advisor Group and LPL Financial are separate non-affiliated entities.

Jonathan Russo
Jonathan Russo has been helping people build their financial wellness for almost 20 years. In 2016 he received 401k Summit Leadership Award by NAPA.