Social Security is one of the most important programs in the United States. Social Security is the federal government’s largest safety net program, providing benefits to over 62 million Americans. This program is funded through the payroll tax.

Social Security is one of the most well-respected programs in the United States, and it is often credited as being the catalyst for the American middle class. Created in 1935, the system provides a monthly benefit to retired and disabled workers and their families, as well as to wounded military veterans.

Social Security was originally designed to solve a pressing problem. The WWII generation had a sense of guilt and responsibility for the country, and planned to pay for their own retirements. But the program has since morphed into a hot-button issue.

Social Security has a poor reputation. Most people connect it with the elderly, or worse, they reject the program completely and ridicule it as if it were a joke.

I can’t tell you how many snarky and sometimes downright nasty things people have written about Social Security as someone who has followed personal finance blogs for a long time. This saddens me because I believe that if individuals took the time to really understand and appreciate Social Security, they would discover that it can be a valuable tool in their quest for financial independence.

Regardless of how people feel about it, the fact is that Social Security is a highly active program that pays out payments to millions of individuals every month. And whether you like it or not, you’ll be one of those receivers at some point.

In this article, I’d like to explain what Social Security is, who it benefits, and how it operates. We’ll also go over how it should be included into your retirement strategy and how it can help individuals who wish to F.I.R.E.

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What is Social Security and how does it work?

Social Security is a government program in the United States that pays individuals who are eligible for retirement, disability, or survivor benefits monthly payments. The Social Security Administration, an autonomous government agency, is in charge of it (SSA).

What Was the Purpose of the Social Security Program?

Social Security was established as a safety net for people who needed financial help. It was signed into law by President Franklin D. Roosevelt in 1935, after the United States had been in the grip of the Great Depression for half a decade. Nearly a quarter of the population of the United States was jobless at the time.

Many old and handicapped people, many of whom had fought in World War One just a few decades before, sensed the despair of the moment. Several of these individuals went hungry and were homeless, causing widespread social discontent among the general public and officials.

A government-sponsored safety net has been suggested as a means to counteract this spreading tendency. The Social Security Act, which became the program we know today, was based on this idea.

According to the plan, the whole working population would be taxed to finance Social Security. Their payments would go into a trust fund that would be utilized to pay out benefits. The Social Security Administration was then in charge of determining who was eligible for these payments and how the trust fund should be administered.

What Is Social Security and How Does It Work?

Social Security does not begin until you reach retirement age. Because of the way the program is set up, you’ll have a part to play for the rest of your life. Here’s all you need to know about how Social Security works, as well as your role in it.

FICA (Federal Insurance Contributions Act) is the method through which Social Security is funded.

Have you ever noticed that money was taken out of your salary for something called “FICA”? The Federal Insurance Contributions Act is abbreviated as FICA. Every working American pays a payroll tax, which is how Social Security is financed.

FICA deducts 6.2 percent of your gross wages for Social Security and 1.45 percent for Medicare from your paycheck. Your employer pays the government the same total 7.65 percent tax, for a total contribution of 15.3 percent.

If you make a lot of money, you’ll ultimately hit a limit on how much FICA tax you have to pay. The highest taxed earnings ceiling will be $142,800 in 2021.

We had a very successful year at my former job, and I received a very large profit-sharing check. I earned more than the taxable earnings limit (which was much lower at the time), so I didn’t have to pay FICA for the remainder of the year. It was like receiving a 7.65% increase for at least a couple paychecks!

So, what happens to all of the money that Social Security receives? The money they receive from FICA taxes is utilized as follows, according to their website:

  • 85 percent of the money goes to a trust fund that pays out benefits to existing retirees, surviving spouses, and children of deceased individuals.
  • A trust fund that provides assistance to individuals with impairments receives 15% of the money.

Did you chance to notice anything in that description, by the way? What percentage of the money you put into Social Security goes to current beneficiaries? So, you may be asking, “Who will pay for my Social Security payments when I’m older?”

Younger individuals who are working and paying FICA taxes are the solution.

Fun fact: A Ponzi Scheme operates in the same way. When money from new investors is utilized to pay out rewards to previous investors, this is known as a Ponzi Scheme.

While I don’t think there was ever any malice or deception in the establishment of Social Security, the reality remains that it is not a long-term solution. Current retirees will not be compensated if fresh money stops flowing, and the whole system would collapse.

… It’s just something to ponder about. One of the main reasons why some politicians advocate for the privatization of Social Security is the scenario I just outlined.

Credits Can Be Earned During Your Working Years

If you labor for a paycheck from the time you were a teenager working at a fast-food counter until you receive your senior discount, you may be collecting Social Security credits.

You must earn 40 credits to be eligible for retirement benefits in the future. For every $1,470 in earnings, you’ll get one credit, up to a maximum of four credits each year. This implies that you may expect to get Social Security payments in the future if you have worked for more than 10 years and earned more than $5,880 before taxes each year.

How Are Social Security Benefits Determined?

Social Security payments are calculated using your top 35 years of earnings. Your “average indexed monthly earnings,” or AIME, is calculated using this figure.

For the most part, this will be the money they earned throughout their working life (presumably in their 20s through 60s). It’s also worth noting that if you reach the $142,800 FICA maximum stated above, this is the highest amount that will be included against your AIME for that year (and not the higher amount that you actually earned).

Social Security calculates your entire payment amount (commonly known as your “primary insurance amount” or PIA) using this AIME value. The following formula is used to determine this:

  • 90% of your AIME’s first $996 will be returned to you.
  • Plus, up to $6,002, 32% of any payment above $996
  • Plus 15% of any sum in excess of $6,002.

Don’t be concerned! If all of that arithmetic is leaving you perplexed, here’s a simple method to find out your total: Create an account on the official website, and then let them compute your benefit for you.

I’ve spent a lot of time on the SSA website, and they offer a lot of helpful, interactive tools for testing out different situations. Plus, looking back at your previous earnings data and seeing how much you used to make in high school or college is entertaining. … How did I manage to stay alive?

It’s also worth noting that the corresponding AIME values will be zeros if you intend to retire early, live off of savings alone, and earn nothing for any of those 35 years. People who intend to F.I.R.E. may consider picking up a side hustle so that they don’t miss out on future advantages (F.I.R.E stands for Financially Independent, Retired Early).

Getting Your Social Security Benefits

If you’ve completed your 40 credits and are ready to retire, you have a few choices for collecting your Social Security benefits.

  • Early Retirement Benefits – At the age of 62, most individuals may apply for Social Security. However, depending on your PIA, they will not be the “whole” benefits. Because you haven’t yet achieved their definition of full retirement age, your benefits will be cut by approximately a half-percentage point for each month you wait. This equates to a decrease of around 25% on average.
  • Full Retirement Age – According to Social Security, full retirement age is 67 years old (if you were born after 1960). You’ll get your full benefit amount depending on your PIA if you wait until then to file for Social Security.
  • Delayed Retirement Benefits – You have a third option to postpone your Social Security payments up to age 70 if you don’t need them or just choose to wait. If you do this, your benefits will be about 25% greater than they would be at the age of 67. Delaying Social Security beyond the age of 70 does not provide any extra benefits.

It’s worth mentioning that, according to Social Security, if you total up all the benefits and account for inflation, all three formulas should theoretically pay out the same amount. This is based on actuarial statistics (i.e. life expectancy) and the trust fund’s return.

So, how much can I expect from my Social Security benefits?

So, after all of that, here’s the big question: How much can you anticipate to get from Social Security each month?

As you would expect, that’s a complicated question. It’s akin to asking 100 individuals how much money they have in their 401(k) account; the responses will be all over the place depending on a variety of inputs and variables.

However, you may get a general approximation by looking at data directly from the Social Security website. They provide statistics on a range of data points every year. The average monthly benefit in 2021 was estimated to be $1,543.

retirement and social security

Social Security Isn’t Just for Retirement.

Although the majority of people think of Social Security as a check they’ll get when they retire, the program also helps a variety of other individuals in need.

Insurance for People With Disabilities

Disability insurance is one of the things that many people are urged to obtain. This is a policy that would provide you supplementary income if you were injured or ill and couldn’t work for a while.

Fortunately, most Americans will be eligible for Social Security Disability Insurance provided they have paid into the system for a long period (SSDI). Your SSDI will be computed using the AIME figure we discussed previously, much like your retirement benefits.

SSDI benefits often range between $800 and $1,800 per month. Unfortunately, if you make a lot of money, SSDI won’t be able to restore all of your lost earnings. The maximum monthly payout is slightly over $3,000.

I recall working with a lady whose husband was injured in a vehicle accident when I was younger. They filed for SSDI and were granted payments for more than a year. It was a true lifesaver in their situation!

Benefits for Spouses

If you’re married, you may apply for Social Security spousal benefits. This is usually half of what they would earn when they reach full retirement age. If your husband is anticipated to earn $2,000 per month at age 67, you may expect to receive approximately $1,000 in spousal benefits at the same age.

Taking advantage of early advantages may be difficult in this situation. If your spouse begins receiving Social Security at the age of 62, your payments may be cut by as much as 30%. (depending on when you start taking these benefits).

Don’t expect to get two sets of benefits if you worked and paid into Social Security. The greater of the two benefit amounts will be given to you automatically by the program.

This is especially significant for couples where one person was the earner and the other one remained home. If the working spouse files for benefits as soon as feasible, the non-working spouse may be trapped into the lowest potential payments.

This occurred to a friend of my grandmother’s. The spouse began collecting Social Security payments as soon as he could and died just a few years later. Unfortunately, this limited her Social Security benefits to a spousal benefit of approximately $300 per month – hardly enough to pay for food!

Spouses Who Have Divorced

If you were married for at least ten years before being divorced, you may still be eligible for spousal benefits. To qualify for benefits, your divorce must have been two years or longer, and both you and your ex-spouse must be at least 62 years old.

You will no longer be eligible to receive benefits from your ex-spouse if you remarry. If your new marriage is less than ten years old, you may take the greater of the two payments (either your ex-spouse or the new spouse).

Benefits Upon Death

If a close relative, such as a spouse or parent, has died, Social Security will give you a modest death benefit. This is now a one-time payment of $255.

Payments are usually made to the surviving spouse or kid (if there is one). A divorced spouse may be entitled for this payment under specific conditions.

What Are the Taxes on Social Security?

Your Social Security payments are, in general, taxed. However, the precise amount will be determined by how much additional income you have and your tax filing status.

To give you an idea, according to Social Security, as of 2021:

  • Individual filers will pay taxes on half of their benefits if their combined income is between $25,000 and $34,000, and on 85 percent if their combined income is more than $34,000.
  • If their combined income is between $32,000 and $44,000, joint filers will pay taxes on 50% of their benefits; if their combined income is more than $44,000, they will pay taxes on 85 percent of their benefits.
  • Regardless of their combined income, married but separate filers will pay taxes on all of their benefits.

For the purposes of Social Security, “combined income” is defined as:

12 of your Social Security payments + your adjusted gross income + nontaxable interest

For example, 401k and IRA withdrawals will account for the majority of my retirement income when I retire. We’ll almost certainly have to pay taxes on at least 85 percent of our Social Security payments since my wife and I are joint filers and our income sources will push our adjusted gross income far over $44,000.

Is it possible to work and collect Social Security at the same time?

Even if they are retired, it is typical for elderly Americans to work these days. Not only may this offer some additional cash padding, but many experts believe that it is also beneficial to mental health and social relationships.

When it comes to Social Security, though, working throughout retirement may have an effect on the amount of benefits you get. Here’s what you should be aware of:

  • If you’re working and under the age of full retirement, Social Security will withhold one dollar for every two dollars in payments above $18,960. (as of 2021).
  • If you are still working when you reach full retirement age, Social Security will withhold one dollar for every three dollars in benefits above $50,520. (as of 2021).

You may begin receiving your full benefits regardless of how much you work after you reach full retirement age in the month. Furthermore, Social Security will adjust your benefits to compensate for any payments that are decreased as a result of working.

This is fantastic news for someone like me, who wants to work part-time or have a side hustle when I’m older. Not only will I be able to supplement my income by working on things that I know I’ll like, but I’ll also be safe in the knowledge that I won’t be losing any Social Security payments (as long as I wait until full retirement age).

Is Social Security going to be available when I retire?

Perhaps the most vexing issue regarding Social Security is whether it will still exist by the time you retire (and therefore should you even put any effort into thinking about it).

In other words, by the time you reach your 60s, Social Security will still exist. However, there is no way of knowing what it will look like or how much it will pay out.

The trust fund surplus is expected to be exhausted by 2035, according to the Social Security Board of Trustees’ 2020 annual report. This is mostly due to the fact that the population of the United States has not grown as quickly as it did after World War II (the “baby boomer” generation). More money is going out than coming in because there are now more elderly Americans than ever before compared to the number of younger employees paying into the program.

That does not, however, imply that the program as a whole is no longer alive. Keep in mind that the revenue for this trust fund comes from existing employees who pay FICA taxes. As a result, Social Security believes that you should still be eligible for approximately 79 percent of your benefits.

So, if you were hoping for $1,000, you could end up with $790. While this isn’t the entire amount, it’s still a lot better than the big fat zero that Social Security opponents like to promote.

The most important lesson from this entire scenario is that Social Security’s architecture is fundamentally broken and in desperate need of reform. This is why you’ll often hear more outspoken opponents advocating for reforms such as privatization of Social Security benefits or a system more like to that seen in European nations.

Is Social Security Enough to Support You During Retirement?

No, Social Security alone will not enough for most individuals in retirement.

If you don’t believe me, consider that the average monthly Social Security retirement payout is $1,543. This equates to only $18,516 per year. According to the ASPE, it puts two individuals barely over the poverty level.

Keep in mind, however, that Social Security was never meant to be your only source of retirement income. It began during the Great Depression as a means to give just enough money to save elderly and handicapped Americans from starving and becoming homeless.

At the same time, the government made it plain that people must still have a role in future preparations. This was achieved for many years after the Great Depression via employer pension systems, which were eventually superseded by the modern retirement plans we have today.

So, how much should I be putting aside?

This is another issue that is completely dependent on you and your circumstances.

The first thing you should ask yourself, in my opinion, is: How much retirement income do I anticipate I’ll need after I’m retired? You may then calculate how much you’ll need to save to get there.

For example, before taxes, my wife and I expect to make $90,000 per year (or $7,500 per month) in retirement. That should be enough to pay all of our living costs, plus a little more for enjoyable things like travel and hobbies.

We can simply figure that we’ll need a nest egg of: Using the 4% Rule, we’ll require a nest egg of:

$90,000 divided by 0.04 is $2.25 million.

Of course, that’s just the two of us. Our estimate is based on years of budgeting and lifestyle changes, both positive and negative. You might say we’ve found a nice medium where we’ve eliminated a lot of needless expenditure while still being able to do anything we want.

To help us reach our goal, I’ve been deliberately maxing out as many of our retirement accounts as possible and saving as much as I can. This is, in general, a total overshoot. However, it is a plan that will assist us in achieving our objective as soon as possible – maybe even with a little additional padding.

You may discover that saving 15%, 20%, or even 30% of your salary can assist you in reaching your nest egg target. You may also use a free online calculator like this one to calculate out how much money you should be putting down each month.

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Where Should You Put Your Retirement Savings?

The government, believe it or not, wants you to save for retirement. (The more self-sufficient you are, the less you will rely on others for help.) To encourage individuals to be proactive, the IRS offers a variety of tax-advantaged incentives.

Here’s a rundown of the retirement resources available to you:

  • 401k. If you work for a company that provides a 401k plan, you may contribute up to $19,500 each year tax-free (or $26,000 if you’re 50 or older). A 403b and a 457 are two similar programs.
  • An Individual Retirement Account (IRA) is a tax-deferred savings account that may be established at practically any financial institution. You have the option of saving up to $6,000 each year (or $7,000 if you’re 50 or older).
  • Accounts in the Roth style. You may establish a Roth-style 401k and IRA if you’d rather pay taxes on your contributions now and make tax-free withdrawals when you retire. Roth 401(k)s are only accessible if your company offers them. Roth IRAs may be opened almost wherever an IRA can be opened.
  • Accounts for self-employed people. There are specific self-employed retirement plans available if you work for yourself or run a company. The Solo 401k, SEP IRA, and SIMPLE IRA are examples of these.
  • Stocks and ETFs that are taxable. Stocks and ETFs (exchange-traded funds) that generate capital gains and dividends will be taxed at a different rate than normal ordinary income, even if they aren’t tax-deferred. This is particularly useful if you’ve already used up all of your previous accounts.

Keep in mind that whatever you save will be in addition to your Social Security payments. As a result, the more money you put into these accounts, the more money you’ll have in retirement.

Should I Even Think About Social Security When Planning My Retirement?

Absolutely! Despite the fact that the Social Security trust fund surplus will be exhausted by 2035, your payments will not be reduced to zero. It just implies that they will be lowered.

While not receiving your entire entitlement may be frustrating, even at 79 percent, these advantages can play a major part in your retirement planning – possibly more than you realize!

Traditional retirement may be shortened by several years.

Let’s look at a “typical” retirement situation and see how Social Security may be beneficial.

Let’s suppose you make $60,000 per year and put 15% of your earnings into a retirement account that yields 7% annually on average. Calculating the figures:

  • To retire, you’d need a $1.5 million nest fund, according to the 4 Percent Rule.
  • It will take you 37.5 years to achieve your objective.

Let’s now add Social Security to the mix. Even with a decreased 79 percent benefit, the typical working American would get approximately $1,219 per month or $14,628 per year. Incorporating this information into the equation:

  • That implies you just need ($60,000 – $14,628) / 0.04 = $1,134,300 in your savings account.
  • Using the same criteria as before, you’d be able to save and invest your way to this amount in 33.8 years.

So, when everything is said and done, Social Security has just cut 3.8 years off this hypothetical timeframe of working and saving. That would be some very good news to someone in their 60s who is ready to retire!

Providing Safety During the F.I.R.E. Program

Even for someone like me, who expects to achieve financial independence in his 40s, Social Security will be a significant assistance. That’s because the additional payments will boost my savings account just when I need it.

Let me give you an example of how this might work:

  • If I withdrew 4% each year for the following 50 years after we achieve our $2.25 million goal, my portfolio would have a 77.2 percent probability of surviving. That doesn’t make me feel very safe, and it’s probable that I should reduce my withdrawal rate to something more reasonable (like 3.5 percent). But if I did that, we’d have to put aside a considerably larger sum of money. Frustration!
  • Add in the cost of Social Security. If I estimate that our benefits will be about $15,000 per year and that they would begin to pay out around the time I reach full retirement age, our portfolio survival rate rises to 92.1 percent. I feel a lot better when I listen to 92.1!

You may use FIRECalc, a free online application, to test these situations or any other numbers you like.

The bottom line is that your Social Security payments will be cut. But don’t reject them outright. They may be just what you need to help you enjoy a long and prosperous retirement.

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Final Thoughts

Social Security is a government program that helps the aged, handicapped, and their dependents in the United States. It’s not intended to be a primary source of retirement income, but rather a modest supplement to meet basic necessities like food and housing.

The FICA payments you pay will support Social Security and Medicare throughout your working years. These payments will be used to pay current retiree benefits, just as your retirement benefits will be paid by the younger workers one day.

During your working years, you’ll also receive credits for each year your salary exceeds the Social Security level. To be eligible for future payments, you’ll need 40 credits.

Your Social Security payments will be calculated based on your top 35 years of earnings. You may begin receiving your monthly benefit at the age of 67, or you can start receiving a reduced version at the age of 62. Alternatively, if you wait until you’re 70 to make your contributions, you’ll receive a bigger advantage.

A part of your Social Security income may not be taxed depending on your other sources of income. If you work part-time or have a side business, your benefits may be decreased.

Despite the fact that Social Security’s coffers will be depleted by 2035, the program will likely continue to pay out 79 percent of eligible payments in the future. While this may not seem to be much, it may enable some individuals retire sooner than they expect. You may also use your own money to augment your social security benefits by investing in a 401(k), IRA, or ETF.

I take great comfort in knowing that Social Stability will help me avoid depleting my savings and provide me with many years of financial security.

Social Security is a federal government program that provides monthly income to retirees, widows and people with a disability. All U.S. citizens are eligible for Social Security benefits, whether or not they have worked for a certain period of time. The Social Security Administration (SSA) is the federal agency responsible for administering Social Security.. Read more about how much social security will i get at 62 and let us know what you think.

Frequently Asked Questions

How do they calculate Social Security benefits?

The Social Security Administration calculates your benefits based on a number of factors, including your work history and the amount of taxes you have paid into the system.

How many years do you have to work to get maximum Social Security?

You will have to work for at least 35 years to get the maximum Social Security.

How does Social Security work simple?

Social Security is a system of social insurance in the United States that provides retirement, disability, and survivors benefits.

This article broadly covered the following related topics:

  • how does social security work today
  • how does social security work for married couples
  • how does social security work when you die
  • how does social security work when you retire
  • how does social security work
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