Understanding Social Security Benefits

If you plan to only rely on Social Security benefits for financial support, you will most likely not be able to enjoy the retirement lifestyle you hope for. Understanding how Social Security benefits work and what benefits you can expect to receive can be a big wake-up call.

The Savings Gap

Social Security was never intended to be the sole source of income for retirees. While Social Security replaces about 40 percent of the average worker's pre-retirement earnings, most financial advisors say that you will need 70 percent or more of pre-retirement earnings to live comfortably.¹ You will need to make up the other 30 percent of pre-retirement income from other sources like a state pension plan or personal savings.

Because of this, estimating Social Security benefits is vital to the retirement planning process. It’s also important to understand that the saving estimate doesn’t necessarily consider every retiree’s plans – expectations and lifestyles can vary significantly from one retiree to another. Setting retirement lifestyle goals early and estimating the cost of this lifestyle is vital to successful financial planning.

Retirement Age

Some may not realize their monthly Social Security benefit amount is also dependent on retirement age and the year they were born.

For those born between 1943 and 1954, Social Security Retirement Age (SSNRA) is 66. At 66, they can receive 100% of their Social Security benefits.

(For illustrative purposes only – Estimates derived from JP Morgan: Guide to Retirement – 2020 Edition, p9 https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/retirement-insights/guide-to-retirement-us.pdf Accessed January 5, 2021.)

However, if you decide to retire early, your benefits are reduced up to 6.25% per year before retirement age.² For those born between 1943 and 1954, retiring at 62 instead of 66 could mean you may only receive 75% of their Social Security benefit.³ If you decide to wait until after your Social Security retirement age, you can actually receive up to 8% more per year until age 70, for up to 132% of benefits.⁴

For those born in 1960 or later, the retirement age is 67, but the same concept applies.

It’s also important to understand that there are Social Security benefit maximums, regardless of contributions. For an individual retiring at full retirement age in 2020, the Social Security earnings limit is $48,600, up $1,680 from 2019's $46,920 annual limit.⁵

Social Security Taxation

Another misconception about Social Security benefits is that they are never taxed. Single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If combined income was more than $34,000, they will pay taxes on up to 85% of their Social Security benefits.⁶ Married couples filing jointly, will pay taxes on up to 50% of their Social Security income if they have a combined income of $32,000 to $44,000. If they have a combined income of more than $44,000, they can expect to pay taxes on up to 85% of your Social Security benefits.⁷ This should be taken into consideration when estimating retirement income savings goals.

Estimating Benefits and Savings Needs

The Social Security Administration offers a free calculator to help you estimate your monthly benefit amount based on your income, age, and retirement age. Use this calculator to estimate what you need to save outside of Social Security benefits, as well as understand when you will be financially secure enough to retire.

This blog is up to date as of May 2021 and has not been updated for changes in the law, administration or current events.