Basics of Social Security

Alright. So basics of Social Security. Let’s dive right in. Okay. So here’s the agenda. First one’s gonna be thinking about Social Security. We’re getting a lot of common questions right now. What this is gonna be is we’re gonna talk about the solvency of Social Security and a little bit about the basics there. Then we’re gonna dive into Social Security benefits. This has to do with timelines. So when are you eligible? When should I take it? I’ll dive into a little bit deeper as far as spousal benefits and hopefully chat about that. So let’s start at the beginning. So thinking about Social Security, again, these are some of the most common questions we get. Will it be around when you retire? When can I start taking the benefits? And how can you maximize the benefit? And we’ll talk about breakevens and maximizing those benefits.

So thinking about Social Security, many people don’t know what their full retirement age is. They say about 40% of people don’t know what their full retirement age is, and we’re actually in a unique time period. They have a sliding scale. It’s one of the changes they made some time ago as far as when your birthday is. So the year of birth determines what your full retirement age is or your primary insurance amount. So we’ll elaborate on that. Most people think they’re eligible for full benefits prior to when they actually are, and most people overestimate what their monthly benefit is. One thing I want to point out is when you’re looking at your Social Security statement, what they’re gonna show you is 62, your full retirement age, and then age 70 amount. Those amounts are calculated based on earnings history and assume you’re working up until that age. If you work up until age 62, that number is probably accurate. If you work up to your full retirement age of 67, then that is accurate. But if you retire earlier—say at age 58—that number will adjust because it’s assuming you’re working until 62. We compensate for that here at Cornerstone in our planning software. If that triggered something, please follow up with me afterwards. Our planning software is called WealthVision or eMoney. We calculate that.

So big question: Will Social Security still be there when you retire? It’s a big one for those of you relying on Social Security for income. A recent poll said about 73 people worry a great deal about whether Social Security will be there. You see a lot of pessimistic news. So what’s really happening? Social Security is a pay-as-you-go system. People working now are paying for people who are retired. In 2021, there was about $2.85 trillion in the trust fund. But now there’s a big shift—lots of people retiring, baby boomers entering retirement. They’re expecting about 75% of the system to be funded going forward. The trust fund is projected to last until 2035. The shortfall is about 25%, which means based on who is paying in right now, the system can cover about 75% of scheduled benefits. There are things out there like increasing payroll taxes, filing later, and other proposals. But the biggest takeaway from all research is this: Social Security is not going away. It will be there in some form. It’s at least 75% funded through pass‑through tax revenue. We just have to figure out the remaining difference in the next 10 years, and we trust that will happen.

Now, Social Security benefits. Here’s the sliding scale. If you were born in 1960 or later, your full retirement age is 67. This is your primary insurance amount—the number all benefits are calculated from. You’ll see your FRA listed on your Social Security statement. Back in the day, Social Security replaced most of retirees’ income—closer to 70%. Now, going forward, especially for those in accumulation, Social Security should not be considered your primary source of income. Think of it as a third of your income.

Filing earlier vs. later: Age 62 is earliest. Age 70 is latest. No benefit to filing after 70. The reduction is about 30% from 67 to 62. Your FRA benefit might be $3,000; at 62 you might get about $2,200. Common reasons for filing early: you need the money, can’t work longer, caregiving responsibilities, or job loss. At Cornerstone, we talk breakevens. If you take at 62 vs. 67 vs. 70, the breakeven is usually around age 78–80. Do you want more money before 78 or after 78? That’s really the decision. Example: If your FRA benefit is $3,000 and your age 62 benefit is $2,200, that’s $800 difference later, but you’re getting $2,200 for 5 years. How long does $800 take to catch up? Around age 78. Also, withdrawing from assets vs. taking guaranteed Social Security is something to consider. Reasons to delay: You don’t need the income, you have a pension, expect a longer lifespan, plan to work in retirement, or want a higher long-term benefit.

Working while receiving benefits: Before full retirement age, there’s an annual earnings limit. In 2023 it was $21,240. Benefits reduce $1 for every $2 above that limit. There’s also a first-year rule where monthly earnings limits apply. There’s also a rule allowing bonuses received after retirement to be counted toward the prior year. We help clients with these when filing. The year you turn FRA has a higher limit—$56,520—and benefits reduce $1 for every $3 above that.

Cost-of-living adjustments: Social Security adjusts for inflation most years. At Cornerstone, we use 4% inflation in plans. Your Social Security benefit increases with expenses. COLA was 8.7% last year.

Survivor benefits: If one spouse dies, the survivor gets the higher of the two benefits—not both.

Spousal benefits: You need 40 credits (10 years) for your own benefit. If not, you can get up to 50% of your spouse’s benefit at your FRA (reduced if taken at 62). Everything is based on the primary insurance amount.

Social Security also adjusts monthly, not yearly.

Income taxes: Depending on income, up to 85% of benefits may be taxable. This is client-specific. You may choose to delay benefits to do Roth conversions earlier.

Big picture: Social Security replaces about 40% of income. The rest should come from savings, pensions, investments, etc. Pensions are becoming less common. We help you determine how much to save to cover that 60%.

Resources: socialsecurity.gov has a new portal. You may see a legacy login; new ones require a unique username and two‑factor authentication. When we do planning, we collect your Social Security statement. If you don’t want to log in, we can estimate based on income.

Quiz section: Social Security replaces 40% of income. Average 2022 monthly benefit was $1,827. About one‑third of people file at 62. FRA for those born after 1959 is 67. Are benefits taxed? Maybe—it depends on income. With good planning, taxes can be reduced.

Closing: We covered the basics and most common questions. We are full financial planning. If you haven’t gone through planning with us, we’d love to help you determine when to file. We show breakevens and how Social Security complements your plan. Feel free to reach out to your advisor. Thank you, and have a great day.