For decades, financial advisors have used the metaphor of a “three-legged stool” to describe America’s retirement system. The equation for late-life security is having a healthy pension from work, ample personal savings, and a monthly Social Security payment. Of those income streams, only Social Security has proven to be steadfast and strong. Here are important facts to help you better understand, and get more value from, the program.
- Congress can’t raid the Social Security trust funds. No one – not the White House or Congress – can take cash from the program. When Social Security receives money (via taxes and interest), what isn’t paid out in benefits goes into Social Security trust funds. The surplus is invested in standard Treasury bonds and flows into the U.S. Treasury’s general fund as loans that help pay for ongoing government programs and expenses. But the bonds pay annual interest and must be repaid on demand.
- Annual benefit hikes don’t always match inflation. The Social Security Administration’s 5.9% cost of living adjustment (COLA) for 2022 is the biggest in 40 years. But it doesn’t bring benefits in line with long-term inflation – an important fact if Social Security is your primary income source. Undercut by rising prices for everything from prescription drugs to gasoline and groceries, monthly Social Security checks have steadily lost ground through the years.
- You can collect benefits and keep working. Once you have reached full retirement age (FRA), you can collect Social Security benefits and still work without a reduction in benefits. But if you claim Social Security when first eligible at age 62 or before your FRA, your monthly benefits check will be smaller than at full retirement. And until the year you reach FRA, $1 in benefits will be withheld for every $2 you earn above $19,560. The good news: You will get that withheld money back a bit at a time in your monthly checks when you do reach full retirement age.
- Your benefits can be taxed. More Social Security recipients than ever face a tax-season jolt: Up to 85 percent of their benefits may be subject to federal income tax, and in 12 states, also state income tax.
- Spousal benefits could mean a bigger payment. If your Social Security benefits will be less than half of your spouse’s at his or her full retirement age, receiving a spousal benefit is a better deal. You don’t have to ask for it. If you’re married, your Social Security claim is considered a “deemed filing” that covers claims for a spousal benefit. Provided you and your spouse have been married for one year, you’re at least 62 years old, and your spouse has reached full retirement age, your monthly benefits will be the greater of either your own earned benefit or 50% of your spouse’s.
- You can change your mind about when you start Social Security. If you change your mind about not waiting until 70 in the first year of drawing benefits, you can get a fresh start by filling out a form. If you change your mind after the first year of benefits, you can voluntarily suspend payments.
Need help navigating Social Security? Schedule a complimentary call with one of our financial advisors to better understand your Social Security benefit.