Isn't That Rich Podcast

Planning for retirement is a crucial step for every working American. Understanding Social Security, how it works, and why you shouldn’t rely solely on it for retirement is essential. Additionally, knowing how to check your future retirement benefits can help you make more informed decisions. Let's dive into this topic and explore the details.

What is Social Security?

Picture this: It's 1935, and President Franklin D. Roosevelt just rolled out Social Security as part of his New Deal. The program promises retirement, disability, and survivor benefits to eligible Americans. Suddenly, older Americans are breathing a sigh of relief. The promise of a guaranteed income in retirement is like a cool glass of lemonade on a scorching day. Of course, not everyone was thrilled; some folks were worried about government overreach, and initially, self-employed individuals and farmers were left out, feeling like they missed the party. But over time, Social Security proved its worth and became as American as apple pie.

How Does Social Security Work?

The Social Security system runs on a pay-as-you-go model, kind of like paying it forward but with a bit more at stake than buying coffee for the next person in line.

Earning Credits: Throughout your working life, you and your employer pay Social Security taxes. In 2024, for every $1,640 you earn, you snag a credit, up to four per year. Most people need 40 credits, which is about 10 years of work, to qualify for benefits.

Calculating Benefits: Your Social Security benefit amount is based on your highest 35 years of earnings. If you have fewer than 35 years of earnings, zeros are averaged in, which can drag your benefit down. The SSA uses a nifty thing called wage indexing to adjust your earnings for changes in average wages over your working years. Your average indexed monthly earnings (AIME) then get you your primary insurance amount (PIA), the amount you'd receive at your full retirement age.

Full Retirement Age: Your full retirement age (FRA) depends on your birth year. For example, if you were born in 1960 or later, your FRA is 67. You can start receiving benefits as early as age 62, but your monthly check will be trimmed for the longer payout period. On the flip side, delaying benefits past your FRA nets you delayed retirement credits, bumping up your monthly amount until you hit age 70.

Types of Social Security Benefits

There are several flavors of Social Security benefits, each catering to different needs. Retirement benefits are available to folks who have worked and paid into the system for at least 10 years. You can start collecting these as early as age 62, but starting early means a smaller check. Disability benefits are for those who have a medical condition that prevents them from working and is expected to last at least a year or result in death. Survivors benefits go to the family members of a deceased worker who earned enough credits. Eligible family members include widows, widowers, children, and dependent parents.

Why You Shouldn't Solely Rely on Social Security for Retirement

While Social Security is a key part of retirement planning, treating it like your only lifeline is a bit like relying on a single tire to carry your car down the highway. Here’s why you need more than just Social Security:

Social Security Replaces Only a Portion of Your Income: Social Security benefits are designed to replace about 40% of the average worker’s pre-retirement income. For example, if you were earning $60,000 a year before retirement, your Social Security benefits might provide around $24,000 annually. While this helps, it's not enough to maintain your current lifestyle.

Rising Cost of Living: The cost of living tends to rise over time due to inflation. While Social Security benefits are adjusted for inflation, these cost-of-living adjustments (COLAs) may not fully keep pace with your actual expenses, especially for healthcare. Consider healthcare costs; Medicare helps, but it doesn’t cover everything, and out-of-pocket expenses for prescriptions, co-pays, and other medical services can add up quickly.

Potential Benefit Reductions: With the Social Security trust funds projected to be depleted by 2034, there’s a possibility that benefits could be reduced if no changes are made to the system. While current retirees might not see a drastic cut, future benefits could be impacted. If the trust funds are depleted, payroll taxes would cover only about 78% of benefits. This means your expected $24,000 annual benefit could be reduced to about $18,720.

Longer Life Expectancy: People are living longer, which means you could spend 20, 30, or even more years in retirement. Relying solely on Social Security increases the risk of outliving your savings. For example, if you retire at 65 and live until 95, that’s 30 years of living expenses. Social Security alone may not be enough to cover all those years comfortably.

Limited Survivor Benefits: Social Security provides survivor benefits, but they might not be sufficient for your spouse or dependents to maintain their standard of living if you pass away. If you were the primary breadwinner, your spouse might receive only a portion of your benefits, which might not be enough to cover all their living expenses.

Lack of Flexibility: Social Security benefits are relatively fixed and lack the flexibility to adjust to unexpected expenses or lifestyle changes. If you want to travel, pursue hobbies, or face an emergency expense, relying solely on Social Security might not provide the financial flexibility you need.

Building a Comprehensive Retirement Plan

To ensure a comfortable and secure retirement, it’s essential to have a diversified income strategy. Contributing to employer-sponsored retirement plans, such as 401(k) or 403(b) plans, is a great start, especially if your employer offers a matching contribution. This is essentially free money for your retirement. Opening a Traditional or Roth IRA can also offer tax advantages and help you grow your retirement savings. Setting aside money in savings accounts, CDs, or investing in stocks, bonds, and mutual funds can provide additional income streams. Diversifying your investments can provide more stability and growth potential. Additionally, consider investing in rental properties or real estate investment trusts (REITs) to generate passive income. Working part-time during retirement can also provide additional income and keep you engaged and active.

Creating Your Social Security Account

Checking your future Social Security benefits is easy with the "my Social Security" online service offered by the Social Security Administration (SSA). Here’s how to create an account:

1. Visit www.ssa.gov/myaccount.
2. Click on "Sign In or Create an Account" and provide some personal information to create one, including your name, Social Security number, date of birth, and a valid email address.
3. Answer some security questions to verify your identity. These questions are based on information from your credit report, so they might ask about loans, previous addresses, or other personal details.
4. Once your identity is verified, set up a username and password. Make sure to choose a strong password to protect your account.
5. After setting up your account, you can log in and view your Social Security statement. This statement shows your earnings record, estimated benefits at different retirement ages, and other important information.

Reviewing Your Social Security Statement

Your Social Security statement is a valuable tool. It provides a detailed record of your earnings history, which is used to calculate your benefits. It also gives you an estimate of the monthly benefits you might receive at different ages, such as 62, full retirement age, and 70. Reviewing your statement regularly is crucial. It helps you ensure that your earnings record is accurate and allows you to make informed decisions about when to start taking benefits. If you notice any discrepancies in your earnings history, you should contact the SSA to have them corrected.

Planning for the Future

Understanding your Social Security benefits is a key part of your retirement planning. While Social Security is designed to replace only a portion of your pre-retirement income, knowing how much you can expect helps you plan additional savings through other retirement accounts, like 401(k)s or IRAs. Staying informed and planning ahead is crucial for a secure retirement.