Demystifying Social Security

Any American younger than 82 years old has most likely been aware of Social Security their entire adult life. Yet, so many don’t really know very much about this incredibly important benefit. The life insurance company MassMutual performed a survey in the form of a quiz on Social Security in 2016. Of the 1,513 people (18 or older, with 40 percent over 50) that took the quiz, only one person received a perfect score. Seventy percent of those quizzed outright flunked by only correctly answering three or four of the ten questions. Some of the noteworthy questions that people failed to answer correctly included which age full benefits are available, and whether or not you can receive full benefits while still working. A whopping 75 percent didn’t know that citizenship was not a requirement if a person has legal residence alien and permission to work status. Regardless of the many potential reasons some Americans are so woefully ill-informed about Social Security, it is a benefit that most can’t afford not to understand.

As part of President Franklin Delano Roosevelt’s New Deal, the Social Security Act was passed into law in August of 1935. President Roosevelt’s probable inspiration for Social Security, ironically, came from Germany. German Chancellor Otto von Bismarck created the first old-age social insurance program in 1889. Chancellor von Bismarck was addressing the growing concern of longevity. As advances were made in healthcare, people started living longer. While living longer is a good thing, once people were too old to work, there was no way for most of them to generate income. Thus, the era of paid retirement began.

A good number of Americans recognize Social Security as a retirement subsidy. But before diving into the retirement benefits, people should also be cognizant of the survivors and disability offering as well as Supplemental Security Income that Social Security covers. In 1939, an amendment was added to the new law that expanded protections for individual workers to include families. The 1939 amendment, a.k.a. the Survivors Benefit, helps safeguard dependents of workers. The Survivors Benefit varies based upon the type of family member and age. Today, the Social Security Administration tells us about 5 million widows and widowers receive a Survivors payment each month. President Richard Nixon signed the Supplement Security Income Act (SSI) in 1972 to replace adult assistance programs performed on a federal-state level. SSI provides stipends to low-income individuals that are blind, disabled or aged 65 or older.

The Social Security Disability benefit may never touch a good percentage of the population. But for those that need it, it may be their only financial salvation. In the first quarter of 2017, over 550,000 (1) people filed applications for disability coverage. The disability coverage may be as important to young adults as it is to older ones. The Social Security Administration’s website references studies that show approximately 25 percent of current 20-year-olds will become disabled before reaching the age of 67. The benefit will terminate when the recipient is no longer disabled or will be converted to retirement coverage when age-eligible.

The retirement benefit Social Security offers is the most well-known, although, many may not know much about how it works. First, it is important to understand what role Social Security will play in funding retirement. Generally, it is wise to anticipate requiring 80 to 100 percent of pre-retirement income, meaning if an individual’s pre-retirement annual income is $100,000 a year, that individual would need at least $80,000 a year to live in retirement. There are several reasons a person may require less income once retired. A retiree won’t incur work-related expenses and does not have to contribute to retirement savings accounts. Conversely, the cost of healthcare tends to be more expensive for older people, so that may offset other savings. The Social Security retirement benefit probably won’t replace all necessary income. The Administration’s website has an easy-to-use calculator, which allows individuals to learn the amount of their anticipated benefit. The benefit amount is gauged on a few factors, but mainly the highest 35 wage years are averaged.

The second big factor in determining the benefit amount is the age one retires. Up until 1983, people could retire at 65 and receive the full amount. Today, a person can receive reduced benefits when they turn 62, take less of a reduction by claiming benefits at 65, or wait until 67 for the full amount. While it is prudent to wait until 67 for the largest amount, for some that may not be feasible or necessary. If someone is able to wait until the age of 70 to claim Social Security, the benefit will increase by roughly eight percent for each year between the ages of 67 to 70. After turning 70, there are no further increases.

As of 2017, Social Security has an earnings threshold of $127,200, which would pay a maximum monthly benefit of $2,687. Realistically, $2,687 a month won’t be enough fund retirement fully. That income gap will have to be made up from other funds, such as 401ks or IRAs. Therefore, it is enormously important for people to start playing a proactive role in their retirement funding at as young of an age as possible. Knowledge and disciplined planning, starting in early adulthood, will go a long way toward making one’s golden years shine.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Global Retirement Partners (GRP), a registered investment advisor. GRP, StoneStreet Advisor Group and LPL Financial are separate non-affiliated entities.

(1) Social Security Administration.

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