How to create a Social Security strategy

Social Security is a cornerstone of most Americans’ retirement plans. Despite this, many myths surrounding Social Security persist, and knowing the best way to integrate Social Security into your overall retirement strategy is confusing. While creating your ideal Social Security strategy is highly individual based on your financial goals, here are general principles and best practices to follow.

What you’ll learn:

• Will Social Security be around when I retire?
• At what age can I retire?
• What will my Social Security payments be?
• When can I start claiming my Social Security benefits?

Will Social Security be around when I retire?

First, it’s important to address the most pervasive myth surrounding Social Security today. While no one can predict the future, Social Security will almost certainly still be around when you retire.

From the early 1980s through the early 2020s, Social Security revenues exceeded the benefits paid out. Over time, this resulted in a large surplus, commonly known as the Social Security Trust Fund. By the end of 2021, the surplus had grown to approximately $2.9 trillion.

Since then, Social Security has begun to run a deficit, largely due to demographic changes and medical advances which have resulted in more retirees collecting Social Security benefits against fewer workers paying into the program. Current estimates indicate that the trust will run out around 2034.

However, this does not mean Social Security will cease to exist, even if the trust is fully depleted. Social Security would still have enough incoming revenue to pay about 80% of promised benefits, and there are many viable solutions to fix the gap between benefits and revenue. In other words, the worst-case scenario is likely a modest reduction in benefits.

At what age can I retire?

The benefits you receive from Social Security are highly dependent on when you choose to begin collecting them. This is not a singular, static number, but rather a sliding scale dependent on both the year you were born and how old you are when you choose to begin receiving benefits.

The key number you want to know is your Full Retirement Age (FRA), which is the age when you can start collecting 100% of your Social Security benefits. For anyone born in 1960 or later, their FRA is 67. Those born in 1959 have an FRA of 66 years and 10 months. 1958 is 66 years and 8 months, 1957 is 66 years and 6 months and so on until those born in 1954 or before have an FRA of 66.

However, while your FRA is used to determine what your full Social Security benefits are, you can start taking Social Security at any time between 62 and 70. If you start before your FRA, you’ll get reduced benefits, while starting after your FRA increases your benefits. There’s no “correct” time to claim your benefits; it all comes down to your individual financial situation and goals.

What will my Social Security payments be?

As mentioned above, a significant factor in determining your monthly Social Security payments is based on when you start claiming your benefit relative to your FRA. However, the other major factor is how much you paid into Social Security during your working years.

The exact formula used is a bit complex. The Social Security Administration takes your highest 35 earning years (after adjusting for inflation) to calculate your benefit amount. However, this is done on a progressive scale, much like how federal income tax works. This means that low- and middle-income workers get a significantly higher percentage of their income as Social Security benefits than a high-income earner.

Because your exact benefit amount is based on your individual career earnings, the best way to determine your benefits is to meet with a trusted financial advisor or use the online resources provided by the Social Security Administration at ssa.gov.

When can I start claiming my Social Security benefits?

Because your Social Security benefits can vary so much based on your work and income history, your FRA and at what age you begin claiming Social Security, there is no one-size-fits-all strategy to best utilize Social Security. Much of the decision will come down to aspects of your individual situation, such as when you want to retire, your monthly expenses and how much you have saved for retirement outside of Social Security.

While the idea of a Social Security strategy can feel overwhelming, it doesn’t have to be. Understanding how Social Security works can give you confidence in your overall retirement plan. Check out our retirement calculator, which includes a section on Social Security, to see how your retirement plan is coming along. For detailed advice tailored to your financial situation, consider meeting with a financial advisor.