The Role of Social Security in Your Retirement Plan

Social Security is a crucial part of many Americans' retirement plans, providing a guaranteed source of income for individuals once they reach a certain age. Established in 1935, this program aims to ensure financial stability for retired individuals, disabled workers, and survivors of deceased workers. Through payroll taxes paid during an individual's working years, Social Security benefits are accumulated and distributed when eligible recipients retire. 

How Social Security Benefits Are Calculated

The amount of Social Security benefits a person can receive is determined based on their lifetime earnings and the years they’ve worked. The more an individual earns and the longer they work, the higher their Social Security benefits will typically be. However, the benefits are subject to certain limits and are calculated using the 35 highest-earning years. If someone has fewer than 35 years of work, the missing years will be factored in as zero, which can lower the monthly benefit amount.

Your monthly Social Security check is based on a complex formula considering your Average Indexed Monthly Earnings (AIME). This measures your earnings over your career, adjusted for inflation. Once your AIME is determined, it’s plugged into a formula to arrive at your Primary Insurance Amount (PIA), which represents the standard benefit you would receive at your full retirement age. If you choose to begin receiving benefits earlier or later, your amount will be adjusted accordingly.

When to Start Receiving Social Security Benefits

One of the most important decisions you will face regarding Social Security is when to begin receiving benefits. You can start collecting Social Security as early as age 62, but doing so will result in a reduced monthly benefit. For each year you delay taking benefits after 62, up to age 70, the amount you receive will increase. You can maximize your monthly payments by waiting until your full retirement age or even longer. 

The decision of when to start taking Social Security depends on several factors, including your health, financial situation, and retirement goals. For some, it makes sense to begin benefits early to ensure a steady income as soon as possible. Others may delay benefits to receive a more considerable monthly amount later, especially if they expect to live longer. Considering your immediate needs and long-term financial goals, it's essential to weigh your options carefully.

How Social Security Fits Into Your Retirement Plan

While Social Security plays a significant role in retirement planning, it should not be your only source of income in retirement. Financial experts recommend diversifying your retirement strategy to include savings accounts, investments, and employer-sponsored retirement plans, such as 401(k)s or IRAs. Social Security benefits complement these other sources of income, providing additional financial support when needed.

Many retirees rely on Social Security as a foundation for their retirement, but it is typically not enough to fully support their lifestyle. For example, the average Social Security benefit is $1,500 per month, which may not cover all your expenses, especially if you have a mortgage, medical bills, or other significant costs. As a result, having additional retirement savings and investment income can be crucial for maintaining a comfortable standard of living.

Maximizing Your Social Security Benefits

There are several strategies you can use to maximize your Social Security benefits. For example, you can increase your benefits by working longer and earning higher wages. Additionally, if you are married, you and your spouse can coordinate your Social Security claims to optimize the total benefit amount. Spouses can claim benefits based on their work records or receive benefits based on their partner’s record if it results in a higher payout. 

It is also wise to carefully consider the impact of taxes on your Social Security benefits. While Social Security income is not taxed at the federal level for everyone, those with higher income levels may be required to pay taxes on a portion of their benefits. Understanding how taxes affect your Social Security income and incorporating this into your broader retirement plan can help you avoid unexpected financial strain.

The Future of Social Security and Its Impact on Your Plan

While Social Security is essential to retirement planning, its future is uncertain. The program faces long-term financial challenges due to the aging population and the increasing number of retirees. Projections indicate that the mid-2030s may deplete the Social Security trust fund unless changes are made to the system. If this happens, benefits could be reduced by as much as 20% or more, affecting your retirement plan.

Despite these concerns, Social Security is still an essential part of retirement planning for most people. Lawmakers continually adjust the program to ensure its sustainability, though these adjustments may include changes in benefit amounts, tax rates, or eligibility requirements. As such, it is essential to stay informed about the future of Social Security and adjust your retirement strategy accordingly. Planning for the possibility of reduced benefits in the future can help you make informed decisions about saving and investing.

Call Journey Wealth Management today at 209-825-8888 or 808 469-4361. You can also visit JourneyWlthManagement.com to learn more about Roy Gagaza, his team, the WealthWize Way, and how proper healthcare planning is essential for a successful retirement in 2025 and beyond.