More than a third of Americans rely on Social Security for all or part of their monthly income. When created, Social Security was intended to serve as a safety net for the sick and indigent. However, it has become part of most American’s retirement budget. An article appearing in The Motley Fool asks the key question: “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?
Social Security was meant to provide 40% of pre-retirement earnings for the average American wage earner. Some people get more based on their years of earnings, and others receive less. Figuring out how much you’ll get isn’t as complicated as you might think.
How does the Social Security Administration calculate your benefits? There are three key numbers used to calculate a worker’s benefits. First, how many years did you work to earn income? Income from other sources, like rental properties or investment accounts, doesn’t factor into the Social Security equation. It’s all about earnings.
The SSA looks at your 35 highest-income years. The lowest earning years are ignored if you worked more than 35 years. However, if you worked for less than 35 years, those years are treated as “zero-income” years and added to your benefit calculation.
The next number is how much money you earned during those 35 highest-income years.
Remember, you pay Social Security payroll taxes on the first $168,600 in 2024, so only this amount counts towards benefits. Every year has a ceiling at which point your income isn’t counted, and in past years, this number was lower.
Increasing your earned income increases your monthly benefits. It’s that simple.
The last of the three factors concerns when you begin receiving benefits. You’ll need to wait until your official “Full Retirement Age” or FRA to receive the full benefits determined by your birth date. Taking benefits too early could reduce them by as much as 30%. Delaying benefits is good if you can. However, it’s simply not a possibility for some people. Consider your health and financial situation to determine the best time to start taking benefits.
The government has a robust website called My Social Security Account that helps you fully understand your benefits. Simply create an account, and you’ll be able to see how much you have paid into the system and what you can expect to receive.
Why should you spend the time getting familiar with this information? One is obvious; you’ll want to plan your retirement budget with this information. However, another reason concerns your estate plan. How much money you’ll have to live on during retirement impacts how your estate planning attorney structures your estate plan. Will you leave anything to heirs based on your Social Security benefits? Will you need to have a trust created to protect assets?
Creating a holistic estate plan with an experienced estate planning attorney will address Social Security income and other retirement income sources, so you’ll know what you’ll have during retirement and what kind of a legacy you might leave to your family. Remember, legacies aren’t just about money.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: The Motley Fool (April 19, 2024) “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?