Yahoo Finance Dave Ramsey Just Answered 14 Common Social Security Questions
How Social Security works is something we all must deeply understand, and yet, partly because of an overall lack of financial literacy, it can be quite a mysterious beast. Financial guru Dave Ramsey recently posted a blog on his site Ramsey Solutions in which he answered the 14 most common questions about Social Security.
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What Is Social Security?
First things first: What even is Social Security? Ramsey provided some interesting background on the program and what it’s meant to do.
“Social Security was created in 1935 to provide income for retired workers, disabled Americans, survivors of deceased workers, and dependents of beneficiaries,” Ramsey wrote. “Today, about 176 million workers pay Social Security taxes, and 69 million Americans received Social Security benefits in 2021.”
Ramsey made a point of noting that Social Security benefits were never intended to be the sole source of income for retirees.
“It was always meant to supplement your retirement income,” Ramsey wrote.
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How Does Social Security Work?
Ramsey also broke down exactly how Social Security works. It’s a bit complex, but Ramsey makes it easy to understand.
“American workers pay Social Security taxes on their income,” Ramsey wrote. “It’s an automatic deduction based on what you earn. The more you earn, the more you owe Uncle Sam. However, there is a tax cap for high-income earners. In 2022, the cap stands at $147,000. This means, if you make $150,000, you’ll only be taxed for wages up to $147,000.”
You also need to know about the Social Security tax rate.
“This year’s Social Security tax rate is 12.4%,” Ramsey wrote. “If you work for someone else, you and your employer split the tax, paying 6.2% each. If you’re self-employed, you foot the entire 12.4%.”
And alas, the taxes you pay are not put in your own personal Social Security savings account; “the Social Security Administration pools the money and uses it to cover benefits for current beneficiaries,” Ramsey wrote.
Will Social Security Be Around When I Retire?
Many people are concerned about whether Social Security will be around when they reach retirement age. It’s a great question, with a slightly worrisome answer. Right now, the Social Security program is on track to be fully funded only until 2034.
“In its current state, the Social Security system is a mess — and you shouldn’t count on an inept government to fix it,” Ramsey said. “If by some miracle Social Security is around when you retire, you’ll have some extra money to work with. But understand, it’s your job to take care of you and your family, not Uncle Sam’s.”
It’s important to remember that even if Social Security is not fully funded in the future, as of now, there will still be funds going into it that can be paid out.
What Is My Full Retirement Age?
Your full retirement age (FRA) depends on when you were born. The FRA is steadily going up.
Here’s the data Ramsey provided:
If you were born in 1942 and earlier: 65
If you were born between 1943-1954: 66
If you were born in 1955: 66 and 2 months
If you were born in 1956: 66 and 4 months
If you were born in 1957: 66 and 6 months
If you were born in 1958: 66 and 8 months
If you were born in 1959: 66 and 10 months
If you were born in 1960 and later: 67
When Can I Claim My Social Security Retirement Benefits?
You actually don’t have to wait until you reach FRA to collect Social Security benefits.
“You can actually claim retirement benefits as early as age 62,” Ramsey wrote. “But if you do claim your benefits before you’ve reached full retirement age, you’ll get less money each month.”
How Do You Qualify For Social Security Benefits?
Social Security benefits are not provided to everyone. You have to earn them.
“Before you can receive any benefits from Social Security, you have to earn enough credits to qualify for them in the first place,” Ramsey wrote. “Credits? Yes, credits. You’ll need 40 of them over your wage-earning lifetime to receive Social Security benefits.”
How much credit you get depends on how much you earn through work. But, “in most cases, you qualify for Social Security benefits after you’ve worked for at least 10 years earning at least $6,040 each year,” Ramsey wrote.
Or you might be able to get spousal benefits — more on that later.
How Much Social Security Will You Get?
Your Social Security benefits depend on how much you earned during your working years and where you paid Social Security taxes.
“Basically, the higher your lifetime earnings, the more money you’ll receive in retirement benefits,” Ramsey wrote. “But the formula Social Security uses to calculate your full retirement benefit is designed to also help lower-income workers by replacing a higher percentage of their monthly salaries.”
Additionally, when you decide to claim Social Security impacts your payment.
“The earlier you start taking benefits, the less money you’ll get each month,” Ramsey wrote.
Can You Live Off Social Security Alone?
As Ramsey pointed out, Social Security was never designed to be your total source of income during retirement, and considering the current insolvency of the program, you’ve really got to build out separate retirement savings
“The average post-retirement Social Security payout in 2022 is $1,657 per month — that’s barely enough to live above the national poverty level for a two-person household,” Ramsey wrote. “That’s why it’s important to build your own retirement savings by investing 15% of your income in growth stock mutual funds through your company’s 401(k) plan or a Roth IRA.”
Should You Claim Benefits Before Your FRA?
When should you aim to claim your Social Security benefits? It’s important to have a plan here, and the answer isn’t the same for everyone.
“You might be asking, ‘But wait, wouldn’t it be better to wait and get a larger monthly payment?’,” Ramsey wrote. “Just for kicks, let’s say your full retirement age is 67 and you’d receive a monthly benefit of $1,000. If you begin claiming your Social Security at 62, your benefit would be $700. But if you wait to claim your benefit until age 70, it would increase to $1,240 a month.”
You must also factor in expected life expectancy here, as Social Security payments end when you die.
“According to the CDC, the average life expectancy for Americans is 77 years old, so let’s say you’ll live to that age,” Ramsey said. “If you run the numbers, you might be surprised to find you actually end up receiving more money from Social Security over the course of your retirement if you start taking benefits on your 62nd birthday instead of waiting for the higher monthly benefit.”
Can You Still Get Social Security Benefits If You Continue To Work?
Many retirees continue to work in their golden years, be it for income or passion. You can start collecting Social Security before you reach FRA and still work, but there’s a catch, as Ramsey highlighted.
“There’s a Social Security income threshold that reduces your benefit by $1 for every $2 you earn above a certain amount,” Ramsey wrote. “In 2022, that threshold is $19,560. There is some good news, though. Once you reach full retirement age, you’ll receive a higher monthly benefit to make up for benefits withheld while you were still working.”
What Is the ‘Spousal Benefit?’
What if you didn’t work, and hence cannot collect Social Security, but your spouse is eligible. “That’s where the ‘spousal benefit’ comes in,” Ramey wrote.
“If you’re married with little or no earnings history to speak of, you can still receive the spousal benefit, which is half of your spouse’s full retirement age benefits,” Ramsey penned. “But you should check to see if your own Social Security benefit is greater than half of your spouse’s — you should always claim the higher amount!”
Ramsey added to keep in mind that if you want to claim the spousal benefit you must be at least 62 years old or have a child in your care to qualify. Additionally, claiming the spousal benefit before your FRA permanently reduces your monthly benefit.
Do You Owe Taxes on Your Social Security Benefits?
Whether you owe taxes on your Social Security benefits depends.
“Some folks who receive Social Security benefits might have to pay federal income taxes on a portion of their benefits,” Ramsey said, adding that, “the good news is you’ll never pay taxes on more than 85% of your Social Security benefits.”
How Do You Apply For Social Security Benefits?
As soon as you’re ready to start collecting Social Security retirement or spousal benefits, you can apply by doing one of the following:
By phone: 800-772-1213
In person at your local Social Security office
Online with your My Social Security account
“When you apply, be ready to provide the following information to Social Security,” Ramsey wrote. “Date and place of birth; Marital history; Names and dates of birth of your children; Job and employer details from the past two years; Net income from self-employment in the past two years; Military service and the routing number of the bank account where you want Social Security to send your payment via direct deposit.”
How Does Social Security Fit Into Your Retirement Plan?
This is the final question Ramsey tackled, and it’s as important as any other.
“As it stands now, Social Security replaces only a portion of a person’s pre-retirement income,” Ramsey wrote. “For example, medium income earners can probably expect Social Security to replace up to 40% of their income. Remember, benefits could be reduced about 20% after 2034.”
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