Should Social Security be part of your retirement plan?

How Social Security works

During your working years, some of your payroll taxes fund the Social Security system. In turn, those taxes pay benefits to Social Security recipients. Even self-employed workers contribute. When you retire, working taxpayers will fund your Social Security benefits.

The amount of your Social Security payment is based on the year you were born, your lifetime earnings, and the age when you start receiving payments—up to a maximum amount, called the "Social Security wage base." The higher your earnings, the greater your benefits, but you’ll need to wait until your "full retirement age" to claim 100% of your benefits. Your full retirement age is based on your birth date—for example, your full retirement age is 67 if you were born in or after 1960.

Changing, but not disappearing

It’s unlikely that Social Security will go away completely, but adjustments are a strong possibility: Congress made adjustments in 1983 to prepare for the future population of retiring baby boomers. 

The government may raise payroll taxes, delay the age you can start collecting, or change the taxes you pay on Social Security benefits.  

There’s a small chance that benefits will be reduced for future generations, but Congress has been hesitant to reduce benefits because of the possible political fallout. 

The icing, not the cake

Regardless of its potential changes, Social Security still plays a part in a solid financial plan. Since its inception, Social Security has been intended as a supplement to retirement savings, not a replacement of main income sources such as a pension or 401(k) plan. Think of it as an extra lever to pull when you need income for sporadic or smaller expenses. You can also use it to reduce the long-term withdrawal burden on your portfolio so you can leave more of your portfolio assets to heirs or to charity.

My younger clients are usually the most skeptical about including Social Security in their financial plan. I start their plan by helping them create an account at ssa.gov and calculating the Social Security benefits they could receive at full retirement age. Then we might factor in only a percentage of the calculated benefits—in case they’re ultimately reduced. Of course, if benefits aren’t reduced by the time they retire, the remaining balance becomes an added bonus. Therefore, your plan should be designed in a way that your retirement savings, such as a 401(k), cover most of your expenses. 

If you do it right, Social Security becomes the icing on the cake.

You’re in control

The sooner you start planning, the more you can maximize your financial resources and prepare for the unexpected. After you identify your goals and create a plan, revisit it often—every 5 years at a minimum. If you’re closer to retirement, do an annual review. Keeping track of your plan’s progress gives you more options and helps you make better decisions. You always have the freedom to make adjustments, when necessary, that align with your goals. If you’re still feeling uncertain, an advisor can answer questions about your specific situation.

When you take the benefits is also in your control. You can start to receive Social Security benefits as early as age 62, but sometimes holding off can increase your monthly payments. Or maybe you start your benefits first, and your spouse delays theirs for a time. Benefits can even be collected after death. A client recently approached me seeking advice on her Social Security benefits. We looked at her options and figured out it was best to delay taking her husband’s benefits until she reached full retirement age—even though he had passed away. She didn’t realize that taking his survivor benefits before her full retirement age would reduce his benefits.

Get the big picture

We offer resources and tools to help maximize your Social Security benefits. You can also visit the Social Security Administration’s retirement overview page to estimate the amount of your benefits and learn more about your options. One caveat: Accuracy depends on how close you are to retirement. 

The odds of Social Security disappearing are very slim. Continue to make Social Security part of your retirement plan but not the main source of income. And like the proverbial icing on the cake, maybe it’ll be the best way for you to get a few well-deserved treats.