Fixed Income

Never Rely on Social Security to Fund Your Retirement

Combine Social Security With Good Planning for a Stable Retirement
BY Anne Johnson TIMEAugust 1, 2022 PRINT

You have worked your whole life for this moment: retirement. And since you paid into Social Security all those years, you may think you now have enough to live on. But, unfortunately, Social Security doesn’t cover all your living expenses. And it won’t help you with a prosperous retirement.

Relying on Social Security for your income is like depending on sand to hold your house up. It’s not stable. You will need another plan, be it investments or working, to help you relieve financial stress and fund a solid retirement. But how can you do that and still collect Social Security benefits?

Working Will Impact Pre-FRA Benefits

There are two scenarios to working while collecting Social Security benefits. One is to receive Social Security before full retirement age (FRA), and the other is to wait until after FRA.

If you elect to draw Social Security before you reach FRA, there are some limitations as to how much you can earn outside of Social Security. In other words, you will be penalized if you make too much, based on the Social Security Administration’s (SSA’s) criteria.

You will not be penalized for annuities and investment income.

Penalty for Making Too Much Before FRA

You can begin drawing Social Security benefits as young as age 62 (or earlier if you’re a widow/widower or disabled).  However, if you’re younger than retirement age, there are limits on how much you can earn aside from Social Security.  Money will be deducted from your Social Security benefits, based on how much you earn over a designated amount. For example, the maximum amount you can earn for 2022 is $19,560 yearly.

For instance, if you were born in 1960 or later, you will not reach FRA until you’re 67. You will be penalized if you work over the maximum amount. This penalty is one dollar from your benefits for every two dollars you earn over the $19,560.

For instance, you file for benefits, and your payment is $7,200 yearly. But if you earned $23,920, which is $4,360 above the limit, Social Security would withhold $2,180 of your benefits.

In the year that you reach full retirement age—up until the month you reach FRA—the exempt amount goes up, and the SSA deducts $1 in benefits for every $3 you earn above the limit.  In 2022, that limit is $51,960.

Once you’ve reached FRA, you may receive some of the dollars you were penalized for. For instance, if you worked before FRA and continued to pay Social Security taxes, this should increase your original benefit because you have paid more into it.

Working After FRA and Drawing Social Security

There is no limit to how much you can earn on top of Social Security benefits, starting with the month you reach full retirement age. You might even have a higher benefit.

If you continue working after FRA, you will probably continue to pay into Social Security while collecting it. Every year, the Social Security Administration reviews recipients who work. They calculate based on whether these earnings are your highest years of income. They then refigure your benefit and pay any increases due.

You don’t have to notify Social Security; this should be automatically done. The adjusted benefit is paid in December of the following year.

If you’ve reached FRA, it’s a win if you work while receiving Social Security benefits. It gives you extra cash from your job and Social Security.

Don’t Rely on Social Security

In December of 2020, 46.7 million individuals aged 65 or older, or nine out of ten, were receiving Social Security benefits. But how secure is Social Security? According to a 2021 Social Security Trustees report, by 2034, retirees will start experiencing reduced benefits. The Trustees’ report says that retirees will only have around 77 percent of their former benefits. This is because Congress hasn’t addressed the Social Security crisis since the 1980s.

Even the benefits retirees receive now are diminishing. In 2022, the cost of living adjustment for Social Security was 5.9 percent. But inflation was running at 9.1 percent in June 2022. That dramatically impacts what your Social Security check is worth.

Relying on Social Security alone is not the way to have a prosperous retirement.

How Big Should Your Nest Egg Be?

You can’t rely on Social Security, but you can rely on yourself.

When planning for retirement, you should hire a sound financial advisor. Even if you’ve already established a nest egg, making sure it grows and is there for you when you retire is imperative. A sound advisor can help you.

Discuss the four percent rule with your advisor. This rule was developed for retirees in the 1990s by financial advisor William Bengen. He based it on 50 years of stocks and bonds returns. And although it needs to be tweaked somewhat for today’s economy, it’s still valid. The premise of the rule is to plan on withdrawing four percent of your retirement fund for living expenses every year.

But in 2022, this is more of a rule of thumb. You still must factor in risk tolerance, your portfolio’s tax status and inflation.  It’s a simple rule that gives a guideline for retirement spending. It just needs to be adapted to today’s economy. The point is to settle on a fixed rate that you will need to live on, in conjunction with your Social Security benefits.

Plan Now, Even If You’re Near Retirement

With the future of Social Security in flux, it’s more important than ever to plan. Even if you’re already nearing retirement, it’s not too late. You can work and actually increase your Social Security benefits. Use the four percent rule to ensure you spend your retirement funds wisely. And finally, regardless of your age, discuss your options with a financial advisor.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Anne Johnson
Anne Johnson was a commercial property & casualty insurance agent for nine years. She was also licensed in health and life insurance. Anne went on to own an advertising agency where she worked with businesses. She has been writing about personal finance for ten years.
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