While Social Security might seem underfunded, it’s poised to make us all millionaires by the time we retire. Here’s why: when I stumbled upon an old bookstore, it dawned on me that despite modern skepticism, particularly among the younger crowd, Social Security holds substantial promise if we contribute for long enough.
Over the years, the cap on taxable income for Social Security has risen due to inflation adjustments. For example, back in 1979, the maximum taxable income was $22,900, but now it’s jumped to $147,000. Earning up to this cap means you’re not taxed on anything you make above this threshold, which can feel like an instant raise. But with our progressive tax system, earning significantly more than $250,000 might just add stress without substantial financial benefit.
A couple who has earned at the payroll tax ceiling throughout their careers could collect $63,944 annually by starting their benefits at 66, their Full Retirement Age (FRA). This amount translates into a substantial nest egg if calculated with today’s low-risk interest rates. Even if the government only fulfills 70% of its promise, that still equates to around $1.1 million in value.
Many wonder how to generate significant passive income over their lifetimes, but Social Security offers a compelling solution as it pays you automatically until you pass away. The key debate is whether to start collecting benefits at the earliest age of 62 or wait until 70 for a larger monthly payout. If you expect a shorter lifespan, perhaps starting earlier makes sense.
To be eligible for Social Security, you need to have worked for at least 40 quarters, which equates to 10 years. The good news is these don’t have to be consecutive. You could work a few years, take a break for further studies, and then continue, as long as you hit that 40-quarter milestone before considering early retirement.
Social Security benefits extend beyond the individual to spouses, ex-spouses, young and disabled children, and even parents under certain tragic circumstances. However, if you’re not legally married, unfortunately, those benefits return to the government instead of supporting a surviving partner.
One strategic approach to maximize Social Security is to marry legally at about 61, just before eligibility kicks in, and then aim to live as long as possible to maximize the benefits received. The longer you or your spouse live, the more you can collect.
For those born in 1960 or later, the Full Retirement Age is 67. For others, it varies slightly based on birth year, which adds a layer of complexity to planning when to start benefits. Despite the seeming clarity of these guidelines, the inherent complexities in our tax and benefits systems can discourage and confuse potential beneficiaries.
On a positive note, Social Security benefits are adjusted for inflation, ensuring the purchasing power of your benefits doesn’t erode over time. This aspect means that while the current maximum benefit is around $30,000 annually, this amount will increase over the years.
Despite these robust features, it’s wise to maintain a conservative stance regarding Social Security in financial planning. Consider it a bonus rather than a guarantee. By preparing for the worst-case scenario financially, any benefits received can serve as a welcome addition to your retirement strategy.
