Social Security Basics

Social Security is often the cornerstone of retirement planning. For most Americans, it provides a significant portion of their income in retirement, acting as a safety net they've been paying into throughout their working lives. But while many people know they're entitled to benefits, the details of how Social Security works can be surprisingly complex.

This week, we'll explore strategies for maximizing your benefits and ensuring your family receives everything it's entitled to.

A Brief History of Social Security

Social Security was signed into law in 1935 by President Franklin D. Roosevelt. Its original purpose was to provide financial support to retired workers, a direct response to the economic hardships of the Great Depression. Over the decades, it has evolved to cover not just retirees but also disabled workers, spouses, and survivors.

Today, more than 65 million Americans receive Social Security benefits, and the program remains a lifeline for millions of retirees. Despite its importance, Social Security faces financial challenges.

How's that? The program is funded through payroll taxes, but fewer workers are paying into the system as the population ages and more people retire. While Social Security is projected to pay full benefits until the early 2030s, beyond that, it may only be able to cover about 75% of promised benefits unless changes are made.

How Social Security Fits Into Your Retirement Plan

Social Security was never designed to be your sole source of income in retirement. Instead, it's a supplement - providing a steady income stream to help cover your basic living expenses. But how big a role Social Security plays depends on several factors, including how much you've earned during your working years and when you decide to claim benefits.

The key is to consider Social Security as part of your broader retirement strategy. If you have savings in an IRA, 401(k), or pension, Social Security can work alongside those resources to create a reliable income stream. But to maximize your benefits, you need to understand a few key concepts.

Eligibility: How Do You Qualify?

To qualify for Social Security benefits, you need to have worked and paid into the system for at least ten years (or earned 40 "credits"). Each year, you can earn up to four credits based on your income, and for 2025, you'll need to make $1,810 to earn one credit.

The amount of your benefit is based on your highest 35 years of earnings, and if you have fewer than 35 years of work history, the remaining years are counted as zeros, lowering your average. This is why it's essential to keep working - if possible - until you've built up enough years of earnings to maximize your benefit.

When to Claim: The Timing Dilemma

One of your most critical decisions is when to claim your Social Security benefits. You can start as early as age 62, but your benefits will be reduced if you claim before reaching your Full Retirement Age (FRA), which is 67 for most people retiring today. On the flip side, if you delay claiming until age 70, your benefits will increase by about 8% for each year you wait beyond FRA.

It's a tricky balance: claiming early gives you more years of income but at a lower monthly amount. Waiting increases your check but shortens the number of years you'll collect. We'll cover this in detail, so you can make an informed decision about what timing works best for you.

Spousal and Survivor Benefits

If you're married or widowed, spousal and survivor benefits can significantly boost your household income. These benefits allow you to collect up to 50% of your spouse's benefit, even if you never worked or earned substantially less. If your spouse passes away, survivor benefits may offer additional financial support.

This area of Social Security is often overlooked, but it can make a substantial difference in your financial security.

Working While Claiming

Many retirees continue working even after they begin receiving Social Security benefits. But working while claiming benefits comes with its own set of rules. For example, your benefits could be temporarily reduced if you claim before your Full Retirement Age and earn more than a set amount. Once you reach FRA, however, you can earn as much as you want without affecting your Social Security checks.

This can be a complex area, so we'll explain what you need to know if you plan to keep working in retirement.

Taxes on Social Security and How to Minimize Them

Did you know your Social Security benefits could be taxed? Depending on your total income in retirement, up to 85% of your benefits may be subject to federal taxes. State taxes can also come into play, depending on where you live. Managing your retirement income streams carefully can help you minimize the tax burden on your Social Security benefits.

So we'll discuss strategies to reduce your tax liability, helping you keep more of your hard-earned benefits.

Avoiding Common Mistakes

Finally, we'll wrap up this series by exploring the most common mistakes people make when it comes to Social Security. From claiming too early to misunderstanding how spousal benefits work, these errors can cost retirees thousands of dollars over their lifetimes.

The Takeaway

Social Security is a vital part of retirement planning, but it's also filled with complexities. The decisions you make - when to claim, how to coordinate benefits with your spouse, and how to manage taxes - can have a lasting impact on your financial security.

Let's get started!