Social Security 101 for 2024
It’s been over a decade since 2011, the year in which the first generation of Baby Boomers turned age 65. Since then, Baby Boomers have been hitting 65 in droves, and over the next 10 years, it is estimated that over 3.8 million more will reach age 65 – this equates to roughly 10,000 people turning 65 every single day until 2029.
This mass influx in Americans nearing retirement age has created a stronger demand than ever among consumers for help understanding their Social Security filing options and guidance on how to maximize their benefits. We’re sure it’s not surprising to hear, but social security rules are anything but simple – ultimately requiring individual analysis based on a handful of factors and assumptions to truly identify the “best” way to collect benefits for your situation.
To that end, we would like to provide you with a few items to consider as you think about claiming your own social security benefits in the months or years to come:
Your 35 Highest-Earning Years
The Social Security Administration calculates your individual benefits based on your historical lifetime earnings (indexed for inflation) – taking your highest 35 years of earnings (NOT consecutive years) and running it through an average monthly earnings formula to establish the benefit at your Full Retirement Age (FRA). It’s important to note that if you either entered the workforce late or had gaps in employment throughout your career – the Social Security Administration will place “zeroes” into the formula if you do not have 35 years of earnings reported. This can, obviously, affect your monthly benefit and you might consider working a few more years to replace any zeros on your balance sheet before claiming to receive a higher benefit amount.
Retirement and the Benefits of Waiting
Many people associate “retiring” from the everyday 9-5 with starting to receive social security benefits, i.e. that filing for your social security benefits needs to coincide directly with your retirement date from work. We are here to tell you that these two life events should be planned for and looked at separately (especially for those looking to “retire” from work before their social security defined full retirement age). It’s commonly understood that filing for benefits before your full retirement age can result in a permanently reduced benefit, however most people don’t understand that waiting to claim benefits past your full retirement age has additional benefits. In fact, your social security benefit amount increases by 8% each and every year that you delay your benefit past your full retirement age until you reach 70 years old. These “delayed retirement credits” can significantly increase not only your monthly benefit but your cumulative lifetime benefit the longer that you live.
Cost of Living Increase
Social Security sometimes gets a bad rap from the general public for a vast multitude of rationales and reasoning. As financial professionals, we actually think Social Security ends up being a pretty good deal. Where else can you find a financial product that provides a lifetime annuity, inflation protected benefits, survivorship AND disability benefits all wrapped up into one single solution? Now don’t get us wrong, there are financial products and solutions that can achieve some of these benefits, but that’s a discussion for a different day. Due to higher-than-normal inflation over the past few years, Social Security benefits have seen some attractive COLA (cost of living adjustment) increases; in 2021 we saw a 5.9% increase, in 2022 we saw an 8.7% increase, and in 2023 we saw a 3.2% increase. Remember, these increases are applied to your benefits even if you’re not actively receiving benefits – these increases are a win for everyone.
As we previously mentioned, deciding when to file your own social security benefits is a complex process with many factors that should be considered before ultimately filing your papers. It’s important to understand that your benefit and strategy might look different than your neighbor, your brother or sister, or your best friend – and we strongly believe that you need to look at your entire financial picture to see how social security fits best from a timing perspective.
This fall, we will once again be hosting 4 Savvy Social Security educational events in partnership with AAA Minneapolis to help AAA members understand their options when it comes to different filing strategies, divorcee and spousal benefits, taxation, and some unique “outside-the-box” financial planning techniques that you can act on TODAY.
Megan E. Gehrman, CFP®, and Luke J. Strom, CFP® are Financial Advisors at Sterling Retirement Resources, Inc., 120 Broadway Ave S. Suite 200, Wayzata, MN 55391. 763-762-3400. Securities and advisory services offered through Cetera Advisor Networks LLC, Member FINRA/SIPC, a Broker-Dealer & Registered Investment Advisor. Some advisory services also offered through AdvisorNet Wealth Partners. Cetera is under separate ownership from any other named entity.
