Social Security: What You Need to Know for Retirement

Navigating retirement can be a complex journey, but understanding Social Security is a critical part of the process. Designed as a safety net during the Great Depression, Social Security has evolved over decades, now serving as a foundation for retirement planning. While it was never meant to replace 100% of income, understanding its nuances can significantly impact financial security in later years. Here’s a closer look at the key insights from this episode joined by guests Samantha Guthrie, LPL Financial Advisor and Vice President at Johnson Financial Group Financial Advisors, and recently retired Marcia Banike, Vice President of Private Banking at Johnson Financial Group.

The Origins and Structure of Social Security

The Social Security Act, passed in 1935, emerged from a need to provide income for retirees. Funded through payroll taxes, the system was initially designed to replace 40% of income in retirement. However, changing demographics have placed pressure on the system, with a shift from 15 workers per retiree in the early years to just three workers today. This shift has raised concerns about the program's solvency, with proposed solutions ranging from raising payroll tax caps to reducing certain benefits.

Eligibility and Timing: Key Considerations

Eligibility for Social Security begins at age 62, but there are critical trade-offs to consider. Early benefits, starting at 62, provide only 70% of the full retirement amount. Full benefits are available at age 67 for most, with an 8% annual increase for delaying benefits up to age 70. This delay can be advantageous for those with longevity in their family history or alternative income streams.

Financial planning plays a pivotal role in determining the right time to claim benefits. For example, Samantha highlights that understanding how spousal benefits work can greatly impact a surviving partner. If one spouse delays claiming benefits, it can result in a higher income for the surviving spouse.

The Role of Financial Planning

Social Security is just one piece of the retirement puzzle. Marcia emphasized the importance of developing a comprehensive financial plan. This plan should consider other income sources such as pensions, 401(k)s, or IRAs, and should be treated as a “living document” that evolves with life events.

She advises reviewing and updating the plan regularly, especially during major life changes. This proactive approach allows retirees to adjust strategies, whether it’s deciding which funds to draw from first or exploring part-time work to supplement income.

Tax Implications and Other Considerations

Social Security benefits can be taxable depending on total income. For example, individuals earning over $25,000 annually or married couples earning over $34,000 could see up to 50–85% of their benefits taxed. Proper planning can help manage these tax implications, especially when combined with withdrawals from taxable retirement accounts.

Additionally, retirees should consider how Social Security integrates with estate planning. Ensuring benefits are optimized for a surviving spouse and aligning retirement goals with legacy planning are vital steps.

More Than Money: Finding Purpose in Retirement

Retirement is about more than financial stability; it’s also a time to rediscover purpose. Whether through volunteer work, part-time jobs, or personal pursuits, staying engaged can significantly enhance the quality of life in retirement.

As Samantha and Marcia stressed, Social Security is a complex but crucial component of retirement planning. With informed decision-making and regular financial reviews, retirees can maximize benefits and enjoy a secure, fulfilling retirement.