By Rupa Pereira
If you’re reading this article, there’s a good chance you know someone who’s retired or nearing retirement, while you may be employed or self-employed and your retirement may be in the distant horizon.
To understand why this is an important topic, let’s look at the shift that has happened since the 90s when a sizeable South Asian diaspora began moving west-ward thanks to a globalization of the workforce. This demographic has therefore a significant employment history and is either approaching retirement or will be there in a decade or two. Retiring in the United States past your 60s can mean relying on social insurance programs such as Social Security and Medicare if one has paid into them through the years of gainful employment.
Regardless of the size of your nest egg, Social Security provides a dependable, lifetime income stream. It is the foundation of every retiree’s retirement plan. But it is estimated that retirees will collectively lose $3.4 trillion in potential income by claiming Social Security at the wrong time—impacting lifetime benefits and overall retirement security.
Here is some context on this program. The Social Security Act dates to 1935 and through the years has evolved to support families through various life transitions whether it is retirement, death, divorce, or disability.
Social Security is a federal program funded primarily through payroll taxes collected from both the workers and their employers, up to a certain wage-base which in 2024 is $168,600. Thus, if your taxable wage is within that limit, you’re contributing 6.2 percent of your wages towards the Social Security Trust Fund. Disbursements from this fund pay out checks to current baby boomers (those in their 60s).
The system operates on a “pay-as-you-go” basis, meaning the taxes collected from today’s workers are used to pay benefits to current retirees, survivors, and disabled individuals. Chances are high your kids will be paying into your Social Security Benefits when you’re ready to collect your benefits. These benefits are indexed for inflation annually and this year the increase will be 3.2 percent.
The math for future benefits seems to be on wobbly footing. It is projected that the fund will run out in 2034 where withdrawals will be higher than the contributions to the fund. Unless Congress acts, there might be adjustments to future benefits post 2034, when a wave of Gen Xers will be ready to stake their claim. Meanwhile, the political parties have a decade to ensure solvency of the program, a critical financial backbone for the retired American community.
There’re quite a few decision points around collecting Social Security and how it meshes with your other sources of income during retirement. When should one claim? Whose earnings record should we use to claim if both spouses have earnings. What happens in case of a divorce? What happens to my Social Security when I’m deceased? What if I’m caring for minor children while on Social Security? Is Social Security taxable? Are there penalties to collect benefits while still employed? Is it indexed to inflation?
Broadly speaking, Social Security can be claimed as early as 62 and as late as 70. One needs to have 40 credits and you can earn a maximum of four credits each year, which means at least 10 years of work history is necessary. A non-working spouse can collect spousal benefits based on a working spouse’s earnings history. Minor children and kids in college are also eligible if their parents qualify for benefits. The actual benefit value depends on the highest earnings across 35 years of earnings history.
How can you estimate your projected benefit? The website ssa.gov is your starting point and source of truth. You can create your personal profile to view earnings history and your expected payout when you’re at full-retirement age. Those born after 1960 will have 67 as their Full Retirement age at which 100 percent of benefits can be collected.
Medicare was added to Social Security benefit in 1965 and is a federal Health Insurance program for retirees aged 65 and above and premiums are usually deducted through Social Security payouts. Medicare part A is funded through payroll tax where 1.45 percent of one’s paycheck goes towards this fund. Medicare is also funded through wages from higher income earners. There is no income limit for Medicare tax. Part A covers hospitalization. Medicare part B covers doctor’s visits and has a monthly premium. Part D offers drug coverage. Medicare Advantage is a program by private insurers while offering comparable benefits and network coverage.
In summary, Medicare and Social Security benefits complement each other and support a retirees’ financial and healthcare needs in the United States.
Currently, you may be in your peak earning years and not ready to throw in the towel yet, but if you expect to live in the US in your sunset years, planning around Social Security should be given some thought, planning, and consideration. Of course, nothing is guaranteed, except for maybe a government funded fixed annuity, i.e. Social Security.
Rupa Pereira is the owner and lead financial advisor at FWJ Planning, an investment advisory and planning firm registered in NC. As an enrolled agent, she’s also authorized by IRS to represent her clients on tax-matters. Contact: [email protected].