There are many factors that can blindside retirees if they’re not fully educated on how to prepare for retirement. One important factor is understanding how Social Security benefits work and what benefits your employees can expect to receive. If your employees plan to only rely on Social Security benefits for financial support, they most likely won’t be able to enjoy the retirement lifestyle they’d hoped for, especially if they plan to retire early, don’t understand how taxes are affected or have continued financial obligations. Understanding these benefits can be a big wake-up call.

The Savings Gap

Social Security was never intended to be the sole source of income for retirees. Social Security replaces about 40 percent of an average wage earner’s income after retiring.1 Most financial advisors say retirees will need 70% or more of pre-retirement earnings to live comfortably2, so employees will need to make up the other 30% of their pre-retirement income from other sources like a state pension plan or personal savings.

Most financial advisors say retirees will need 70% or more of pre-retirement earnings to live comfortably

Because of this, estimating Social Security benefits is vital to the retirement planning process. It’s also important to understand that the saving estimate doesn’t necessarily consider every retiree’s plans – expectations and lifestyles can vary greatly from one retiree to another. Setting retirement lifestyle goals early and estimating the cost of this lifestyle is vital to successful financial planning.

Retirement Age

Some employees may not realize that their monthly Social Security benefit amount is also dependent on their retirement age and the year they were born. For employees born between 1943 and 1954, Social Security Retirement Age (SSNRA) is 66. At 66, these employees can receive 100% of their Social Security benefits.

Retirement Age 66

(For illustrative purposes only – Estimates derived from JP Morgan: Guide to Retirement; February 2015.)

However, if employees decide to retire early, their benefits are reduced up to 6.25% per year before retirement age.3 For an employee born between 1943 and 1954, retiring at 62 instead of 66 could mean they may only receive 75% of their Social Security benefit.4 If employees decide to wait until after their Social Security retirement age, they can actually receive up to 8% more per year until age 70, for up to 132% of benefits.5

Monthly social security benefit amounts

(For illustrative purposes only – Estimates from Social Security Administration: Effect of Early or Delayed Retirement on Retirement Benefits; accessed from ssa.gov on August 9, 2017.)

For employees born in 1960 or later, retirement age is 67, but the same concept applies.

Retirement Age 67

(For illustrative purposes only – Estimates derived from JP Morgan: Guide to Retirement; February 2015.)

It’s also important to understand that there are Social Security benefit maximums, regardless of contributions. For an individual retiring at full retirement age in 2017, the maximum Social Security benefit he or she could receive is $2,687 per month or $32,244 per year.6

Social Security Taxation

Another misconception about Social Security benefits is that they are never taxed. In 2014, although less than 30% of all Social Security benefits were subject to tax, 49% of Social Security beneficiaries paid an average of 6.7% in income tax on their Social Security benefits.7 So, who pays income tax on Social Security benefits? Someone who files a federal tax return as an “individual” and whose “combined income” is more than $25,000 will pay tax on Social Security benefits.8 Also, someone who files a joint return with a spouse and their combined income is more than $32,000 will pay tax on Social Security benefits.9

Estimating Benefits and Savings Needs

The Social Security Administration offers a free calculator to help employees estimate their monthly benefit amount based on their income, age, and retirement age. Encourage your employees to use this calculator to start planning what they need to save. American Fidelity provides and administers retirement savings accounts for our customers in the education community.

If your group is interested in retirement planning education, contact your local American Fidelity account manager today or visit AFPlanServ.com.

 

1Social Security Administration: Understanding the Benefits; January 2017. 2Social Security Administration,"Social Security: Understanding the Benefits," 2014. 3JP Morgan: Guide to Retirement; February 2015. 4Social Security Administration: Effect of Early or Delayed Retirement on Retirement Benefits; accessed from ssa.gov on August 9, 2017. 5JP Morgan: Guide to Retirement; February 20156Social Security Administration: Workers With Maximum-Taxable Earnings; accessed from ssa.gov on August 9, 2017. 7Social Security Administration: Income Taxes on Social Security Benefits; December 2015. 8Social Security Administration: Must I pay taxes on Social Security benefits?; accessed from ssa.gov on August 9, 2017. 9Social Security Administration: Must I pay taxes on Social Security benefits?; accessed from ssa.gov on August 9, 2017.

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