Social Security

Retirees often want to know how Social Security fits into their retirement in terms of timing and amount of income.

By Financial Advisor Peter Egolf

When does Social Security start?

Social Security full retirement begins around age 66 to 67, depending on your year of birth:

• 66 years for those born between 1943-1954.
• 66 years and 2 months of age for those born in 1955.
• 66 years and 4 months of age for those born in 1956.
• 66 years and 6 months of age for those born in 1957.
• 66 years and 8 months of age for those born in 1958.
• 66 years and 10 months of age for those born in 1959.
• 67 years for those born in or after 1960.

You can take Social Security as early as age 62, regardless of birth year. However, each month earlier than the normal retirement age will reduce your benefits up to a potential maximum reduction of 30% and your spouse’s benefit up to 35%.¹

Alternatively, you can delay taking Social Security beyond your full retirement age (FRA) up to age 70 to maximize your earnings benefit.

How much of my income will Social Security replace?

Social Security is calculated by using the average indexed monthly earnings over 35 years of earnings.² Your average income over that period will dictate how much income Social Security will produce. Social Security at full retirement age is scheduled to replace:³

• 76.4% of income for someone with “very low” earnings (average annual working earnings of $16,563).
• 55.6% of income with “low” average earnings ($29,813 annually).
• 41.3% of income with “medium” average earnings ($66,251 annually).
• 34.1% of income with “high” average earnings ($106,002 annually).
• 27.2% of income with “maximum” average earnings ($163,305 annually).

As you can see, Social Security has a high-income replacement for very low-income earners (up to 76.4%) and a low-income replacement (up to 27.2%) for maximum-income earners at full retirement age.

These replacement figures are lower for those who claim Social Security earlier than the full retirement age (e.g., age 62 vs. 67) and if you assume Social Security benefits will be reduced as projected in 2035.

How is Social Security Taxed?

The percent of your Social Security that is taxable as federal income is based on the amount of your “combined income.”^4,5

• 0% of Social Security benefits are taxable if your combined income is <$25,000 as a single filer [<$32,000 married filing jointly]
• 50% of Social Security benefits are taxable if your combined income is >=$25,000 and <$34,000 as a single filer [>=$32,000 and <$44,000 married filing jointly]⁵
• 85% of Social Security benefits are taxable if your combined income is >=$34,000 as a single filer [>=$44,000 married filing jointly]

It’s important to note that “combined income” is defined as your adjusted gross income + nontaxable interest + plus ½ of your Social Security benefits. Thus, if you have other significant income sources (e.g., pension, IRA distributions, wages, self-employment, interest, dividends, etc.), you may pay federal tax on up to 85% of your Social Security benefits.

Social Security may or may not also be taxed at the state level. Here are two examples:

• Vermont fully taxes Social Security payments at adjusted gross incomes at or above $60,000 for single filers ($75,000 or above for married filing jointly).⁶ However, Vermont partially or fully exempts Social Security income from state income tax for lower incomes, depending on the adjusted gross income level.
• Pennsylvania does not tax Social Security income.

How should I plan my retirement income?

At retirement, there may be multiple income sources, including retirement savings/investments, pensions, and Social Security. For most retirees, Social Security is a material part of their overall income but may start years after stopping work. It’s important to consider your income needs and the timing around these sources of income. For example, if you plan to retire before you are eligible for Social Security, will you withdraw from your taxable or tax-advantaged retirement accounts? It is helpful to develop a plan for retirement income, including deciding when it is appropriate to begin taking Social Security payments based on your specific needs and which investment accounts to withdraw from.

At One Day In July, we help our clients prepare for retirement, including understanding and maximizing the amount and timing of Social Security income. As fee-only fiduciary financial advisors, we put our clients’ interests first. If you want to learn more about being a client, please contact me to schedule a conversation.

1. Starting Your Retirement Benefits Early – Social Security Administration
2. Social Security Benefit Amounts - Social Security Administration
3. Replacement Rates for Hypothetical Retired Works - Social Security Administration. Note, these numbers vary slightly depending on the worker's year of birth.
4. Combined income is also referred to as provisional income.
5. Income Taxes and Your Social Security Benefit - Social Security Administration
6. Vermont's Social Security Exemption