Social Security Planning: What You Need to Know!

When planning for retirement, understanding Social Security is essential. Whether you’re years away from retiring or on the cusp of receiving benefits, Social Security plays a key role in your financial future. During a recent episode of the Forget About Money podcast, financial advisor Emma von Weise shared her insights into Social Security’s mechanics, debunking myths, and providing practical strategies for maximizing benefits.

In this blog post, we will explore the main takeaways from that episode and break down what you need to know about Social Security. Whether you’re wondering about full retirement age, cost of living adjustments, or how your type of financial independence retire early affects your payouts, this guide will help clarify how Social Security fits into your retirement plan.

What is Social Security?

Social Security is a government program that provides financial benefits to retirees, disabled individuals, and survivors of deceased workers. Funded through payroll taxes, it acts as a critical safety net for millions of Americans. According to von Weise, understanding the intricacies of Social Security is vital for anyone looking to maximize their retirement income.

Full Retirement Age (FRA) and Claiming Benefits

One of the most important concepts to understand is Full Retirement Age (FRA). This is the age at which you are entitled to receive your full Social Security benefits. For most people, the FRA is 67 years old. However, you can start receiving benefits as early as age 62, although this will result in a permanent reduction of up to 30%.

Von Weise elaborated on this topic during the podcast, explaining that delaying your claim beyond your FRA can increase your monthly benefit. “From age 67 to 70, your benefits grow by about 8% per year due to delayed retirement credits,” she said. Delaying until age 70 can result in a significantly higher monthly payout, which provides a greater safety net for those who live longer.

Key Points:

• FRA is currently 67 for most individuals.
• Claiming early reduces benefits by up to 30%.
• Delaying benefits increases payouts by 8% per year from FRA to age 70.

Cost of Living Adjustment (COLA)

Cost of Living Adjustments (COLA) are applied to Social Security benefits each year to keep up with inflation. The COLA ensures that Social Security recipients can maintain their purchasing power as the cost of goods and services rises. In 2025, the COLA is expected to be around 2.7%, significantly lower than the 8.7% increase seen in 2023.

Von Weise pointed out that COLA is tied directly to inflation rates: “COLA happens every year based on inflation from the prior year. Because inflation has come down recently, the 2025 COLA is expected to be lower than in previous years.” Although COLA adjustments help, some critics argue that they fail to fully reflect the actual expenses faced by retirees, particularly in healthcare costs.

Key Points:

• COLA is adjusted annually to account for inflation.
• The 2025 COLA is projected to be 2.7%, down from 8.7% in 2023.
• COLA helps preserve purchasing power but may not cover rising healthcare costs.

How Social Security is Funded

Social Security is funded primarily through payroll taxes under the Federal Insurance Contributions Act (FICA). Employees and employers each contribute 6.2% of the employee’s earnings up to a wage cap. Self-employed individuals must pay the full 12.4% themselves.

“The program is funded through payroll taxes,” von Weise explained. “When you see that FICA line on your paycheck, that’s your contribution to Social Security and Medicare.” This funding structure ensures that current workers contribute to the benefits of today’s retirees, creating a pay-as-you-go system.

Key Points:

• Social Security is funded through payroll taxes.
• Employees and employers each pay 6.2%; self-employed individuals pay 12.4%.
• This system relies on current workers to fund the benefits of retirees.

The Impact of Early Retirement on Social Security Benefits

Early retirement can have a significant impact on Social Security benefits. Retiring before your FRA results in reduced monthly benefits. For instance, if you claim at age 62, your benefits could be reduced by as much as 30%. Von Weise discussed how early retirees must plan carefully to account for this reduction: “If you claim at 62, you’re accepting a lower benefit for the rest of your life. But some may find this trade-off worthwhile if they plan to invest the money or need the income sooner.”

Additionally, Social Security benefits are calculated based on your highest 35 years of earnings. If you retire early and have fewer than 35 years of earnings, zeros will be factored into the calculation, which can further reduce your benefits.

Key Points:

• Early retirement reduces benefits by up to 30% if you claim at age 62.
• Benefits are based on your highest 35 years of earnings.
• Retiring with fewer than 35 years of work will result in lower benefits.

Spousal and Survivor Benefits

One of the most overlooked aspects of Social Security is the availability of spousal and survivor benefits. These benefits allow spouses to receive Social Security based on their partner’s earnings record. In the event of a spouse’s death, the surviving spouse is entitled to the higher of their own or their spouse’s benefits.

Von Weise explained: “If both spouses are eligible for Social Security, it’s generally a good strategy for the higher earner to delay claiming benefits until age 70, as the surviving spouse will receive the larger benefit after the other passes away.” This makes Social Security not just a retirement income source but also a vital part of financial planning for couples.

Key Points:

• Spouses can claim benefits based on their partner’s earnings.
• Surviving spouses receive the higher of their own or their partner’s benefits.
• The higher earner should delay claiming benefits to maximize survivor benefits.

Taxes on Social Security Benefits

It’s also important to understand that Social Security benefits may be taxable depending on your income level. For individual filers, up to 50% of benefits are taxable if your income exceeds $25,000, and up to 85% is taxable if your income exceeds $34,000.

Von Weise pointed out, “The income thresholds for taxing Social Security benefits were established in the 1980s and have not been adjusted for inflation, so more people are subject to taxes on their benefits today.” This is an important consideration when planning your overall retirement income strategy.

Key Points:

• Social Security benefits can be taxed based on your income level.
• Up to 50% of benefits are taxable if income exceeds $25,000; up to 85% if income exceeds $34,000.
• The income thresholds for taxation have not been adjusted for inflation.

Social Security as Longevity Protection

One of the key insights from von Weise is the idea of viewing Social Security as longevity insurance. By delaying your claim until age 70, you maximize your benefit, ensuring that you have a stable income for as long as you live. “Think of Social Security as insurance,” von Weise said. “If you live a long life, those delayed benefits will provide a higher income over the long term, which is especially valuable for retirees with longevity in their families.”

Key Points:

• Delaying benefits provides a higher income for life.
• Social Security acts as longevity protection, ensuring financial stability in old age.
• Delaying benefits until age 70 is often the best strategy for those with long life expectancies.

Conclusion: Social Security is Essential to Retirement Planning

As discussed by Emma von Weise on the Forget About Money podcast, Social Security is a critical component of retirement planning. Understanding how it works, when to claim benefits, and how to integrate it with other income sources is key to ensuring financial security in retirement. While Social Security is sometimes misunderstood or overlooked, it should be viewed as a foundational element of your overall financial strategy.

By taking the time to learn about Full Retirement Age, COLA, and the potential impact of early retirement, you can make informed decisions that help you maximize your benefits. Whether you’re years away from retirement or preparing to claim benefits soon, Social Security deserves careful consideration as part of your long-term financial plan.