Social Security has been operational for nearly 85 years. While many changes have been made over the years, the main idea remains intact: a system designed to supplement income for retired workers and their families.
The Social Security Administration estimates that benefits replace about 40% of a person’s income in retirement, making it an important part of your retirement income plan. Today, we are going over what federal employees can expect from the Social Security program, and will review frequently asked questions about how and when Social Security benefits are received in retirement.
Breaking Down Social Security
Before we jump into when you should collect benefits, and other frequently asked questions, let’s get a quick overview of Social Security and how it works. All of this information will help you calculate your projected benefit and provide clarity on how the system operates.
Social Security is funded through a payroll tax that you and your employer split, you pay 6.2% and they pay 6.2% up to $137,700. Keep in mind that this is not an individual long-term savings plan. What you contribute isn’t what you take out. Your contributions now are supporting those currently receiving benefits.
So how are your benefits calculated?
Social Security benefits are all about your work record and in order to qualify for benefits, you need at least 40 work credits or 10 years of working (and paying into the Social Security system through taxes).
Your Social Security benefit is calculated by your lifetime earnings. The SSA uses a system that averages your monthly income over your 35 highest-earning years and applies their specific formula to get your primary insurance amount (PIA).
Your PIA is the amount you would be eligible to receive when you reach full retirement age, which differs depending on the year you were born. The maximum monthly benefit someone can receive in 2022 when filing is $2,364 at age 62, and $3,345 if you file at your full retirement age.
When Are You Eligible to Take Social Security?
The earliest time for workers to collect Social Security benefits is 62. Exceptions are made for surviving spouses who can collect as early as 60 and those with disabilities and dependents who are exempt from age restrictions.
Even though you can technically start collecting benefits early, retirees who go this route can expect a 30% reduction in benefits over their lifetime. This is a huge reduction that can leave a big gap in your retirement budget.
However, although benefits are reduced by collecting early, there are some instances where it makes sense. It is important to take your current income needs, retirement lifestyle, tax burden, health, and longevity into consideration. For someone who has a shorter life expectancy, perhaps collecting early and enjoying the benefit while healthy makes the most sense.
Although retirees can start to collect benefits at age 62, the most common time to collect Social Security is at your full retirement age. Full retirement age is determined by the SSA and for those born in 1960 or later that age is 67. Once you hit this age you are eligible for 100% of your benefit which makes it an ideal time to collect.
Social Security benefits are adjusted for inflation by a system called cost-of-living-adjustment (COLA) which is good to keep in mind in terms of your long-term planning needs.
In some instances, delaying Social Security benefits until after your full retirement age may also make sense. This can be the best way to maximize your benefit if you don’t need the cash flow during retirement. For each year that you wait to collect past your full retirement age, you increase your benefit by about 8%.
How does this work? When you put off enrolling in benefits you earn delayed retirement credits which effectively increase the amount of your monthly check.
Delayed retirement credits only accrue until you reach 70 so there isn’t any added benefit to waiting any longer than this to take your benefit.
Are You Still Eligible for Social Security If You Receive a FERS Pension?
In a word – yes. Those federal employees who are enrolled in the FERS pension program are eligible to receive Social Security benefits starting at age 62. All federal employees who were paid and employed after 1984 have paid into Social Security through their standard tax withholdings and are eligible for benefits when they retire. No federal employee is exempt from this, even the President pays into the Social Security program.
What About CSRS?
Prior to 1984, the federal government had an alternative program to Social Security for government employees called Civil Service Retirement System (CSRS). Employees who worked with the federal government in 1983 or earlier did not pay into Social Security and are not eligible for benefits as a result.
When Should You Start Taking Social Security Benefits?
Deciding when to claim Social Security benefits should be determined by a number of factors including:
- Income or cash flow needs during retirement.
- Marital status.
- Tax planning.
- Future health needs and longevity.
- Retirement lifestyle and goals.
All of these things will help you and your financial planner figure out a plan that best reflects your financial needs and goals. Social Security plays a big role in your retirement plan. It takes a thoughtful strategy in order to maximize your benefit and help support the retirement lifestyle you have been working so hard for.
For some, taking Social Security when they reach age 62 makes the most sense for their cash flow situation. For others, delaying until their full retirement age (or later) can help them to maximize their benefit. When you take Social Security is a decision that needs to be based on your unique circumstances.
We’re here to help. We recommend all federal government employees who have started their retirement planning journey download our free eBook – The Federal Employee Retirement Guide. This ebook summarizes what retirement benefits you should be aware of, and how they can be leveraged together to create a holistic retirement strategy that meets your goals.
Know it’s time to start planning, but aren’t sure where to start? We encourage you to reach out to us! Our team has years of experience partnering with federal employees to help them clarify their goals, and reverse engineer a unique-to-them financial plan that helps them to move the needle. We’d love to speak with you about your financial questions.