Fundamentals of Social Security

In this episode, we break down the fundamentals of Social Security and why it remains one of the key pillars of retirement planning. Social Security has been around since 1940, originally created to help provide retirement income for Americans, with Medicare added later in the 1960s. It’s often referred to as one leg of the “three-legged stool” of retirement. The program is funded through FICA taxes, totaling 15.3% of gross income, with employees and employers each paying half to fund both Social Security and Medicare.

Most individuals can begin claiming benefits as early as age 62, though doing so results in a reduced benefit. Widows and widowers may start as early as 60, Medicare eligibility begins at 65, Full Retirement Age is 67 for most people today, and age 70 is generally the latest it makes sense to delay benefits. Understanding Full Retirement Age is especially important because claiming before that age can limit how much earned income you’re allowed to make while receiving benefits. Benefits are reduced roughly 5–6% for each year you claim before FRA, while delaying beyond FRA increases your benefit by about 8% per year until age 70.

We also discuss the personal factors that influence when someone should claim, including income needs, health considerations, sensitivity to market volatility, and simply wanting to benefit from a system you’ve paid into for decades. Spousal benefits play a major role as well, since a spouse may be entitled to up to half of the other spouse’s benefit, and a surviving spouse receives the higher of the two benefits. Finally, we explain how Social Security calculates your benefit using your highest 35 years of earnings, making your long-term income history a critical component of your retirement strategy.