Retirement and Social Security – Part 1

by David D. Holland


Planning your retirement can be easier if you understand Social Security. Here are some of the more common questions I’ve received. You can check my answers and get more information at the Social Security Administration’s website:


1. How are Social Security taxes applied?

During your working years, your employer is required to deduct Social Security and Medicare taxes as well as city, state and federal income taxes (as applicable) from your paycheck. For 2013, the Social Security tax is 6.2% on the first $113,700 of wages. If you make $50,000 a year, for example, your employer will deduct $3,100 in Social Security taxes to send to the Social Security Administration (SSA). Your employer is also required to match those taxes on your wages. In addition to any other retirement plans they may provide you, your employer is paying for half of your Social Security retirement benefits. Self-employed individuals are required to pay “both sides” of the Social Security tax (which is then referred to as “self-employment” tax).


2. How are benefits calculated?

Social Security payments are based on your top 35 years of wage-related earnings. If you don’t have enough years with earnings, the SSA will use zero for the remaining years. The only relevant wages are those on which you paid Social Security tax. Non-work earnings such as dividends, interest, capital gains, rental income and “money under the table” don’t count toward your Social Security benefit. The SSA adjusts your reported earnings for inflation and then applies a formula to arrive at your “primary insurance amount” − the monthly benefit you receive at your full retirement age.


3. At what age can I draw retirement benefits?

If you’ve paid enough Social Security taxes for at least forty quarters (ten years), you can take reduced benefits as early as age 62. To enjoy full benefits, however, you need to wait until your full retirement age (also called normal retirement age), which varies by birth year. If you were born before 1938, your full retirement age is 65. Due to longer life expectancies and understandable concerns about long-term costs of Social Security, the program was amended in 1983 to delay full retirement age for those born after 1937. The older age requirement has been phased in as follows: 1938 = 65 and 2 months, 1939 = 65 and 4 months, 1940 = 65 and 6 months, 1941 = 65 and 8 months and 1942 = 65 and 10 months. For the group born in 1943 through 1954, full retirement age is a 66. Thereafter, the older age “phase in” resumes: 1955 = 66 and 2 months, 1956 = 66 and 4 months, 1957 = 66 and 6 months, 1958 = 66 and 8 months and 1959 = 66 and 10 months. For anyone born after 1959, full retirement is currently age 67.


4. Is it better to start drawing retirement benefits early or delay payments as long as possible?

Deciding the best time to start benefits depends on your individual circumstances. Is continued employment an option? Are you married? How much money do you have? Do you or your spouse have a pension? Are you healthy? Does longevity run in your family? What do you think about the stability of Social Security itself?


If you draw benefits before your full retirement age, the monthly check will be reduced based on your age and benefit start date. For example, if your full retirement age is 66 and you retire at 62, you would see a 25% reduction in benefits. Generally, the longer you delay the start of retirement benefits, the greater your monthly payment when you do begin. If you are able to work beyond normal retirement age, or can draw on an alternative income source, you can increase your Social Security benefits in two ways: 1. If you’ve got any of those “zero” or low earnings years, the additional years you work will likely improve your lifetime earnings. 2. Your benefit payment will also be increased for every month you wait beyond your normal retirement age. Delaying Social Security until age 70 will help maximize your benefits. For example, if you were born in 1943, your normal retirement age would be 66. If, instead, you waited until age 70, your Social Security benefit would have increased 8% in each of those four years, or 2/3 of 1% each month.


5. What can I do to increase my Social Security benefits?

Don’t retire early. Work longer if you like your job and your health permits. Get rid of as many “zero” earnings years as possible. Always report your income and pay Social Security tax on it. If you can’t continue to work, seek financial advice on whether you should draw income from savings or start receiving Social Security. And, if it isn’t too inconvenient, stay married to someone with a long history of high earnings! I’ll cover more about that, and survivor’s benefits, in Part 2 of this column.



David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to