Money Rehab with Nicole Lapin - WTF is Social Security?

Episode Date: January 18, 2022

… and how much will it help you in retirement? Listen to find out! Here’s the link for that sweet Social Security calculator Nicole references in the episode: https://www.ssa.gov/OACT/quickcalc/  Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never will. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. If you're American or work in America, you have a social security number.

If you do have an SSN, you probably have it memorized. And you probably know that the number has something to do with the Social Security checks that you'll receive in retirement. But do you know how you'll get those checks or how much money those checks will be worth? Here's Marley with today's question. Hey, Nicole, I've been paying special attention to your episodes on retirement. When you mentioned different accounts to fund retirement, I haven't heard you mention anything about Social Security. How can I know how much I'll get from Social Security in retirement and whether it'll be enough for me to live on? Thank you so much for sending in this question, Marley.

I'm going to get to your question about projecting your Social Security earnings in retirement. But first, let's step back and answer the question, what the fuck is Social Security anyway? question, what the fuck is Social Security anyway? You've probably noticed on your paycheck that some of your income goes to OASDI. We should all get into the habit of looking up anything we don't understand on our paycheck because, hello, your paycheck is so important and you want to know where that's going. But if you've never stopped to look that up, OASDI is basically the line item for your Social Security contributions. It stands for Social Security's Administration's Old Age Survivors and Disability Insurance Program. You may think that Social Security works like a 401k and that the money taken from your paycheck goes to an OASDI account with your name on it and it just sits there growing and waits until you retire.

Not really. Your Social Security contributions go to people who are claiming Social Security benefits now. To date, $7.4 trillion has been paid out to qualifying Americans. How much of that $7.4 trillion is from you? In 2022, the amount each American contributes to social security is 12.4% of their paycheck, up to a certain limit. However, if you are employed by a company, you only get 6.2% taken out of your paycheck and your employer pays the other 6.2%. If you're self-employed, you have to pay the whole 12.4% yourself. This year, if you're not self-employed, the maximum that you'll contribute to Social Security is a little more than $9,000. Social Security, of course,

has become a bit of a political issue. Some people think, I worked hard for this money, no one else should get it but me. Listen, I get it. But at the same time, it's easy to say that federal aid is overrated if you're not depending on it. I know it stings to lose money under any circumstances, but Social Security does good work. The misconceptions are harsh, but I'm going to say them out loud because you've probably already heard them before. A common assumption is that Social Security goes to lazy Americans who fake disabilities because they don't want to work. What a lot of people don't know is that Social Security pays more benefits to children than any other government program. In 2021, of every Social Security tax dollar you paid, 85 cents went to current retirees and survivors,

like children, of workers who have died. Only 15 cents went to folks on disability. Plus, your Social Security good karma does come back to you when you retire. When you're able to opt into Social Security retirement benefits, how much you'll receive will differ depending on how long you've been working and how much you earned in the workforce. The thinking here is that if you've worked a long time and you've made a lot of money, you've also contributed a lot of money and should be rewarded for your contributions. Because don't forget, the whole point of this program is to benefit you too. Sure, your exact contributions from your individual paychecks don't come back to you, but when you're

in retirement, you'll be collecting Social Security payments that are funded by the contributions of someone else. It is the grand financial circle of life. And when will you be able to get those Social Security checks? If you were born after 1960, you'll likely want to start claiming benefits at age 67. You can claim your benefits earlier or later, but whatever age you choose comes with consequences for your payout. Unless you're a beneficiary or qualified to collect Social Security because of a disability, the earliest you can collect Social Security benefits is 62, but you will receive less benefits if you do so. On the flip side, you get some perks if you claim your benefits between the age of 67 and 70. Okay, those are the hard-hitting facts that you

need to know about Social Security. Now let's get into Marley's awesome question of whether or not you can project what you'll earn from Social Security. And I have some good news. The Social Security Administration has an online calculator. You know how much Mama Money Rehab loves a good online financial calculator. You can use said calculator to project how much money you'll likely receive from Social Security in retirement. And the best news, I linked that calculator in the show notes for you to enjoy. It's a helpful resource, but don't take this calculation as gospel. I take my number with a grain of salt and expect the amount I can actually collect in retirement to be lower. Regardless, I recommend

that you check this out because it will probably help you confront an important reality. Social security was not designed to replace your income when you retire. You might be thinking, wait, what? I thought the exact opposite. Yeah, a lot of people do. But no, I'll say it again. Social security was not designed to replace your income when you retire. This answers the second part of Marley's question around whether Social Security will be enough to live on in retirement. According to the Social Security Administration, on average, retirement beneficiaries receive 40% of their pre-retirement income from Social Security. In other words, you can only expect your Social Security checks to cover about 40% of their pre-retirement income from Social Security. In other words, you can only

expect your Social Security checks to cover about 40% of what you're now making. Would you be able to cut your spending plan in half now in an easy breezy transition? I know, honestly, I wouldn't. Plus, you have to pay taxes on 85% of your Social Security benefits if your income is greater than $34,000. And this income includes taxable income from investments. The broken record that you'll hear again and again throughout money rehab is that most of the retirement options that people think will replace their income when they retire won't. It's not just Social Security. It's 401ks, too.

The way 401ks have been marketed to us over the years has made most people believe that they're going to be enough for retirement. Financial newsflash that boils my blood. A 401k is not going to be enough to cover your retirement. The truth is you'll need to mix and match different retirement plans to live your best life in retirement. Even though that might not be what you want to hear, it's not all bad news. Because in the financial world, the worst kind of bad news is the news you never find out about. The worst case scenario is that you spend your career thinking your social security account is going to leave you in great shape for retirement, and you only realize the stark reality once you've entered retirement land. But by being here, you've already

saved yourself from that worst case scenario. Now you know how to best strategize for retirement. You can take action. And as far as I'm concerned, that's some good financial news. For today's tip, you can take straight to the bank. If you have a social security number, a U.S. mailing address, and you're over 18, you can create an online account with the Social Security Administration called, appropriately, my Social Security account. You can use that account to check your earnings and get your benefit estimates. You can also use this account to request to replace your Social Security card if in case you lost yours. This account will be your best friend as you edge closer to retirement because you'll be able to use this account to set up direct deposit

and everything you need to collect your social security money. Whatever it ends up being, whatever the amount is, it is your money. So you should get it. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together

and get it all.