Wachovia Social Security and Retirement

For the average American, Social Security retirement benefits will replace only about 40 percent of pre-retirement earnings.¹ This percentage is lower for those in the upper-income brackets and higher for those in the lower-income brackets. Since you will likely need a much higher replacement percentage to maintain your current lifestyle, Social Security should only be one part of your retirement income, along with personal savings and income from a pension and/or a defined contribution plan, such as a 401(k).

If you have worked long enough at a Social Security-covered job (generally about 10 years depending on when you were born), you will be eligible for Social Security benefits upon your retirement. The amount of your Social Security benefit is based on your earnings over your working career. If you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.

And, while higher lifetime earnings generally result in higher benefits, there is a maximum benefit limit. In 2007, for an individual that begins receiving benefits at full retirement age, the maximum monthly Social Security benefit is $2,116. The average benefit at full retirement age in 2007 is less than half of that: $1,044 a month.¹

While Social Security benefits should not make up most of your retirement income, they will be part of what you do live on during your golden years. So it's important to be aware of three factors that will affect how much Social Security benefits you will eventually receive.

To help offset the financial costs of growing life expectancy, Congress in 2000 started raising the full retirement age, the age at which you can receive your full Social Security retirement benefits. For those born in 1937 and earlier, it remains at age 65. However, for those born after 1937, the full retirement age increases incrementally until those born in 1960 and after will have to wait until age 67 to receive full benefits.

Despite this, anyone who has paid into the system for at least 10 years can start receiving benefits as early as the first full month after reaching age 62. However, accessing benefits at 62 will permanently decrease your monthly amount by 20 to 30 percent based on your age. (As the retirement age increases, this percentage reduction may increase for future retirees.) Conversely, if you delay taking benefits past your full retirement age, your monthly benefits will increase. Once you turn 70, however, the monthly benefit increase no longer applies and the rewards of waiting to draw on your benefits come to an end.

Why the difference? Based on average life expectancies, all recipients should receive about the same overall amount. Those receiving benefits earlier just have that amount spread over a longer period of time.

The decision to receive Social Security benefits before the full retirement age is contingent on individual circumstances. Even the month in which you choose to begin benefits may make a difference. In addition, other benefits, such as Social Security disability benefits, may be available if you are eligible. While not everyone has the financial flexibility to defer Social Security benefits, those who do must compare the advantage of receiving benefits for a greater number of years with the cost of permanently reduced monthly benefits.

If, in addition to Social Security benefits, your retirement income includes taxable income in the form of wages, interest, dividends and other taxable sources, you could end up paying taxes on at least part of your benefits. It all depends on your gross taxable income. Single taxpayers reporting $25,000 or less in annual taxable income pay no taxes on their Social Security benefits. For married taxpayers filing jointly, the threshold is $32,000. If your taxable income exceeds those limits, however, at least a part of your Social Security benefits will be taxable.

Another thing to keep in mind when considering whether to take Social Security benefits before your full retirement age is that any other income you receive during this time may decrease your benefit payments.

Generally, Social Security recipients not yet at full retirement age will see their benefits reduced by $1 for every $2 they earn over the annual limit ($12,960 in 2007). Once recipients reach the year in which they will reach their full retirement age, that reduction changes to $1 for every $3 they earn over $34,400 (in 2007).² After you reach your full retirement age, you can earn as much as you like and still receive your full Social Security benefits. However, the rules for how work affects your benefits are complicated; if you would like to work while receiving benefits, you should contact the Social Security Administration before making any decisions. (Note that you should apply for Medicare at age 65, even if you decide to continue working. In some cases, waiting to apply will result in higher premiums.)

Even if your spouse has never worked outside your home or in a job covered by Social Security, he or she may be eligible for spousal benefits based on your Social Security earnings record. Other family members who relied on your income for financial support may be eligible as well. Spousal (or eligible family member) benefits can be as much as 50 percent of your benefit.

Widows and widowers can begin receiving Social Security benefits at age 60, or age 50 if they are disabled. And they can take a reduced benefit on one record and later switch to a full benefit on the other record. For example, a woman could take a reduced widow's benefit at 60 or 62 and then switch to her full (100 percent) retirement benefit when she reaches full retirement age. The rules vary depending on the situation, so you should talk to a Social Security representative about the options available to you.

It's not hard to understand why the solvency of Social Security has been the center of a growing national debate over the past few years. It's simple economics. More people are retiring than entering the workforce, lowering the ratio of workers to beneficiaries from 40 to 1 in 1935 to 3 to 1 today.³ And people are living much longer in retirement, sometimes decades longer.

Under the pressure of possible insolvency, Congress has debated several Social Security reform measures in recent years. While no new legislation has been passed, the possibility continues to exist that dramatic revisions to this 70-year-old federal pension system could come about in the near future, changing how Social Security factors into your retirement planning.

To learn more about your benefits, visit the Social Security Web site at www.ssa.gov.

Understanding how Social Security affects your retirement is essential to putting together a retirement income plan that truly meets your needs. Few people approaching this exciting time in their lives have all the answers. That's why sitting down with a Wachovia Securities Financial Advisor can help you make more informed and realistic decisions about what lies ahead.

07/07 1106-40749

¹ According to Social Security Benefit Structure (Found at www.ssa.gov)

² 2006 Social Security Fact Sheets

³ Alliance for Worker Retirement Security, February 20, 2005

This material has been prepared or is distributed solely for informational purposes. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

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SOCIAL SECURITY AND RETIREMENT