Social Security Benefits Primer

Social Security benefits were never intended to be the sole financial support during retirement but for 21% of retirees Social Security benefit is the only source of income. For most American workers, Social Security benefits are the only guaranteed retirement income that is also inflation adjusted each year.

All workers in America are entitled to pay into Social Security and based on their pay history, to receive a lifetime income each month starting from ages 62 to 70.

Ideally prior to retirement, you’ll also maximize other income sources that include taxable savings, IRAs, ROTH, Qualified plans (401K, 403b, 457b), annuities, deferred compensation, and employer pension plans.

Since your future Social Security benefit is calculated from your Social Security work history, you must ensure (and correct if necessary) that this history has been recorded correctly at OR the new

Social Security benefit calculation uses your top 35 highest earning years and projects your estimated benefit at your FULL RETIREMENT AGE (FRA).

Your FRA is based on your birth year and, as you can see on this table, it has been increasing. In fact, since 1983 when the FRA was 65, it has been increased gradually so that by 2025 (for those born in 1960 or later) the FRA will be 67. To understand Social Security, you must first determine your FRA.

When can you collect Social Security? At FRA, you can file and receive your full benefit (100%) based on the amount of Social Security tax paid to your Social Security number. The earliest you can collect Social Security benefits on your record is at age 62 (when your FRA amount is reduced ½% for each month or 6% less each year until FRA) and the latest at age 70. If you delay past your FRA, you earn Delayed Retirement Credits (DRC) and for each month it will grow two-third of a percent or 8% per year until age 70.

Example of how benefits are calculated: If you were born in 1960 and your FRA amount is $1K/month then collecting at age 62 will result in a lifetime amount of $700/month but delaying until age 70 would result in $1,240/month (plus annual COLA adjustment).

When creating your financial plan, we will consider different Social Security timing strategies based on your financial and longevity expectations. When deciding on your best timing we always request that you consider your health, your family’s longevity, and known increases in population longevity.

Compared to what you earned, what can you expect to receive?
As an example, an average earner ($58K) could receive $1,907 or $23K per year in benefits for life, starting at FRA. On the other hand, those who paid Social Security at maximum earnings for 35 years would receive $3,822/month or $45K per year if 2022 was their FRA.

What if you take early benefits while still working? It seldom makes sense to work and take Social Security benefits early because your benefits are reduced by $1 for each $2 earned above an annually set earning level (in 2024 you can only earn up to $22,320 per year ($1,860/month) before your benefits are reduced). Once you reach FRA your Social Security benefits are NOT reduced (regardless of earnings).

We encourage each of you to work with us to review your Social Security history and then use your financial plan to make the best Social Security timing decision for you.

Applying for Social Security should be started three to four months prior to your chosen Social Security benefit start date. You would apply online at or call (800-772-1213) or go to the local Social Security office.
One last and very important cyber security reminder: Protect your Social Security log in information (or credentials) – make certain that you are using a secure device when you log into your account.

Edi Alvarez, CFP®

Stress Testing Your Retirement Plan for Social Security

Social Security is a unique guaranteed source of income in retirement and one of the essential components in everyone’s retirement plan. Findings from the Annual Social Security Trustees Report for 2022 shows that at the current rate, existing reserves will be depleted in 2034. It is also estimated that on depletion, continuing social security tax income will provide for 77% of guaranteed benefits.

Social Security is inflation adjusted (COL). The 2022 COL was 5.9% and increased to 8.7% for 2023. This increase will certainly accelerate the level of depletion. We don’t yet know if the trust reserve will be amended to last beyond 2034 so we need to consider how to stress test your retirement plan for this potential risk. How might we prevent depletion of the trust?

  1. Raise social security retirement age again?
    This is least likely since the benefits take a long period of time to be effective and the impact is highest on those with least savings. Can you imagine the reaction if the full retirement age was changed from age 67 to 70? This strategy would need to be implemented early enough to have an impact.
  2. Raise the income cap or eliminate it as we did with Medicare?
    This is more likely and, in a small way, is already taking place. For example, Social Security taxable earnings in 2022 were capped at $147K and increased 9% to $160K for 2023. This should provide additional assets for the Social Security benefit trust, BUT it will also reduce disposable income and impact economic growth.
  3. Follow an IRMAA-type of income/means testing of benefits?
    It has been suggested that Social Security benefits should be reduced like Medicare based on your retirement income (means tested). This appears to have traction since it is currently working for Medicare (which uses the IRMAA annual tables to increase Medicare premiums on those with higher retirement income).
  4. Target a % Reduction of Social Security benefit?
    This is possible and much easier. This approach will occur by default if congress doesn’t take some alternative accommodation before 2030. The estimates are that we are looking at a 21%-25% reduction in benefits.

    On a positive note, although the potential fixes outlined above are outside of our control, they nevertheless could push back the depletion date of this essential benefit or reduce the benefit reduction that will be required if the trust is depleted.

    Either way, we include social security stress testing once we have a functioning retirement plan and after we’ve considered all other risks (like long term care).

    Edi Alvarez, CFP®
    BS, BEd, MS

    The American Rescue Plan of 2021: Highlights

    The details of the American Rescue Plan 2021 are still being processed BUT we know
    that it doesn’t include RMD relief for 2021 nor increased minimum wage. It does
    provide both 2020 and 2021 tax filing items. Below, I’ve outlined those that I found
    most significant so far.

    1. “Stimulus Checks” For individuals: $1,400 per eligible individual for
      all dependents with stricter phaseout that start at $75K for individuals and at
      $150K for those married filing jointly (MFJ). File early if your 2019 tax filing
      does not qualify you for this stimulus.
    2. Expansion of Child Tax Credit: It provides an increased amount of child
      tax credit for those under $150K (MFJ) AND an increase to $400K (MFJ) in
      earnings for the base credits. In 2021 there should be an opportunity to
      receive more child tax credits for up to $400K.
    3. Extension of Unemployment Compensation: An additional weekly
      $300 Unemployment benefit was added, and coverage was extended until
      September 6th, 2021.
    4. 2020 Tax-free Unemployment Insurance income: For those receiving
      Unemployment Insurance in 2020, up to $10,200 of those earnings will be
    5. Increased Premium Credit Assistance: Healthcare premium assistance
      extended from 2020 through 2021 with higher earnings.
    6. Tax Credit for Employers to cover COBRA for 3 months: Any
      employee involuntarily laid off will have free full COBRA coverage for 3
      months by the employer who will receive credits for paying their COBRA.
    7. Tax-free student loan forgiveness for the future – if a student loan is
      forgiven by 2025, it will be tax-free.

    It will take time to distill what will be relevant for 2021 taxes particularly since we are
    all still trying to understand and work through CARES 2020 tax rules and implications
    for 2020. For now, it makes sense to slow down the 2020 tax filing and
    ensure that your CPA is aware of all of the CARES 2020 and TARP 2021
    rules before filing – luckily, we all now have until May 17th.

    Edi Alvarez, CFP®
    BS, BEd, MS

    Social Security – an under appreciated but invaluable part of your retirement plan

    Retirement planning entails finding ways to cover expenses when we ultimately cease or reduce our working income. The goal is to ensure that we don’t outlive our assets, regardless of our longevity.

    To the surprise of many, one of the most valuable (yet under rated) tools to fund retirement is Social Security. Clients often ask about ways to bolster their retirement income; such as, maximizing their investments, reverse mortgages and annuities. They seldom consider how to maximize their Social Security benefits.

    We pay for Social Security and Medicare through payroll taxes with the employer paying half of this expense and the employee, often grudgingly, paying the other half. In particular, I detect a sense of being “over taxed” by those who are self-employed and must therefore bear the full brunt of the Social Security tax. Some make it a goal to reduce their profit or earnings so that they can lower this tax, sometimes entirely avoiding paying any social security tax. And yet the very best inflation protected guaranteed income during retirement is Social Security. If you don’t pay the tax you don’t collect the retirement benefit.

    I will outline a few interesting facts to help you understand aspects of Social Security that we consider when creating retirement projections.

    Although you must have 10 years of Social Security taxed earnings to qualify for benefits the Social Security Administration actually uses the highest 35 years of earnings (any missing years are zeroed) to calculate your retirement benefit. To earn the maximum retirement benefit you would need to pay social security tax at the highest level allowed each year for 35 years. Each year the maximum social security taxable earnings changes. In 2014 it is $117K.

    The earliest age you can begin to collect Social Security is 62 while the Full Retirement Age (FRA) is now between 66 and 67, dependent on your birth year. Unless in poor health, it is seldom advantageous to collect Social Security benefits before reaching FRA. Collecting Social Security prior to FRA will close the door on some options that can help maximize your Social Security income and should only be considered in unusual situations.

    Many file for benefit at their FRA whereas others delay filing until sometime after FRA. Waiting until as late as age 70 to collect these benefits can significantly increase the Social Security payout for a lifetime.

    One feature of Social Security that often surprises clients is the option to collect spousal benefits. Spousal benefits uses only your spouse’s work history to provide you with half of your spouse’s social security benefits. One way to use this option is (once you reach your FRA) to choose to delay filing for Social Security based on your own work history and instead claim half of your spouse’s benefits. Why would you do that? By collecting a reduced spousal benefit you can allow the benefit based on your own work history to continue to grow until up to age 70.

    What are some considerations associated with receiving spousal benefits? The marriage must have lasted at least 10 years. You can claim based on your ex-spouse’s Social Security benefits so long as you’ve not remarried (or if you remarry after age 60). You can only claim a spousal benefit when you’ve both reached FRA. This feature works maximally for same age spouses since they can both claim spousal benefits on each other, therefore collecting Social Security while still allowing their own Social Security to grow until age 70.

    One unpleasant feature of Social Security is called the Windfall Elimination Provision which can surprise workers who have worked for two employers where one was not subject to Social Security withholdings. The social security benefits are reduced even though the second earnings were subject to Social Security withholdings. We see the Windfall Elimination most often with teachers who also worked in other non-teaching positions.

    So are Social Security benefits taxed? Yes. 85% of your Social Security earnings will be part of your retired taxable income. This can drop to 50% if the in-retirement AGI is low enough.

    Your Social Security tax payment entitles you to guaranteed retirement income, an essential part of the retirement plan for most Americans. The important role Social Security plays in your retirement planning cannot be over stated. A sole conversation with Social Security Administration should not be enough. Considering that the Social Security handbook has over 2,700 rules in a thick manual called POMS (Program Operating Manual System) it should come as no surprise to you that the Social Security Administration can’t always provide the best information in relation to your own situation.

    Take the time to determine what will be the best way to deploy your Social Security scenario since this retirement income will be both inflation protected and last you through your entire retired life.

    Edi Alvarez, CFP®
    BS, BEd, MS

    Social Security – Have a plan

    Maximize your inflation protected pension plan
    – Couples must have a Social Security strategy

    According to a recent survey (1) married couples nearing retirement do not maximize their social security benefits.  The vast majority of people are unaware of strategies that could increase their lifetime Social Security benefit by $40,000 or more. Only those with high net-worth or higher income appear aware that couples should have a social security implementation strategy.

    Seventy-four percent of people with household income exceeding $200,000 expect to receive advice on Social Security benefit options from a financial planner, compared to only 48 percent of those with household incomes less than $50,000.

    Most (77 percent) felt that the best advice to maximize their Social Security retirement benefits would be the Social Security Administration. Unfortunately, SSA personnel are not trained to provide more information than monthly benefit amounts at different election ages, and the SSA prohibits its representatives from dispensing advice.

    If you are approaching your full retirement age or are planning on enrolling to receive social security make the investment to evaluate your social security implementation strategy with a qualified financial planner.

    (1) survey source form

    Edi Alvarez, CFP®
    BS, BEd, MS

    2012 Social Security Rate Update

    Annually SSI and Social Security payments are increased by the Consumer Price Index (CPI).  The CPI was just announced at 3.6% and this increase will translate to a similar increase for 55 million SSI (disabled) and SS (retired) recipients starting on December 30th.

    Don’t be too quick to spend it! We expect an increase in Medicare premiums to be announced soon.  Even so, drug premiums are not expected to increase (Part D) and for many their out of pocket costs have decreased with the new donut hole coverage.  We caution that medical costs have risen and can be expected to translate into a rate increase for Medicare premiums.  Your specific situation will dictate if this rate increase translates to available cash.

    On that note – October 15th started open enrollment for Medicare.  Make your annual Medicare selection before December 7th (

    Although it may turn out to be good news for those already retired, it also  means that workers can expect an increase in their payroll taxes.  The ceiling for social security taxes will rise from $106.8K to $110K.

    Currently 161 million workers contribute to Social Security taxes while 63 million receive SSI or Social Security income.

    We’ll keep you posted and let us know if we can be of assistance.

    Edi Alvarez, CFP®
    BS, BEd, MS