Social Security – Essential Tidbits on Early Benefits

We normally estimate that we need the same pre-retirement spending budget plus taxes to meet minimum retirement cash flow. Since Social Security was created to be a safety net, it only covers at most 40% of needed retirement cash flow. It is for this reason that additional savings are required to support retirement lifestyle cash flow.

The most important aspect of Social Security is that it is a lifetime benefit that is inflation adjusted and therefore holds a very unique place in any retirement plan and yet I find that it is often undervalued. Misunderstandings and short-term thinking can result in poor use of this very powerful resource.

More than a third of American workers claim Social Security benefits at 62, which is the earliest entitlement age, and also when they will receive the least benefit. This is referred to as early filing. With early filing the new lower-than-expected benefits are locked in for the remainder of one’s life. To highlight the difference, consider a person who at full retirement age of 67 would receive a benefit of $2,291 per month for life. If instead they file at age 62, their monthly benefit would be reduced to $1,487. This amounts to $9,648 less annually for life (or $17,844 instead of $27,492 each year), a significant decrease in retirement cash flow.

Claiming early Social Security benefits can be further reduced if you continue to work between ages 62 and your full retirement age. Early Social Security benefits will be dramatically reduced — up to a dollar for every $2 in earned income if your earnings exceed annual limits (usually the limits are around $19K of earnings though it changes each year).

There is a breakeven point for those thinking to file early. If, for some reason, you expect to die early and without a dependent spouse, then considering early Social Security benefits should be part of your planning.
Finally, many early Social Security claimants assume that Social Security is not taxed. In fact, taxation of Social Security benefits isn’t determined by a person’s age, but instead by income level. For example, if a married couple files jointly, and their income is above $44,000, then they will pay taxes on 85% of their Social Security benefits. On the other hand, if they earn less than that amount, they only pay tax on 50% of their Social Security benefits.

Always consider each available resource fully (including social security) to create the best support for your ideal retirement.

Edi Alvarez, CFP®

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®

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®