Making Smart Social Security Decisions Is Harder Than You Might Think
You may have been told to start taking social security as soon as possible (when you reach age 62). Or that you can just keep right on working full time even as you collect. These are just two of the biggest Social Security misconceptions, and if you follow that advice it can end up costing you a lot.
The truth is that Social Security is a complicated element of anyone’s retirement plan, and it can be difficult to navigate all the variables and figure out the best timing and options for your situation. You need to make smart decisions to ensure that you aren’t leaving money on the table for you and your spouse.
Just One Piece of The Portfolio
Social Security (SS) is just one piece of your retirement income picture—don’t count on it to fund your entire retirement. You need to augment it with savings, investments, 401k accounts, pensions, etc.
To be eligible to collect SS benefits, you need 10 years of earnings, or 40 “credits.” The amount of your benefit is tied to your highest 35 years of earnings. To keep the program equitable, SS has an earnings maximum each year, beyond which you don’t accrue additional benefits. In 2019 the maximum earning level is $132,900 of salary credited towards your SS. If you earn at least $132,900 then you’ve maximized your potential benefits. If you made more than that, it won’t make any difference towards increasing your benefits.
If you haven’t accrued 10 years of work history, you may still be eligible to collect under a spouse’s employment record.
What Will My Benefits Be?
The Social Security Administration used to mail annual statements to everyone who had accrued benefits, but recently they stopped mailing statements to anyone under 60 years old. However, you can still go online to https://www.ssa.gov/myaccount/ and register online to receive your statement any time. Starting three months before your 60th birthday, you will start receiving regular statements without having to register.
These statements will show you the exact dollar amount of your expected benefits based on the age you start collecting, and they enable you to review your earnings history (and make corrections if there are any errors—it’s a good idea to check and make sure your earnings haven’t been under reported).
What Age am I Eligible for Social Security?
Everyone is eligible for SS at the age of 62. But it’s not as simple as that. If you delay for several years and wait to start collecting until you reach “Full Retirement Age” (FR), that will affect the amount of your benefits. Your FRA depends on the year you were born. If you look at the chart below, you’ll see that baby boomers born between 1943 – 1954 reach FRA on their 66th birthday. If you were born before or after those years, your FRA is somewhere between age 65 - 67.
|Year of Birth||Retirement Age|
|1937 or earlier||65|
|1938||65 and 2 months|
|1939||65 and 4 months|
|1940||65 and 6 months|
|1941||65 and 8 months|
|1942||65 and 10 months|
|1943 - 1954||66|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
When Should I Start Collecting Benefits?
The answer to this question can be different for each individual. In general, the longer you wait to start collecting, the greater the benefits you will receive long term. Starting your SS benefit payments as soon as possible (at age 62) is not always the best choice. Your benefit amount is not just what’s shown on your SS statement, but varies depending on when you start collecting. For example, if you were born in 1960 or later:
|Age you can start collecting SS Benefits||Amount of Benefit|
|Age 62||70% of your designated benefit amount|
|Age 66||100% of benefit|
|Age 70||100% of benefit|
If you’re in this demographic and decide to initiate benefits right away on your 62nd birthday, you will be receiving 30 percent less than your allotted monthly benefit amount (as shown in your SS statement). And that discounted payment amount will be locked in for the rest of your lifetime, for every subsequent benefit payment you receive! It doesn’t jump up to 100 percent when you reach age 66. However, if you wait to start collecting until you reach age 70, you’ll receive 124 percent—higher than your designated monthly benefit amount—permanently. (All Social Security beneficiaries do receive periodic cost of living (COLA) increases, but your original payment will not change).
Considerations such as your work status, your life expectancy and family situation, and spousal SS benefits all come in to play when deciding on the right timing. Some couples take a “barbell” approach (one on each end of the collection timeline), with one spouse initiating benefits as soon as they’re eligible, while the other spouse waits until they can take the maximum, thus having some flexibility while also giving themselves a higher average benefit over time.
When Should I Stop Working?
It might seem like a great idea to keep working at full salary and collect SS benefits at the same time to build up your nest egg. But If you’re under the full retirement age and receiving SS, you can only earn a maximum of $17,640 per year. If you make more, then $1 out of every $2 (or 50%) of your retirement benefits will be withheld until you reach your FRA. In your FRA year, you’re allowed to earn $46,920/year, with any additional earnings resulting in $1 out of every $3 in benefits withheld.
If you are at or older than the full retirement age, then go right ahead—you can work and earn as much as you want while receiving SS at the same time at your full benefit amount.
Does Social Security Affect My Taxes?
There is tax on social security benefits, as a form of income. If your Modified Adjusted Gross Income (MAGI) is more than $25,000 (individual) or $32,000 (couple filing jointly), you’re subject to this taxation. Up to 85% of your SS benefits can be treated as taxable income. About half of SS recipients end up paying at least some taxes on their benefits.
Gee, This Is All Pretty Complicated…
The information presented here is just the tip of the iceberg. There are additional rules (e.g., for non-working spouses and widows/widowers), ever-changing regulations, and a plethora of strategies and advice—both good and bad—for you to sift through. If you’re feeling a bit daunted by all the complexities, or just want to ensure that you have the optimal plan in place for your individual situation, Butera Wealth Management can help. We have the expertise and 25+ years of experience, and we use sophisticated tools to help you run all the scenarios and pick the best option for you, your spouse, and your overall retirement and family goals.
We’ll make sure that you’re set up to enjoy the “Security” of your Social Security and retirement income.
NOTE: This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Louis Butera to provide information on a topic that may be of interest. Copyright 2018, Louis Butera Wealth Management, LLC.