First Friday Focus: Diving Into Social Security
First Friday: Focus Diving Into Social Security, We hear lots of questions about on an ongoing basis, it’s a big topic and a very important piece of retirement plan.
The History of Social Security
First Friday: Focus Diving Into Social Security: The retirement age stood at 65, but it’s important to note that, at that time, life expectancy also equaled 65. Hence, the designers of Social Security did not intend it to furnish retirement income for 20 to 30 years.
If we consider the era when Social Security began and the average number of children per family, and then compare it to today’s figures, we observe a significant shift. Approximately 40 taxpayers supported each Social Security beneficiary initially, whereas today, the ratio stands at about 2 to 1.
In 2019, experts estimated that Social Security held assets sufficient to cover scheduled benefits until 2035. Beyond that point, payroll taxes and other income will only cover 79% of program costs.
Current Social Security and Possible Changes
Eligibility and Full Retirement Age
The Full Retirement Age (FRA) for Social Security has been 65 for a significant period, but it has recently seen an increase, and there is ongoing discussion about raising it to age 70.
The FRA (Full Retirement Age) is set at age 66 for people born between 1943 and 1954. For individuals born in 1955 and later, the FRA increases by an additional two months each year until 1959. If your birth year falls in 1960 or later, your full retirement age becomes 67.
You become eligible for Social Security benefits at age 62. However, if you choose to retire before reaching your FRA, you will receive a reduced percentage of your FRA amount. Conversely, if you decide to retire after your FRA, your benefit will continue to grow until you reach age 70.
Nevertheless, if you opt for early Social Security benefits and continue working, your earnings exceeding the eligible limit will likely result in a reduction of your benefits. For every $2 earned above the current limit, they will deduct $1 in benefits.
Once you reach your FRA, you can earn any amount without incurring penalties from Social Security. Additionally, there are different income limits for eligibility during the year of your FRA.
Spousal or “derivative” Social Security benefits depend on the work history, earnings, and age at which each spouse applies for or begins drawing benefits.
The spousal – or derivative – benefit equals 50% of the higher earner’s accrued benefit at the spouse’s full retirement age. If the higher-earning spouse starts taking benefits before full retirement age, the spouse’s derivative benefit will be reduced.
When spouses take time off from the workforce to raise children, provide care for senior parents, or work part-time (or on a farm), lower earnings may contribute to fewer earnings years considered in the 35-year calculation. This may result in a much lower benefit compared to individuals who work full time throughout their adult lives. This is why many individuals might qualify for a higher benefit based on their spouse’s (or previous spouse’s) work history.
If a couple was married for at least 10 years and subsequently divorces, either spouse can qualify for Social Security benefits at age 62 under the other’s work history. Even if the higher-earning ex-spouse has not yet applied for benefits, as long as they are eligible and the couple has been divorced for at least two years, the other ex-spouse can still receive benefits.
Once an ex-spouse remarries, they are no longer eligible to receive benefits based on the first spouse’s work history, unless the second (third, fourth, etc.) marriage ends in divorce, annulment, or death. You are eligible for the highest derivative available from any number of ex-spouses, provided each marriage lasted at least 10 years, and you are not currently married.
These same rules apply to widows or widowers.
When to Take Social Security
The key lies in coordinating your Social Security benefits with all your other retirement income, including pensions, IRAs, investment income, wages, and rental income, among others. This coordination must align with your personal plan.
Deciding when to take Social Security isn’t solely a mathematical matter. You can generate reports that display the breakeven point and the option offering the highest lifetime benefit, which often leads to a delay until age 70. However, it ultimately hinges on your lifespan, a variable no one can predict.
Thus, this isn’t merely a mathematical decision but one that must make sense overall.
For instance, if you retire and opt to defer Social Security, you might need to supplement retirement income from other sources like IRAs and 401(k)s, potentially depleting or even exhausting those accounts. While Social Security payments may increase, you’ll only receive a monthly income, with no access to a lump sum, and these benefits don’t pass on to the next generation.
Is this trade-off acceptable to you? Do you have faith in the government handling your retirement, or would you prefer retaining some control? These are just a few of the non-mathematical questions you should pose and answer when determining the optimal time to start receiving Social Security benefits.
Planning for the Survivor
When you’re planning for retirement income you have to plan for Survivor income. It’s important to know whether your income is set up for joint life or single life. At a minimum, a surviving spouse will lose the lower Social Security check, they will keep whoever’s is higher.
Taxes on Social Security
The distinction between total income and taxable income for tax purposes is important. Federal income taxes do not apply to at least 15% of Social Security income. However, when combined with all other sources of taxable income, your tax liability can increase significantly. Your total provisional income is the determining factor for the taxation of your Social Security benefit. To calculate this, take half of your Social Security benefit and add it to all other income sources, such as wages, company pension, and bond yields.
If you surpass a specific income threshold, your Social Security benefits become subject to taxation on a graduated scale. For individual tax filers:
- If your total income falls between $25,000 and $34,000, then up to 50% of your Social Security benefits are subject to taxation.
- If your total income exceeds $34,000, then up to 85% of your Social Security benefits are subject to taxation.
For joint filers:
- If your total income ranges from $32,000 to $44,000, then up to 50% of your Social Security benefits are subject to taxation.
- If your total income surpasses $44,000, then up to 85% of your Social Security benefits are subject to taxation.
How Do I apply for Social Security?
You apply for Social Security by calling the Social Security office and either making a phone appointment or an in-person appointment at your local Social Security office.
It’s normally about a three-month process to get the benefits started, which is important to note when you’re thinking and planning ahead on starting benefits
Is Social Security going to continue to pay me throughout my retirement, will the program last?
I can’t provide a definitive answer with 100% certainty. My personal belief is that they won’t attempt to reduce security for Social Security recipients. The changes I foresee are likely to impact future generations, potentially by raising the full retirement age or introducing qualification criteria similar to Medicaid. First Friday Focus: Diving Into Social Security, If this is a concern, it’s essential to incorporate it into your overall plan, including how you would replace Social Security benefits if they were unavailable.
Can I reduce taxes on my Social Security?
Yes and no, it really depends on where your overall income is, however, there are things you can do to reduce taxes overall which could lead to reduced taxes on Social Security as well, again, this is why you want a well-coordinated plan around all areas – income planning, investment positioning, tax planning, and estate preservation.
Click here to learn more about the different tax buckets in retirement.
Give us a call if you have any questions, we’re always happy to talk and work through all your options and what is best for you. When you start Social Security, you can’t go back and redo it.
First Friday Focus: Diving Into Social Security: If you are taking such security already it’s still not too late to at least be sure everything’s working together and coordinated with your overall plan. It’s important to have that clarity because clarity gives you confidence in your plan and confidence breeds financial security.
If you have more questions and would like to schedule a personal one-on-one call with Michelle, click HERE to access Michelle’s calendar and schedule a day and time that is convenient for you.
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