Finding True Wealth EP 032: Social Security - The Decision of a Lifetime

| March 22, 2018

Social Security is more than a monthly check.  Do you realize it can be worth well over a million dollars? A $1,500/mo SS payment with 1.5% inflation will add up to over $675,000 in 30 years. If your check is $2,000/mo for 30 years the total is $900,000, and if your check is $2,500/mo for 30 years it would total over $1,100,000.

It is a pension with cost of living inflation adjustments, which pretty much do not exist anywhere else. It is a pension for a homemaker, which you can’t get anywhere else. You can to control when to turn it on to maximize your benefits. It provides for your spouse if you die. It provides for your children if you die when they are under 18. It provides disability benefits. Simply put, it is amazing. All these benefits truly are amazing but there is a catch - this is why the system is broken and massively underfunded.

The most common question I get from people is, when should I begin my social security benefits? Followed by, from younger folks, will Social Security be there for me? And will I be there for SS, which means if I die young what will happen to my benefits? OK,  let’s tackle some of these questions:

When can you turn on your benefit?

Age 62 is earliest, age 67 is the new normal retirement age (NRA), and age 70 is the latest you can delay while still accruing benefits. You can turn on your income at any point between 62 and 70. Be aware that you will receive much much less at 62 vs age 70.

When is my Normal Retirement Age (NRA)? For those born before 1954, the NRA is age 66. But for those born after 1960, the NRA is 67. However, you can take it as early as 62 with a 25% reduction. This means if your benefit at 66 is $1,000/mo, you can take it at 62 for just $750/mo. You are rewarded for each year you wait. At 63 your haircut is just 20%, and so on. You are also rewarded for each year you wait beyond your NRA. For instance, if your NRA is 66 and you wait until 67, you would collect an extra 8% or $1,080 per month. And that is a permanent increase for the rest of your life and your spouse's life. You can delay until age 70 at which point there is no further incentive to wait. If you are age 70, please file for SS if you have not yet! Using the same example, your amount at age 70 would be 32% more than age age 66, or $1,320/mo instead of just $1,000/mo.

When should you turn on your benefit?

First, full disclosure: It depends - it is different for everyone. But, I am in favor of waiting as long as possible to maximize your benefit. I realize that for most people they will turn on the income before age 70 because they are going to need the money.  If you have other income sources, you should at least evaluate waiting and allowing your Social Security benefit to roll up.

Will it be there for you?

Many young people do not count on Social Security to be there for them. However, when I build financial plans for these folks, I like to use a 75% assumption from the statement they get. Here is why: according to the 2017 annual report of the Board of trustees of Social Security, full benefits are available to be paid until 2034. At that point, just 77% of the benefits payable are funded. I feel pretty good about using 75% as a conservative expectation because many speculate that legislation will change between now and then. Some common proposed solutions to extend the solvency of the program include, but are not limited to:

  • Changing the way inflation is calculated to something more slowly growing than CPI.
  • Increase the normal retirement age beyond 67 to an older age
  • Increase the income base above 128,400
  • Increase FICA taxes

A combination of these can make a big difference. At the LPL conference circa 2009/2010, President George W Bush said changing the inflation was his favorite way to go after the private accounts legislation failed. Regardless, I like to do extremely conservative planning and as a result I use 75% for those under age 50.

Will you be there for SS?

Meaning, will you live long enough to take advantage of the benefits? If you are 65 years old and male, you have a 50% chance of living to age 86 and a 25% chance of leaving to 93. for females, those same probabilities would extend to age 89 and 95, respectively, according to the Society of Actuaries in 2015. For married couples, there is a 50% chance one spouse will reach age 93. So yeah, I think most of us who are old enough to file for benefits will be collecting for a long time. This supports the case for delaying your start date.

Spousal benefits. Let’s say my spouse did not work and stayed at home raising kids. Let’s also assume my amount at age 66 is $2,000/mo. A spouse can take their own Social Security or take half of their spouse. Since my wife's Social Security would be zero, she could take half of mine for $1,000/mo. That means a couple we would have a total of $3,000/mo - $2,000 from me and $1,000 from my spouse. Its a pretty sweet deal since in my example the spouse never paid in a dime into the program, but still gets a lifetime pension. Then if I die, she will step up to my $2,000/mo and lose her $1,000/mo. Remember, These nice benefits are part of the reason why the program is insolvent, folks.

Surviving spouse benefits. Let’s continue with the same example but say I died at 55. Under the widows or widowers benefits, She would be able to collect my benefits at age 60, which is 2 years earlier than the normal rules. One other neat planning strategy is to have the surviving spouse collect the widow's benefit at age 60, and not taking her own benefit. Since she is delaying her own benefit, allowing it to roll up each year, she could take 132% of the NRA amount at age 70 and possibly get a raise by switching from the deceased spouse's Social Security. Of course, for this example to hold true the surviving spouse could not have been a homemaker - they would have had to have their own earnings record.

Surviving children’s benefits. Today I have 3 kids and each child would receive an amount just over my age 62 amount with a family max. With three kids, my family would hit the max.

For divorced spouses. Divorced people are eligible for benefits of the ex-spouse. They must have been married for 10 years and the roll-up does not extend beyond age 65 like in traditional cases.

For disabled individuals. People may file for Social Security disability if they are unable or not expected to work for a period longer than 12 months. This is a larger amount and is permanent. On my statement it says it is 41% larger than my amount at age 62 but a couple dollars short of my normal retirement age amount at age 67. What is nice here is that you get your larger payment up until age 65 and don’t have to take less upon reaching retirement age and then when you die your spouse can keep that amount. Essentially, the disability income becomes a higher reitrement income than would have been. It is hard to get approved so you should always consult an attorney who specializes in this sort of situation.

Taxation. Full disclosure! I do not provide legal tax or accounting advice.

In retirement we have taxable income such as a pension, or IRA withdrawal. We have tax-free income such as a Roth IRA withdrawal, muni bond income, or loans again a life insurance policy. And then we have social security, which for most people is partially taxed. Its called your provisional income. If your provisional income is less than 32k for a couple, all of your benefits are tax free. If you are married and between 32k and 44k, you will pay tax on 50% of your benefits. And for those of you who are married with provisional income over 44k, you will pay tax on 85% of your SS benefits.

Potential penalty.

If you work in retirement, the timing of your election to begin ss is critical. If you are under your NRA (such as age 62)for the full year, you will pay a $1 penalty for each $2 of earnings above the limit which is presently 17,040. Let’s say your SS at 62 is 1,000/mo or 12,000 and you earn 25,000 in income in that year. You are 7,960 above the earnings limit so you would have to repay 3,980 of your SS. Bad idea! In this type of satiation you are better of waiting to elect your ss or better off telling your boss to schedule you for less hours so you don’t pass that 17k threshold! In the year you reach your NRA, meaning if I am turning 67 this year, the calculation changes to an earnings limit of 45,360, and beyond the month when I turn 67 there is no earnings limit.

Planning milestones

  • 50 catch up contributions
  • 59.5 ira w/d no penalty
  • 62 ss can start
  • 65 Medicare
  • 66/67 NRA (Normal Retirement Age)
  • 70 no further beneift to wait
  • 70.5 RMD (Required Minimum Distribution)

So, when do we do the SS planning? Late 50’s is my answer. If you want to try and maximize benefits, we are going to have to delay your election. That means we need income from other sources such as portfolio dividends, IRA withdrawals, rental real estate, or part time work. If you have a portfolio of over $500,000 , or an income over $250,000 or you’re trying to consider when to retire and how Social Security fits in to your plans, reach out to me for a second opinion. Click below to schedule. 

Peak Wealth Management is a full-service Registered Investment Advisor located in Plymouth, MI. We believe by providing education and guidance, we inspire our clients to make great decisions putting them on a path toward fulfillment and their own definition of true wealth.