Last week I had an introductory zoom call with Walt* and Skyler*. A couple nearing retirement that was referred to me by a client.
Walt is 62 and Skyler is 64. They live in the Midwest and have both worked for many years saving in their 401K’s and paying into the Social Security system.
They would like to retire at the end of the year. This is a synopsis of our conversation. (Their main concern was about Social Security but that is just one part of the retirement puzzle, so I suggested they tell me a bit more)
Rick: How can I help?
Walt: Well, Sky and I would like to retire at the end of the year. I’ll be 63 and Sky will be 65. I think we will be okay financially, but I want to make sure before actually retiring.
Rick: That makes a lot of sense. Tell me more.
Sky: We are good savers and have accumulated quite a bit in our respective retirement plans at work. Our house is paid for, and we don’t have any debt.
Rick: That’s great! You have a leg up on many that are contemplating retirement. Have you completed a financial plan to see if retirement is possible at this time?
Walt: Well, not formally but I ran some numbers and with the maximum Social Security benefits coming in, we should be good.
Rick: Maximum Social Security?
Walt: Yes, based on our highest three years of salary, we should be pulling in over $7,000 a month.
Social Security is not based on one’s highest three years of salary like some pensions but rather Social Security looks at one's highest 35 years of earnings and does a calculation based on that. If you worked less than 35 years (maybe you were out of the workforce raising a family for a few years), Social Security will insert zero earnings for those years until they get to 35 years. These years with "zero earnings" will therefore lower one's monthly benefit. By working an extra year or two before collecting, you have the ability to replace those low earning years with higher ones which can increase your monthly benefit.
Walt: Hmmm. Well, then since I earned more than Skyler, I guess she should just collect on my benefit so we will get double what I’m entitled to. How do I calculate my benefit?
In a nutshell, one can collect Social Security at three ages (or anywhere in between). The earliest is age 62. The second is at one’s Full Retirement Age (FRA) which is age 67 for those born after 1959 and age 66 and varying months if born before 1960. For example, if you were born in 1958 like Skyler, her FRA is 66 and 8 months. The latest one can collect is age 70.
Walt didn’t have it quite right on Skyler receiving what he was receiving. Once one is at FRA, they are entitled to their own benefit or HALF of their spouse’s benefit, whichever is greater.
So, let’s say Skyler is collecting her own benefit at her FRA and Walt waits until he is at his FRA, If Skyler’s FRA benefit is $3,000 a month and Walt’s FRA benefit is $3200 a month, Walt would take his own because $3,200 is more than $1,500 (Half of Skyler’s benefit)
Walt also thought he read where he could collect Skyler’s benefit now and switch to his own later.
If one was born before January 1, 1954, there was a strategy a married couple could use where you collected on your spouse and switched to your own down the road allowing your own benefit to grow. Since Walt (and Sky) were both born after 1954, this option is not an option.
At this point Walt asked, why did he think this?
Rick: Walt, you are not the only one. These rules can be very complicated (We didn’t even get to Medicare yet!) and there is a lot of misinformation out there. Once you know and understand the rules as they apply specifically to you, you can then make an informed decision on when to start collecting.
We decided together that a more holistic approach to retirement was in order. This way, we make sure we are making good decisions and on track for a comfortable retirement.
Here are two more Myths I’ve heard lately that didn’t come up on our call, but I wanted to point them out.
I can collect a benefit on my ex-spouse if we were married for at least two years.
If you are divorced but were married for at least ten years, you are entitled to a Social Security benefit on your ex. Actually, one has to have been married for at least 10 years. (And divorced for at least two years) and must be at least 62. If remarried, you must not have done so before age 60 to receive a benefit on your ex if they have passed away. (I told you this stuff gets complicated). The most you can receive on an ex-spouse is 50% of their FRA benefit if they are still living.
I can collect a benefit at 62 (The earliest allowed) and continue to work.
This is true however, if one earns more than $19,560 before their FRA, Social Security will hold back benefits so it is usually best to wait to collect SS if you are under your FRA. In the year you turn your FRA, the limit goes up. ($51,960 in 2022). Once one is past their FRA, the earnings test doesn’t apply and one can earn as much as they like.
As you can see, there can be a lot to Social Security.
Feel free to reach out to me if you have any questions. I’m here to help.
Here’s another blog article…Check out, 7 Social Security Traps
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
*Not their real names
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.