On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received $22.54, according to the Social Security Administration. She was 65 years old at the time. She passed away at 100 years of age.
Ida May Fuller worked for three years under the Social Security program, paid a total of $24.75 in payroll taxes, and collected $22,888.92 in Social Security benefits.
Today, nearly 70 million people receive some form of assistance from Social Security. You and I will never receive the rate of return on our contributions that Ms. Fuller received, but Social Security can and does play a role in supplementing savings accumulated over a lifetime.
Recognizing that Social Security supplements other sources of income, we can take proactive measures that maximize benefits while avoiding the pitfalls that poor choices can create.
With that in mind, let’s review potential financial Social Security potholes that can cost you money.
- Collecting benefits too soon.
You may begin receiving your retirement benefit at age 62…at a reduced rate. You probably know this, but let’s continue.
If you were born in 1960 or later, full retirement age is 67 (before age 1960 your age would most likely be somewhere between 66 and 67) . At age 62, your monthly benefit amount is reduced by about 30% of what you would receive if you waited until you are 67. The reduction for starting benefits at 63 is about 25%; 64 is about 20%; 65 is about 13.3%; and 66 is about 6.7%. So, the earlier one starts before their full retirement age (FRA) the more one "looses out". Well, that's what the media says anyway. Bear in mind, if you collect earlier than your FRA you are indeed getting less each month BUT you are getting money today.
In casual conversation, it’s common for folks to ask us, “When is the right time for me to begin receiving benefits?” We usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.
- You collect prior to your full retirement age while still working.
If you are under full retirement age for the entire year, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640. That's not a whole lot of money.
In the year you reach full retirement, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. Only earnings before the month you reach your full retirement age are counted.
In many cases, the price of collecting Social Security while working and under full retirement age can be costly. I've done the math for a couple of people and it turned out they wouldn't receive any benefit.
- You are unaware that your Social Security may be taxed.
IRA and 401k contributions may be deducted from income. However, Social Security taxes paid by the employee are not deductible. But that doesn’t necessarily translate into tax-free Social Security income.
If you file a federal tax return as an “individual”, and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Earn more than $34,000, and up to 85% of your benefits may be taxable.
If you file a joint return, the threshold rises to $32,000 and $44,000, respectively.
- You decide to defer the spousal benefit.
The longer you wait to take Social Security, the greater the monthly benefit, up to age 70. So, why not employ the same strategy for your spouse, if money isn’t the primary issue? Unfortunately, that may not be a wise choice.
The most your spouse may receive is 50% of the monthly benefit of the primary account that you are entitled to at full retirement age (FRA). If your spouse waits past his or her full retirement age, he or she is leaving money with the government. Bear in mind, rules have changed recently on collecting spousal benefits. It can get tricky so we need to look at a few things. The first hurdle is you both now need to be collecting to be able to receive a spousal benefit. And if you were born after January 1, 1954, it gets even more complex.
- Remarriage and your benefit. It’s complicated.
You may already be aware that divorced spouses are eligible for benefits tied to their former marriage. (Or a marriage before their most recent marriage)
Eligibility is determined by these criteria:
- You were married for at least 10 years.
- You are at least 62 years old.
- Your ex-spouse is eligible for retirement benefits. (they don't need to be collecting nor are they informed that you are collecting a benefit on their behalf)
- You are currently unmarried.
However, if you remarry, you lose the rights to your former spouse’s benefits unless your new marriage ends, whether by death or divorce.
I understand that the monthly Social Security check you receive may pale in comparison with the new journey you are about to begin, but it’s important that you are aware of the financial component.
- How many years have you worked?
Most of us understand one simple concept: the longer we wait to take Social Security (up to age 70) the higher the benefit (spousal benefit may be an exception–see #4).
We also understand that higher wage earners can expect to receive a higher benefit. But did you realize that your monthly benefit is also based on your highest 35 years of earnings?
What if you haven’t worked 35 years? Social Security averages in zero for those years, which reduces your benefit. If you have at least 35 years but some of those years are low earning years (your worked p/t etc.), they will be averaged in, creating lower benefit versus continued employment at higher wages.
Are you still working in your 50s or 60s? Great! Those afterschool jobs in high school or years when your income may have been low are removed from the benefit calculation if you’ve exceeded 35 years of income. These later in life higher earnings can bump up your monthly and therefore, lifetime benefit.
When we are factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but I believe it is something to be aware of.
- Widow Benefits
There are benefits available if one loses a spouse as well. I have a couple of clients that lost a spouse and I explained a strategy that put more money in their pocket. Namely, collecting a widows benefit and then switching to their own (sometimes it makes sense not to switch to one's own benefit). Again, every situation is different so we need to look at these on a case by case basis.
For some folks, Social Security may seem simple. For others, it feels as if you’re entering a complicated financial maze. If you have questions about Social Security or are uncertain how to proceed, feel free to give us a call.
We will help you determine what's best for you based on YOUR situation.
I'm here to help.
All the best.
Rick Fingerman, CFP®
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.