Ida May Fuller of Ludlow, Vermont, received the first monthly Social Security check on January 31, 1940. She received $22.54, according to the Social Security Administration. She was 65 years old at the time. She received benefits until she passed away at 100 years of age.
Ida May Fuller worked for only 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. While we will never receive the return on our contributions that Ms. Fuller received, Social Security can and does play a role in supplementing savings accumulated over our lifetime.
Recognizing that Social Security supplements other sources of income, we can take proactive measures to maximize benefits while avoiding the pitfalls that poor choices can create.
With that in mind, let’s review potential financial Social Security traps that can cost you money.
1) 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 review it anyway.
If you were born in 1960 or later, full retirement age is 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%.
In casual conversation, it’s common for folks to ask us, “When is the right time for me to start taking social security?” We usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.
If you have questions, let’s talk about it. We believe it’s important that our recommendations are specific to your particular circumstances.
(If you were born prior to 1960, find out your full retirement age on the Social Security Administration website.)
2) Collecting benefits 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.
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.
3) Being unaware that your Social Security may be taxed. While it’s a common understanding that if IRA and 401k contributions were deducted from income, we know that they will be taxed upon distribution. 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” (ie. filing Single) and your combined provisional income* 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.
*Provisional income equals your adjusted gross income (excluding social security) + tax exempt interest + 50% of your social security benefit.
4) Deciding 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, otherwise known as your primary insurance amount (PIA). Your spouse would not receive 50% of your increase delayed benefit. So, if your spouse waits past his or her full retirement age, he or she is leaving money with the government.
5) Not understanding spousal benefits. It’s complicated. You may be aware that divorced spouses are eligible for benefits tied to their former marriage.
Eligibility is outlined as follows:
A) You were married for at least 10 straight years.
B) You are at least 62 years old.
C) Your ex-spouse is eligible for retirement benefits.
D) 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.
6) Not understanding how your working years affects your social security calculation. 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.
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.
Or, are you thinking of retiring early? Before you do, you should review your social security statement first. Would an extra year or two of working help to increase your benefit and replace a year of lower income?
When we are factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but at least it’s something you should take into consideration.
For some people, Social Security may seem simple. For others, it feels as if you’re working your way through a financial web. If you have questions about Social Security or are uncertain how to proceed, feel free to give us a call.
Securities offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC. Advisory services offered through The Strategic Financial Alliance, Inc. (SFA) and Strategic BluePrint LLC.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. The SFA does not provide tax or legal advice.
Published November 18, 2019