This month I wanted to talk about another concern families have: Social Security. Whether you are taking your benefits now, expect to be starting in the near future, or are still early on in your career, understanding Social Security and what it will mean for you is important. While this can become a very complex and personal topic, knowing even the basics can help you to get a great jump start into some of the decisions you may need to make in the future.
Enjoy! And as always, if you have any questions or if something strikes you that you’d like more information on, please let me know.
5 Questions to Consider around Social Security
1. How are my Benefits Determined?
Throughout your career, and even in early employment, you have been contributing to Social Security. With each paycheck received as a W2 employee, or with each tax filing if you are self-employed, social security has continually tracked your income for each year.
When the time comes to calculate your benefits, social security uses the top 35 years of work history, adjusted for inflation, to calculate what your indexed earnings are, and ultimately the amount you are projected to receive. These 35 years can include everything from your lower-earning position during your teenage years all the way through your higher-earning career role. The more higher-earning years you have, the better chance that some of your lower-earning years will be removed from your calculation.
If you have not recorded a full 35 years of work, 0s will be added into your benefits until you have a total of 35 years for the calculation. For some non-working parents, this could be of concern, however there are other options for claiming social security. If you are at least 62 years old and have been married for at least one year, or if you are at least 62 years old, married for at least 10 years and are currently unmarried, you may be eligible for a Spousal Benefit based on your current or ex-spouse’s working benefits. Widows and widowers are also eligible to collect on their deceased spouse’s benefits, as a part of their survivor benefits.
2. When can I take my Benefits?
There are 3 main claiming ages to be aware of:
First is age 62. This is the earliest that you are able to claim your benefits. On the positive side, you will begin receiving your benefits as early as possible. However, on the negative side, you are only entitled to the smallest amount available to you. There are also potential reductions to your benefits to be concerned about if you are still employed.
Second is at Full Retirement Age. Currently, this is age 66 or 67, depending on the year you were born. At this point, your monthly check will be higher than if you started claiming at age 62. There is also no penalty if you are employed at this point. However, you will have 4-5 years of no benefits claimed by waiting.
In either the first or second scenario, you will still receive cost of living adjustments each year to your income, however it will not be as large of an annual increase as if you waited until scenario 3.
Third is at 70 years old. This is the highest monthly check available to you. For each year you wait between your Full Retirement Age and age 70, your benefits grow by 8% per year (much higher than a typical cost of living increase). There is still no penalty for being employed at this point, but you have also waited 8 years since initial eligibility to receive your benefits.
3. Why should I wait?
After looking through the 3 claiming scenarios, sometimes it is hard to decide the optimal time to claim social security. When starting to consider what works best for you, it is important to keep in mind a few considerations:
The most important question is always: Are you still employed? As indicated in the 3 scenarios above, if you are still working, most of the time it makes sense for you to delay at least until Full Retirement Age. At this point there is no longer a penalty for employment earnings, plus, you may be adding valuable earnings records to your 35 years of work calculation.
It is also important to consider what your other income will look like. For some people, relying on personal retirement accounts for a few years while waiting for age 70 to take social security makes sense. This allows a guaranteed 8% growth of your social security benefits, which you may not get the same return with your retirement benefits.
You may also want to simply consider if you need the money. If there is currently a gap between your income needs and your actual income, social security may be your only option and so taking the benefits now is important.
If you are still confused about what you’d like to do, working with a financial professional, such as myself, can help you get clarification. With just your recent Social Security statement, I help clients run a customized Social Security Maximization Report to determine the pros and cons of waiting for your personal financial situation.
4. Is Social Security Income Taxed?
Unfortunately, this answer is also ‘it depends’. Similar to the rest of the tax code, social security benefits have their own brackets to be aware of when determining if you will be taxed. Across all tax filing status’ there are different income thresholds which help determine how much of your social security will be taxable.
Currently, for single filers, if you make under $25K in other income, you will not get taxed on your social security. This threshold is $32K for married filing jointly filers. As your other income increases, the taxability of your social security increases as well. This tops out at 85% for all filing statuses, the maximum amount of your social security benefit you will be taxed on in any given year.
5. What new changes and proposals should I be concerned about?
Social Security has been warning that benefits may be reduced in the future. Congress oversees the changes to the social security laws and has noted that by 2035 the taxes collected will only make up about 79% of the benefits scheduled to be paid. This means that it is important to see what other income is available to you in retirement and how your potentially reduced benefit will impact your planning.
The Restricted Application Window is closing on January 1, 2024. For those who qualified, this previously allowed a person to suspend their own worker benefit, allowing it to continue growing, while still receiving their spousal benefit. This will no longer be allowed and that same person will be required to file for both their own and their spousal benefit when applying, receiving a combination of the two benefits.
There is additionally a proposal which would increase benefits for certain eligible workers to at least 125% of federal poverty level. This same proposal will look to increase benefits by 5% for those who have been taking social security for at least 20 years, and increase benefits by 20% for widows and widowers. To pay for these increased benefits, they are also proposing increasing the maximum Social Security payroll tax to $400K, instead of the current $142.8K.
What does all of this mean for you? Similar to what I’ve said in the past, Plan! While these changes have not yet been made, it is important as always to be prepared. Working with a CPA and / or a Financial Advisor, such as myself, to make sure you are aware of what these changes could mean for you are important. Additionally, it can always help to have someone by your side when making big decisions around claiming and making use of your social security as a part of your retirement planning.
If you want more information or guidance, please let me know! I am happy to schedule a complimentary consultation to discuss any questions or concerns you may have.
Thank you, as always, for your time.