Social Security is ubiquitous and essential, yet many people are confused about how some of the basic tenants of it operate. I took on the 8 most common questions I’ve gotten over the years and answered them in (hopefully) an easy to understand, bullet point format below.
Social Security decisions are a crucial factor in your financial plan and how your portfolio will be structured in retirement. Be sure you or your advisor is very aware of your options and have discussed it thoroughly. If you have any questions or would like to talk about how social security will influence your own plan please reach out to Alex today at alex@anfieldwealth.com or 330-592-3870.
1. What is my Full Retirement Age (FRA) and why is it important?
Your FRA is the age you are eligible to receive 100% of your social security benefit, and the age at which your benefits are no longer reduced if you continue to work (if you claimed benefits early).
When it comes to understanding how your benefits work your FRA is a central factor. If you were born between 1943 and 1954 your FRA is 66. If you were born 1960 or later your FRA is 67. If you were born between those dates, it’s a bit more complicated. The table below has the details:
2. If I claim benefits before my FRA, will they be reduced?
Yes. If you claim benefits before your FRA, your benefit is permanently reduced. The amount of the reduction depends on your FRA and on your claiming age so it can vary slightly but in general your benefits will be reduced as follows:
To stress this point again, the reduction is not temporary, rather it is a permanent reduction meaning if you claim right away at 62, your benefits will be permanently reduced by 30% for your entire retirement. (See #5 for more on when to claim).
3. Do my benefits increase if I wait to claim?
Yes. If you claim your benefits after your FRA, your benefits will increase by 8% per year until you are 70. This can result in a fairly substantial return for those who are working past their FRA (see #7 below) or otherwise able to put off receiving the benefits until a later date. Consult your financial plan before making this decision but in many cases it could be a benefit.
4. How do spousal benefits work?
If your spouse is already collecting benefits, you have been married for at least one year, and you are at least 62 you are entitled to collecting based off your spouse’s benefit even if you’ve never worked a day in your life. Depending on your start date you can receive between 32.5% and 50% of your spouse’s benefit.
If you have also worked, you are eligible for your own benefit. When you file the SSI will compare your benefit to the percent you qualify for of your spouse’s and you will get the higher of the two.
If you are divorced but were married for at least 10 years and did not remarry (even if your ex did remarry), you can file a claim to get spousal benefits based on their earnings record.
Spousal benefits can get a bit more complicated so it’s best to either read in-depth on the social security website or to contact a financial advisor to discuss your specific situation.
5. Should I defer my benefits or start as soon as possible?
This tends to be a personal decision for many people. Speaking from a purely mathematical standpoint, if you were to spend all the benefits, that is not invest them, the break even age between starting at 62 and 70 comes around age 83. Therefore, if you’re spending all your benefits, it is typically beneficial for you to defer to age 70 if longevity runs in your family as once you pass age 83 you will have received a higher sum of benefits than if you began at age 62.
That being said, many people struggle to make a decision based purely on the math, many feel they don’t want to take the chance that they won’t live past 83 or that social security could run out or change benefits (see #8). This decision typically won’t make or break your retirement, but it could have a substantial impact so be sure to refer to your financial plan.
6. Will my benefits be taxed?
Up to 85% of your benefit could be taxed based on your income as follows:
For example, say you have income of $55,000 and are married. You will pay income taxes on 85% of your annual benefits.
Most of the time benefits are just Federally taxable, however they are taxable at the state level in 13 states (Ohio is not one).
7. Will my benefits be reduced if I continue to work while receiving them?
Again, this is dependent on your FRA. Once you have reached your FRA (66 or 67) your benefits will not be reduced even if you continue to work. However, if you choose to receive benefits while working and before your FRA (which is typically not a good idea) your benefits can be reduced based on how much you make until you reach your FRA. For 2019 you will lose $1 in benefits for every $2 in income you earn over $17,640. This is why in many cases if you continue to work it is best to defer receiving benefits.
Fun fact – if you are self employed the SSI only considers your NET pay, where if you work at a job with normal wages they consider your GROSS pay. This can be a substantial difference and leads many early retirees into starting their own business.
8. Is social security going to run out of money?
This year the Trump Administration stated that if there are no changes made, Social Security will have to begin reducing benefits in 2035. Therefore, a short answer would be yes, they could run out of money. However, that is assuming nothing is done which is entirely unlikely. There are many potential changes that can be made, and most wouldn’t even result in reduced benefits. It’s more likely that in the near future one of these rules will change:
Social Security taxes are only paid on the first $132,900 of income. Most likely raising this cap or eliminating it would be one of the first options.
The FRA for many different birth dates will almost certainly be changed. I would not be surprised that if those born in 1980 or 1990 say would have their FRA moved back to age 70.
Overall, yes, SSI is going to have expenses exceed its income shortly, but the chance of it running out of money are slim. There is too much on the line politically for either party to ever let that happen, so more than likely we will just see some adjustments to the benefit formula over the next few years.
Hopefully you found these items helpful. When considering retirement social security is too important of a factor to overlook so you need to be sure you are getting the most out of it as it will affect your plan and your portfolio.
If you have any questions or would like to discuss how social security decisions will affect your plan please reach out to Alex today at 330-592-3870 or alex@anfieldwealth.com.