Social Security Basics

The following information is from a True/False quiz about Social Security retirement benefits from Kiplingers. Below are the items that have consistently generated the highest levels of misconceptions during conversation with clients over the years. We have also noted some additional thoughts of our own in italics.)

For roughly two-thirds of American retirees, Social Security represents more than 50% of their retirement income.

True. Social Security makes up the majority of income for about two-thirds of American retirees. For about 20%, Social Security is the only income source in retirement, and for about one-third of Americans, Social Security is more than 90% of their retirement income.

(Our note: Social Security was never intended to fully replace your income earned from work. With fewer and fewer workers covered under employer pensions, the need for personal retirements savings becomes increasingly important.)

Currently, the Social Security system is on a trajectory to run out of money around 2033 and would stop making any payments in 2034.

False. Social Security’s Trust funds are expected to run out of money around 2033 or 2034. However, because Social Security is funded by a payroll tax, the annual incoming funds would still allow Social Security to pay roughly 77% of all promised benefits at that time.

(Our note: This is by far the area of biggest concern and confusion about Social Security retirement benefits.)

To maximize the total amount of Social Security benefits paid, a single person who expects to live to age 90 should consider delaying to start benefits until age 70.

True. Each year you delay your Social Security benefits past your full retirement age (up to age 70), you receive an 8% increase in benefits per year. The downside of delaying is that you are giving up payments today, to get higher payments in the future. Delaying Social Security is beneficial for individuals expecting to live a longer-than-average life as you now receive higher benefits for a longer period of time. So, if you expect to live into your mid-80s or 90s, or are concerned about longevity, the best strategy is typically to defer benefits to age 70 in order to maximize your lifetime payments from Social Security.

(Our note: this becomes a choice between “possibility” and “probability”. It is possible that you may die before receiving much or any benefit from Social Security. However, the probability is that you will live a long time in retirement.)

Since Social Security is funded through a payroll tax, Social Security benefits that you receive are always income tax-free.

True. Social Security benefits can be taxable, depending on your income level. No one pays federal income tax on more than 85% of his or her benefits. If you filed an individual tax return and had combined income (consisting of your adjusted gross income + non-taxable interest + ½ of your Social Security benefits) of more than $34,000, up to 85% of your benefits may be taxable. For those filing joint returns, if your combined income is more than $44,000, up to 85% of benefits may be taxable.

(Our note: The taxation of Social Security benefits is another major topic of confusion. Have a conversation with your tax preparer to understand the impact of Social Security on your personal income taxes. Also, higher income earners in retirement may pay higher Medicare premiums.)

Joe is receiving $1,500 a month from Social Security and his wife Ann is receiving $1,000. If Joe passes away, Ann will receive $1,750, which is half of Joe’s benefit plus her own benefit.

When one spouse dies, the surviving spouse can receive the larger of their own benefit OR the deceased spouse’s benefit. Ann will receive $1,500, which was Joe’s benefit, and lose her own benefit.

(Our note: survivor benefits are another topic of confusion. It is important to understand this and to also understand that delaying benefits by the higher recipient will also provide high benefits to the survivor.)

A retiree can claim a Social Security worker’s benefit as early as age 60.

The earliest age at which a retiree can claim a worker’s benefit is age 62.

(Our note: This is true but incomplete. Widow(er) benefits can begin as early as age 60.

In some cases, a spouse who never worked can still get Social Security retirement benefits based off of their working spouse’s benefit as early as age 62.

True.If an individual did not work long enough to qualify for his or her own Social Security benefits, he or she might still be eligible for spousal retirement benefits as long as the spouse is receiving Social Security retirement or disability benefits and the individual seeking spousal benefits is at least age 62.

Social Security calculates retirement benefits based off of an individual’s highest 35 years of work history.

True. Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. Social Security averages together your highest 35 years, meaning you need to work for 35 years to maximize your benefits. For example, if you only worked 30 years, then you have five years in which you have $0 attributed as to your income when your Social Security benefits are calculated.

(Our note: this is important to understand as part time work in retirement can have a positive impact on Social Security retirement benefits because today’s higher income could replace past years with lower income. You can view your wage history on the Social Security website: https://www.ssa.gov/myaccount/ )

Disclosures

The information contained is derived from sources believed to be accurate. However we do not guarantee its accuracy. The information contained is for general use and it is not intended to cover all aspects of a particular matter. The views expressed are our own, and do not necessarily represent the views of The Investment Center, Inc. IC Advisory Services, Inc. or any other member of their staff. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

 

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