by Jason Marrs & Karin Rettger
This is the time of year when we get the most questions about Social Security. Why is that? Well often times, individuals are looking to retire at the end of the calendar year and want to review their retirement income strategies revolving around their retirement accounts and how Social Security fits into the picture. So this month, we wanted to discuss five common misconceptions we frequently hear as it pertains to Social Security.
1. Will Social Security fully fund my retirement?
We always find this to be such a good question. When Social Security was originally designed back in the 1930’s, it was meant to fully fund retirement. Over time, we have realized that this is NOT the case. Social Security is there as an add-on to other retirement income streams that you may have. Just to throw out an example, the average Social Security benefit is roughly $1,500 per month. We find most of our clients cannot live on $1,500/month. However, the benefit can vary based on your income and the amount of years you have worked. The most important component of analyzing retirement income needs is to figure out how much money you will need in retirement. Then, figure out how much of that Social Security will cover. Lastly, figure out how we can develop a plan to save the necessary amount of money now in your 401(k), IRA, or other retirement vehicles to make up the difference, so you can live a long, healthy life, hopefully without the worry of running out of money
2. Will I receive my full benefits at age 65?
The age 65 for the longest time was always the widely accepted age to retire. For most of our clients, that is the age that they are aiming for. But why? Most people believe that they will receive their full Social Security benefit starting at age 65. This statement is Fake News. For individuals who were born 1960 and later, you are considered fully retired at age 67 by the Social Security Administration, regardless if you are still working or not. So at age 67, you would qualify for your full benefit. If you have questions on what your exact full retirement age is, let us know. We also recommend setting up an account on www.ssa.gov as well, so you can view timely information. On the flip side, there is some flexibility on when you can take Social Security. The earliest you can start taking Social Security is at age 62. If you decide to take it at 62, your benefit will be reduced accordingly by 28.3% than at your full retirement age. If you take it at 63, 64, etc, your benefit will also be reduced, but not as much as it would have been at 62. The latest age where you can take Social Security is 70 years old, which means you have to take it at age 70 regardless of if you’re still working. If you retired in 2020, for every full year after you delay taking Social Security from your full retirement age, before age 70, they will add on 8% per year to your benefit.
3. Can I work and receive Social Security at the same time?
When we talk to clients about what retirement looks like, a lot of them still want to have a part-time job of some sort to stay busy. We have clients who want to work at a golf course, or the gardening department at Home Depot, but how will that impact their Social Security benefits? It really just depends on when you take benefits. If you wait until you reach your full retirement age, you can earn as much as you want without impact to your benefit. However, if you take Social Security early, not only will your benefit be reduced (See Question 2 Above), you may also have to “pay back” a portion of your Social Security based on how much you earned. For example, in the current year of 2020, you will “pay back” $1 in benefits for every $2 earned over $18,240 annually. If you made $30,000 in 2020 from a part time job, $11,760 over the limit, you will owe $5,880 back to Social Security. In order to “pay it back”, Social Security will withhold your benefit. Lastly, as mentioned previously, if you have reached your full retirement age, there is No Cap to what you can earn from work on top of receiving your benefit.
4. Will Social Security be there when I retire?
A lot of younger investors ask us this question when we run financial plans for them. We tell them that although we cannot rely on Social Security, there is a solid chance that it will be there until the end of time. Let’s discuss why. As long as there are people working and employers to pay payroll taxes, Social Security will always have funding. As the population and the economy grow, over time there will be more and more people paying into Social Security. You likely see this on your paycheck marked FICA (Federal Insurance Contributions Act) tax. The reason for the hysteria now is due to the aging population. With all of the baby boomers retiring or retired, it has shown that Social Security has more money going out than it has going in. The surplus is projected to run out around 2035, so we would anticipate Congressional legislation within the next 15 years to make sure that Social Security is well taken care of. Something we could be aware of as potentially happening is that Congress will continue to raise the full retirement age until funding is balanced, or raise the payroll tax requirement to fund it. But, we suggest you have a financial plan put in place so you do not have to rely on Social Security.
5. Will my Social Security benefit be taxed?
You should know by now that very few things are tax free. Uncle Sam always seems to get his portion of the money. But, we do see this as a common question that people ask and how taxes affect their benefits. With Social Security, taxes are subject to the amount of your benefit and the amount of other income you are taking from other retirement accounts, pensions, part-time work, etc. For example, in the 2020 tax year, if you are single and you made less than $25,000, you won’t be taxed on your Social Security income. Also, if you are married and between both spouses, earn less than $32,000, you won’t be taxed on Social Security either. For those of you who earn more than those brackets, expect to pay income tax on your social security benefit. Most clients and other investors have retirement income coming from alternative places like IRA’s and pensions. So it is important to have a discussion with your CPA or tax professional as well to get a proper understanding of what your current situation looks like from a tax perspective and see how Social Security fits into the picture.
We are happy to answer any additional questions that you may have as it pertains to Social Security or how it fits into a financial plan. You can contact us at 630.858.5430 or email us at jmarrs@myfinancialadvisor.org if you have any questions. Stay tuned as we will continue to have different topics of the month. For October, look out for an article that talks about Medicare and open enrollment as well as another Seminar talking about the details.
Jason Marrs & Karin Rettger, Registered Representatives. Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Jason Marrs & Karin Rettger, Investment Advisor Representative Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Cambridge and My Financial Advisor, A Division of Principal Resource Group are not affiliated.