By Erik Brenner
The COVID-19 pandemic has changed our lives significantly and it has forced people to think about aspects of their lives that maybe they took for granted, including comprehensive Social Security planning.
Older Americans have been the most vulnerable to the damaging health effects of the coronavirus and many have been forced to change their retirement strategies because of the pandemic. Some have lost their jobs and decided to start retirement earlier than planned, while others have reevaluated their finances and opted to delay retirement due to loss of current income. Whatever the situation, most Americans incorporate Social Security benefits into both short and long term retirement plans.
Questions that often arise when I’m talking to people about Social Security include, “How long will it last?” “Will it be there when I need it?” My answers are yes, it will be there, and you can count on it.
According to the Social Security Administration the trust fund right now would run out of reserve money in 2034 if nothing were done to add funds. The COVID-19 pandemic may have impacted that 2034 date, but exactly how much is not clear. Either way, when the reserve funds expire, there would still be enough money to fund benefits at a rate of 79 percent. So, the money will be there, even if it is reduced.
Additionally, there is legislation in the works to correct the ever-concerning Social Security solvency issues. Congressman John Larson of Connecticut has introduced a bill called the Social Security COVID-19 Correction and Equity Act. Very basically, it would prevent any cuts to Social Security benefits and it would boost benefits for people who need it the most during this pandemic. Obviously, there are other issues impacting our country right now that are more important, but there is growing political support to fix the Social Security system and most people believe something will get done. Too many people are dependent on it and retirees now represent a huge block of voters. Marcia Mantell’s article “Social Security Is Not Going Bankrupt” addresses concerns about the fund in great detail. You can find that article right here on Retirement Daily.
So, once you get past the question of will it be there, then you have to start thinking about how to use Social Security in ways that maximizes your benefits. Many people don’t think about Social Security as a pension, but that’s what it is. Better yet, it’s a pension that you cannot outlive, and has cost of living adjustments built in to offset inflation.
The most critical decision in building out an impactful Social Security strategy is when to begin drawing Social Security income. While early retirement benefits currently become available at age 62, they are proportionately reduced by how early you begin receiving income. For example, should you elect to receive benefits as early as possible your income would be reduced by nearly 28 percent.
The full benefit retirement ages scale then increase gradually for people born between 1955 and 1960. If you were born in 1954, or before, you became eligible for your full benefit at age 66 and you are probably already enjoying it. If you were born in 1960 or later, your full benefit retirement age is currently 67.
One common strategy to maximize retirement income is to delay receiving Social Security benefits until after your full retirement age. The longer you wait to take the benefit the better off you will be in terms of payment amount. Under current guidelines, your Social Security benefits max-out at age 70. However, every retirement plan is unique and every situation is different, so waiting is not always an option although it needs to be a consideration. There are also other reasons people choose to take the benefit early and it’s important for me as an advisor to respect those decisions. That said, when people do take the money early, they may end up missing out on thousands of dollars, and sometimes hundreds of thousands of dollars, in payment over their lifetime. Many people do it though: According to the Social Security Administration, 57 percent of people take their benefits before their full retirement age.
Taxes are another consideration when you choose to receive Social Security before your full benefit age. If you receive between $25,000 and $34,000 in Social Security benefits and began taking Social Security early you will pay federal income taxes at your marginal tax rate on about 50 percent of the Social Security income you receive. If you receive more than $34,000 you will pay federal taxes on about 85 percent of what you receive. Those thresholds have not changed for many years and they may seem low by today’s standards, but don’t expect them to change as they provide money for the system. Working with an experienced Social Security planner to develop a strategy that addresses taxes in retirement in a critical component of overall retirement planning. For more detail on tax implications regarding Social Security and your retirement plans check out Doug Gjerde’s article on Retirement Daily, “Don’t Let Taxes Ruin Your Retirement”.
I also encourage people who choose to take Social Security early due to lost wages to continue looking for work, even if it’s only part-time. You can make about $1,500 a month working part time before your Social Security payment would get reduced. The government will deduct $1 from your benefit for every $2 you earn above $18,240. You also must factor in how much your monthly Social Security payment adds up to annually because the government will also deduct $1 from every $3 you earn above $48,600 when you combine your work pay and Social Security benefit.
Once you reach your full benefit retirement age you can earn as much as you want and still receive your full Social Security payment, although you may still want to plan to use it in a way that minimizes the taxes you will pay.
If you land a full-time job and no longer need Social Security, you can suspend it and start earning back some of the payment amount you lost by taking it early. You may not reach the full amount you would have received had you not taken it at all, but you might earn back a good portion of the money you lost. So, if you feel taking Social Security early is your only option, it may be advisable to keep looking for work. When you think about working during your retirement there are many other factors to consider. I would encourage you to read Bob Powell’s article, “Working Longer Solves Almost Everything,” for information about the different benefits working longer can have on your life.
These decisions become even more critical for married couples. Spousal benefits and survivor benefits can be tremendously affected by the timing of the decisions. Spousal benefits can be a great option for spouses who didn’t work or had lower incomes for many years. It pays 50 percent of the higher-earning spouse’s benefit. But again, the longer you can wait to apply for benefits the more money you would receive. Once you commit to receiving that benefit you cannot change the amount.
The survivor benefit allows a person to claim the benefits of a deceased spouse. In this case you can claim the benefit as early as age 60, but it comes at a significantly lower amount than it would be at the full retirement age.
When both spouses are receiving benefits and one of them dies, only the benefits of the higher earner will be received as the survivor benefit. It’s important for the highest earner to maximize his or her benefit because that amount will eventually become the survivor benefit.
There are so many decisions and calculations that must be made when it comes to getting the most out of Social Security. Make sure your financial advisor understands these decisions and all the potential ramifications when you develop your retirement plan.
A recent Harris Poll of 2,000 people conducted for the Nationwide Retirement Institute found that 80 percent of the people questioned said they would seek another financial advisor if their advisor could not answer their questions about Social Security. People are starting to understand more and more how important these decisions can be and why it’s critical to receive good advice. Smart Social Security decisions can help secure a successful retirement plan.
About the author: Erik Brenner
Erik Brenner is the president and founder of Hilltop Wealth Solutions in Mishawaka, Ind. He is a certified financial advisor who has been in the business since 1993, and he believes strongly in a holistic approach to financial planning. Brenner is also certified as a national social security advisor and he hosts a weekly TV show called “Your Wealth Health” on the Fox affiliate in South Bend, IN.