Social Security: What You Don’t Know Could Cost You
Do you remember the game of telephone you played as a kid? The game where someone whispered a message into someone else’s ear and everyone repeated it until the final result was completely different? Well, the commonly-held assumptions about Social Security are kind of like that. The true details of the system are complicated, difficult to muddle through, and the messages that are received are often skewed.
How important is it to truly understand Social Security? Think of it this way: you’ve been contributing to Social Security your whole life, right back to your first official paycheck. Between you and your employers, you’ve doled out 12.4% of your annual income. That’s a substantial amount and one that could make your 401(k) look like chump change down the road. Don’t you want to maximize your benefits so you get every penny that’s rightfully yours? In order to do so, you need to properly understand how your benefits work. Let’s look at some common Social Security assumptions and set the record straight so you don’t leave money on the table.
1. SOCIAL SECURITY WON’T BE AROUND FOREVER
Many of us, especially those who won’t be retiring for decades, are worried that Social Security will run out of money by the time we retire. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to end in 2019 and the system will rely on incoming contributions to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink to 75% of what many Americans are expecting. (1)
Since you can’t control the success or failure of the Social Security program, educate yourself and plan ahead. Create an account on the Social Security website so you understand your current benefits and know where you stand. There is plenty that could happen between now and 2034 that could impact the program, so don’t believe the myth that there will be no money left for you by the time you retire.
2. WHAT YOU GIVE IS WHAT YOU GET
Social Security is not a savings account per se. The taxes that everyone is paying from their paychecks are pooled and then paid out. Your contributions are supporting others and, when you retire, the money others pay into the system will support you.
In 1960, the amount of contributing workers-to-beneficiaries was 5:1. In 2013, it was 2.8:1. So, while the number of workers paying into Social Security is decreasing, there are still more paying in than receiving benefits. As time passes and the average life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than you think they will be.
3. EVERYONE CONTRIBUTES EQUALLY TO SOCIAL SECURITY
Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), to an earnings cap of $128,400. (2) So, if you earn that amount, and your neighbor earns $5 million, you will both pay the same amount into Social Security. (3) If the earnings cap were eliminated, it’s estimated that 71% of the coming Social Security shortfall would be wiped out.
4. YOU CAN ACCESS YOUR BENEFITS AT AGE 65
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the total amount of benefits you receive.
Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later.
If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned.
5. YOUR BENEFIT AMOUNT DOESN’T CHANGE
For every year beyond your FRA that you delay taking benefits, the value increases by 8% until you reach age 70. There is nowhere else you can get an 8% return guaranteed by the U.S. government! If you retire early, benefits may be about 30% less, which means you could be leaving a significant amount of money on the table.
6. SOCIAL SECURITY BENEFITS AREN’T TAXABLE
While Social Security benefits are not normally taxed, they could be taxable if you are working or have other sources of income while you are collecting benefits. If you’re receiving Social Security benefits, any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2018, the limit is $17,040. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn.
The income restrictions change in the year in which you reach FRA. That year there is a higher limit: $45,360 for 2018. Once your income exceeds that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. After the year you reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
7. YOU CAN CHANGE YOUR MIND
A shocking 38% of people incorrectly believe they can switch their claiming strategy after they’ve made their official choice. (4) This just isn’t true. According to the Social Security website, you can withdraw your claim once within 12 months after applying, but you must repay all the benefits you received during that time. (5)
8. YOUR CLAIMING STRATEGY AFFECTS YOUR EX-SPOUSE
Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. If you are married for 10 consecutive years and haven’t remarried after your divorce, you are entitled to either your full benefit or half of your former spouse’s benefit, whichever is greater.
9. YOU CAN RECEIVE YOUR BENEFITS WHEN YOU WANT THEM
If you want your first Social Security check next week but haven’t yet applied for benefits, you are out of luck. You must file for benefits 3 to 4 months before you get your hands on your money.
AVOID A SOCIAL SECURITY HEADACHE
Social Security is a major piece of your retirement game plan. It was designed to replace 40% of an average worker’s wages, (6) and that’s money you don’t want to miss out on. There is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional.
At Archer Investment Management, our goal is to provide comprehensive financial strategies for a secure future, including a customized Social Security plan. We work hard to educate you on your opportunities, answer your questions, and offer objective guidance. If you want to maximize your Social Security benefits and plan for a comfortable and secure retirement, schedule a 15-minute phone callto learn how we can help you.
Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.