5 things to consider when maximizing social security
Creating a custom financial model of your future gives you the framework and lens to make important financial decisions.
How to structure your social security benefit is just one of the important decisions to consider
At Divergent Wealth we are state-of-the-art financial planners and investment professionals who specialize in simplifying complicated things.
To create a complimentary customized financial plan, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.
1 | TIMING IS EVERYTHING
Depending on the year you were born, the government has determined what they deem to be your “Full Retirement Age” (referred to as FRA). If you were born after 1960 your FRA is 67. Born before and your FRA could be as early as 65. Your FRA is the age at which you can draw your full social security benefit. Your full social security benefit is referred to as your “Primary Insured Amount” or PIA.
You can start your benefit as early as age 62 and as late as age 70. For every year you delay starting your social security benefit past your FRA, you will receive a “delayed retirement credit” of up to 8% on your full benefit.[1] That can potentially be a big deal the longer you live.
However, it’s important to note, not everyone can afford to delay.
If you need to start your income earlier than your FRA, you’ll be forced to permanently reduce your benefit. By starting your benefit at 62 you could see a reduction of 20%-30%, depending on the year you were born. [2]
When determining which social security strategy pays you the most over your lifetime, two main questions need to be considered.
“How long might I live?”
For most people, waiting until age 70 will give them the highest monthly social security payment. However, if you only live to age 75, you only received that payment for 5 years. Compare that scenario with starting social security at age 62… the monthly benefit would have been lower, but you would have been paid that slightly lower payment over 13 years, and likely would have received more in total lifetime benefits.
Figuring out how long you’ll live can feel like a shot in the dark. Looking at your family’s history of longevity is usually a great place to start. Your current health and activity habits may also be good indicators of longevity. As a general rule of thumb, the longer you think you might live, the more you should consider delaying your benefit.
“What other sources of income will I have in retirement?”
Understanding your cash flow wants and needs (including how much, how often, and the source) is very important when determining your social security optimization strategy. If you have other guaranteed sources of income throughout your retirement years (pension, real estate income, annuity) or a nest egg of retirement savings, then being able to defer and grow your social security payment may be a viable option. If you don’t have access to those financial options, working longer may be your only option to accrue “delayed retirement credits.”
Depending on your spend rate and your investment account balances, deferring social security without those additional income sources could put you at risk of depleting your retirement and savings accounts by drawing from them at a faster pace than you would otherwise. This scenario could make the latter years of your retirement difficult if not impossible to fund.
2 | THE SPOUSAL BENEFIT GIVES YOU MORE OPTIONS
“Spousal Benefits” may be available to lower earning spouses who are currently married to a higher earning spouse or were married to the higher earning spouse for over 10 years but are now divorced.[3] Spousal benefits may potentially offer additional income strategies. It’s important to note that the spousal benefit may no longer be claimed unless the higher earning spouse has already started receiving their own personal social security benefit.[4]
How is the spousal benefit calculated?
In its most basic form, the spousal benefits purpose is to provide an opportunity for the lower-earning spouse to increase their personal benefit to 50% of the higher-earning spouse’s full retirement age benefit (PIA).[5]
The spousal benefit can be claimed as early as age 62, however, doing so will permanently reduce the spousal benefit. The spousal benefit cannot accrue delayed retirement credits, so waiting until 70 to claim the benefit will do you no good. The spousal benefit should be applied for no later than the full-retirement age (FRA) of the lower-earning spouse or when the higher-earning spouse files for their personal benefit, whichever is longer.
Historically, there have been several unique filing strategies that entailed creatively using the spousal benefit to increase a couple’s lifetime benefits, however, most of these strategies have ceased due to the “Bipartisan Budget Act of 2015”.[6]
Double Dipping
A lower earning spouse may collect their own personal benefit while the higher earning spouse delays their benefit and possibly accrues delayed retirement credits. When the higher earning spouse applies for their personal benefit, the lower earning spouse may also apply for the spousal benefit, potentially increasing the lower earning spouse’s overall benefit.
This strategy allows the lower earning spouse to collect something while they wait for the higher earning spouse to accrue more credits. It can potentially be an effective strategy, especially if the lower earning spouse is older than the higher earning spouse.
3 | INFLATION AND MEDICARE
Everyone knows the prices of goods and services increase over time, this is commonly referred to as inflation. Social security also has an inflationary adjustment referred to as a COLA (cost of living adjustment). This COLA is based on a government defined measure called the CPI (Consumer Price Index). The CPI has averaged between 1-3% per year since 2008.[7]
However, it’s important to note that the healthcare industry has experienced higher inflation averaging between 3-5% per year.[8] This is important to understand because at age 65 every eligible American must apply for Medicare. Medicare is basically government mandated health insurance for seniors. Failure to file in a timely fashion, may result in a penalty for life. The monthly Medicare premium will most likely come directly out of your social security check before you receive it. Because health care inflation rates usually outpace general inflation, or CPI, retirees often feel like their COLA is not keeping up with inflation.
4 | YOUR SOCIAL SECURITY IS LIKELY TAXED
Yes, your social security income is likely taxed as income when it’s received. For many social security recipients, there is little to no way around this tax, unless you can sustain your standard of living far below the national averages.[9] We’re not saying it’s impossible, but from our experience, for most affluent investors who are planning for a comfortable retirement, it’s virtually impossible to get around this tax.
For those that think they have a lower standard of living and are looking for strategies to get a little closer, moving a significant portion of your income producing assets inside a tax deferred accounts is a viable planning option.
In 2018, 0%, 50%, or 85% of your social security benefit will be taxed as ordinary income. It depends on a calculation used to determine how much other income you have for that calendar year. A simple explanation is below.
If you take your adjusted gross income (line 37 on a tax form 1040, line 21 on a form 1040A, and line 4 on a form 1040EZ) and add back your nontaxable interest, plus ½ of your social security, you’ll arrive at what’s considered your “combined” income.[10]
For single tax filers, if that “combined income” is under $25,000, 0% of your social security benefit is taxed. If your combined income is between $25,000 and $34,000, 50% of your social benefit may be taxed. If your combined income is over $34,000, up to 85% of your benefits may be taxable.
For joint tax filers, if that “combined income” is under $32,000, 0% of your social security benefit is taxed. If your combined income is between $32,000 and $44,000, 50% of your social benefit may be taxed. If your combined income is over $44,000, up to 85% of your benefits may be taxable.[11]
One way to quickly find out how much of your benefits are currently being taxed is to check line 20a and 20b on your tax form 1040. Line 20a is the amount in benefits you received and line 20b is the amount of those benefits you were taxed on.
5 | SOCIAL SECURITY WAS NEVER INTENDED TO BE YOUR SOLE SOURCE OF RETIREMENT INCOME
Unfortunately, for most Americans, Social Security is the sole source of a guaranteed income during retirement, but it should not be your only source of income.
Making sure you are optimizing your social security benefit for your personal plan is very important, but that is only about 1/3 of the equation. Understanding additional savings, accumulation, and distributions strategies may account for 2/3 of your retirement plan or more if you have a higher than average standard of living. [12]
The best ways to supplement social security are:
EMPLOYER “DEFINED CONTRIBUTION” PLANS. If your employer has a 401(k) or other retirement program, take advantage of it - especially if they are offering a match. Deferring as much of your income as possible is a great way to supplement your social security benefit. Keep in mind that you typically own the investment risk in these plans.
EMPLOYER “DEFINED BENEFIT” PLANS. These are often referred to as pensions and are quickly going the way of the dinosaur. Corporations have figured out that it’s easier for them to put the onus of investment risk on your shoulders for your retirement instead of their shoulders. If you’re lucky enough to participate in a pension plan, make sure you are maximizing your participation in it.
WORK LONGER. In our planning experience, working a little longer than you planned typically has the greatest positive effect in closing a retirement income gap. By working longer, you can essentially remedy three and potentially planning pitfalls.
-Working longer mean fewer years of drawing from your retirement accounts
-Working longer give you more years to contribute to your retirement accounts
-Working longer could allow you to delay your social security benefit, allowing you to earn those generous deferral credits.
-If you are lucky enough to participate in a pension plan, working longer often increases the amount you will receive from the plan at retirement.
OTHER INVESTMENTS. There are host of other investment vehicles that can be utilized when looking to save additional monies to supplement your social security benefit. Consulting your financial advisor is a great first step.
CONCLUSION
Creating a custom financial model of your future gives you the framework and lens to make important financial decisions. How to structure your social security benefit is just one of the important decisions. At DivergentWealth® we are state-of-the-art financial planners and investment professionals who specialize in simplifying complicated things. To create a customized complimentary financial plan, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.
Divergent Wealth Advisors LLC is registered as an investment adviser with the SEC and only transacts business in state where it is property registered or is excluded or exempted from registration requirements. SEC registration in an of itself does not constitute an endorsement of the firm by the commission nor does it indicate that the adviser has attained an adequate level of skill or ability.
The information contained in this material is given for information purposes only, and no statements contained herein shall constitute tax, legal, or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the needs of an individual’s situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor.
Individual clients should review with their adviser the terms, conditions, and risks involved with specific product or services. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
[1] Social Security Administration “Retirement Planner: Delayed Retirement Credits” https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2017/fast_facts17.pdf. Accessed August 22, 2018.
[2] Social Security Administration. “Retirement Planner: Benefits By Year of Birth.” https://www.socialsecurity.gov/planners/retire/agereduction.html. Accessed August 22, 2018.
[3] Social Security Administration “Benefits For Your Spouse” https://www.ssa.gov/planners/retire/applying6.html. Accessed August 22, 2018
[4] Social Security Administration “Deemed Filing For Retirement and Spouse’s Benefits FAQs” https://www.ssa.gov/planners/retire/deemedfaq.html. Accessed August 22, 2018
[5] Social Security Administration. “Retirement Benefits.” https://www.ssa.gov/pubs/EN-05-10035.pdf. Accessed August 22, 2018.
[6] Social Security Administration. “Social Security Legislative Bulletinhttps://www.ssa.gov/legislation/legis_bulletin_110315.html. Accessed August 22, 2018.
[7] Bureau of Labor Statistics “Databases, Tables & Calculators by Subject” https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths. Accessed August 22, 2018
[8] Bureau of Labor Statistics “Databases, Tables & Calculators by Subject” https://data.bls.gov/timeseries/CUUR0000SAM?output_view=pct_12mths. Access August 22, 2018
[9] US Department of Labor “BLS Data View” https://beta.bls.gov/dataViewer/view/timeseries/CXUTOTALEXPLB0101M. Access August 22, 2018
[10] Social Security Administration “Benefits Planner | Income Taxes and Your Social Security Benefit” https://www.ssa.gov/planners/taxes.html. Accessed August 22, 2018
[11] Social Security Administration “Benefits Planner | Income Taxes and Your Social Security Benefit” https://www.ssa.gov/planners/taxes.html. Accessed August 22, 2018
[12] Social Security Administration. September 2017. “Fast Facts & Figures About Social Security, 2017.” https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2017/fast_facts17.pdf. Accessed August 22, 2018.