On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received $22.54, according to https://www.ssa.gov/history/imf.html. She was 65 years old at the time. She passed away at 100 years of age.
Ida May Fuller worked for three years under the Social Security program, paid a total of $24.75 in payroll taxes, and collected $22,888.92 in Social Security benefits.
Today, nearly 70 million people receive some form of assistance from Social Security. You and I will never receive the return on our contributions that Ms. Fuller received, but Social Security can and does play a role in supplementing savings accumulated over a lifetime.
Recognizing that Social Security supplements other sources of income, we can take proactive measures that maximize benefits while avoiding the pitfalls that poor choices can create.
With that in mind, let’s review potential financial Social Security potholes that can cost you money.
1. Collecting benefits too soon.
You may begin receiving your retirement benefit at age 62…at a reduced rate. You probably know this, but let’s talk turkey.
If you were born in 1960 or later, full retirement age is 67. At age 62, your monthly benefit amount is reduced by about 30% of what you would receive if you waited until you are 67. The reduction for starting benefits at 63 is about 25%; 64 is about 20%; 65 is about 13.3%; and 66 is about 6.7%.
In casual conversation, it’s common for folks to ask us, “When is the right time for me to begin receiving benefits?” We usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.
If you have questions, let’s talk. We believe it’s important to tailor our thoughts and recommendations to your specific circumstances.
2. You collect prior to your full retirement age while still working.
If you are under full retirement age for the entire year, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640. Ouch!
In the year you reach full retirement, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. Only earnings before the month you reach your full retirement age are counted.
In many cases, the price of collecting Social Security while working and under full retirement age can be costly.
3. You are unaware that your Social Security may be taxed.
If you file a federal tax return as an “individual” and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Earn more than $34,000, and up to 85% of your benefits may be taxable.
If you file a joint return, the threshold rises to $32,000 and $44,000, respectively.
4. You decide to defer the spousal benefit.
The longer you wait to take Social Security, the greater the monthly benefit, up to age 70. So, why not employ the same strategy for your spouse, if money isn’t the primary issue? Unfortunately, that may not be a wise choice.
The most your spouse may receive is 50% of the monthly benefit of the primary account that you are entitled to at full retirement age. If your spouse waits past his or her full retirement age, he or she is leaving money with the government.
What if you haven’t worked 35 years? Social Security averages in zero for those years, which reduces your benefit. If you have at least 35 years but some of those years are low earning years, they will be averaged in, creating lower benefit versus continued employment at higher wages.
Are you still working in your 50s or 60s? Great! Those afterschool jobs in high school or years when your income may have been low are removed from the benefit calculation if you’ve exceeded 35 years of income.
When we are factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but I believe it is something to be aware of.
For some folks, Social Security may seem simple. For others, it feels as if you’re entering a complicated financial maze. If you have questions about Social Security or are uncertain how to proceed, feel free to give me a call.