Here are 19 things advisors and clients should know in order to make the most out of Social Security, and alleviate fears of outliving ones money.
1. Dont panic over reports that Social Security is going Bankrupt
People who warn that the Social Security Trust Fund is projected to run out of money sometime after 2033 often neglect to say that even then, current workers FICA taxes would cover 78% of retiree benefits. And meanwhile, with that date still two decades away, there is plenty of time to fix any shortfall. Example: Eliminating the cap on income subject to the FICA tax.
2. Dont take Social Security benefits too early
As Alicia Munnell, director of Boston Colleges Center for Retirement Research notes, delaying collecting Social Security until age 66, or better yet, 70, is the best single investment an ordinary person can make, since the benefit amount keeps rising each year you wait.
Example: A $12,000 benefit at age 62 would be a $16,000 benefit at 66 (not counting annual inflation adjustments), and if taken at age 70 would be $21,120 a year (also not counting inflation adjustments). Munnell argues that even if you need the money, it would generally be better to draw down your IRA or 401(k) balance in order to allow you to postpone collecting Social Security benefits.
3. Social Security benefits are not just for you
Contrary to a common misconception, there is no marriage penalty with Social Security. Both spouses can collect their full benefits. There is, however, often a better alternative if one spouse earned a lot more than the other, and has a much higher Social Security benefit coming: the spousal benefit amount is set at 50% of the higher spouses benefit amount. Thus if a high earning spouse is getting $30,000 a year in Social Security benefits, while the low-earners own earnings only resulted in a $12,000 annual Social Security benefit, that spouse could take a spousal benefit instead of $15,000 a year.
4. Social Security has a death benefit
When a higher-earning spouse dies, the surviving spouse starts receiving a widows benefit that is 100% of the deceased spouses Social Security benefit. Thats a good reason for the higher earning spouse to wait until age 70 to start collecting benefits. Where else can you get an annuity like that with an inflation clause linked (so far at least), one-to-one to the Consumer Price Index?
5. Its possible for a lower-earning spouse to collect early, and then switch to a higher benefit later
Say you are the lower-earning spouse. Your wife or husband, the higher earner, can file for benefits at 66 but then opt not to receive them. That allows this spouse to have the benefit amount continue to rise right up to age 70 and to continue to work and earn a high income without any penalty. Meanwhile, however, because he or she has filed for retirement, the lower-earning spouse can retire and start collecting the spousal benefit of the higher-earning spouse, which would be one-half of the higher-earners benefit amount.
In addition, if the lower-earning spouse is also 66, he or she can also continue to work without penalty. And since this person has not filed for his or her own Social Security benefits, he or she can wait to age 70, and then shift over to his or her own account and collect the maximum benefit.
6. Maximizing your earnings just before retirement can pay off big in higher Social Security benefits
The Social Security administration calculates your benefit amount in retirement by averaging the top-earning 35 years of your working life, after adjusting earlier years for inflation. What this means is that each year over 35 that you earn more money, a lower-earning year is erased from the average. This is another good reason to work longer and wait to collect benefits.
7. Dont throw your deadbeat spouse out too soon
An ex can retire on his/her former spouse's benefits, as long as they were married at least 10 years. Apparently, surprisingly many marriages blow up just shy of 10 years. This puts the advisor in the awkward position of needing to advise the lower-earning spouse that she (usually) should hang in there, even if hubby is a jerk, to get past that 10-year limit so as to be eligible later in life to collect spousal Social Security benefits.
8. Children and Surviving Parents get Benefits from a Deceased Spouses Social Security
If your spouse dies at the age of 62 or older, and was thus eligible to collect Social Security, any children under 18 (or under 20 if still in high school), are eligible for child benefits. The surviving parent of any children under age 16 can also receive survivor benefits. Children receive 75% of the deceased parents Social Security benefit. The surviving parent of children under 16 also receives 75% of the deceased spouses benefit. (There is a cap for a surviving family of between 150-180% of the deceaseds benefit amount.)
9. A widow can start collecting Social Security spousal benefits on the deceased spouses account at age 60
This amount will be reduced by a small amount for each month before the widowed spouses actual retirement age of 62, but after age 62, the widow may switch to his or her own account. The best time to switch over can be complicated and the Social Security Administration advises such people to consult with a Social Security representative before making such a decision.
10. If you started collecting early, and now think that was a mistake, you can fix it
The government allows you to pay back the benefits you received, say be withdrawing funds from your IRA or 4019(k) savings, and then re-file when you are older, allowing you to receive much higher benefits later.
11. You dont need to retire to collect Social Security, even at age 62, but you will pay a penalty
Those who retire at 62, or before reaching full retirement age of 66 (67 for those born after 1960), pay a penalty of $1 for each $2 earned over $15,120 in 2013. For those who are reaching full retirement age of 66 this year and who start collecting Social Security will pay a $1 penalty for every $3 earned over $40,080 (these limits are raised each year for inflation). But dont be too troubled by the penalty. The Social Security Administration, after you reach full retirement age, will adjust upward your benefit amount to reflect the extra money you earned by continuing to work while collecting early benefits, and the money that was withheld as a penalty.
12. Social Security Income and the Law
Social Security income is protected by law from most creditors but not from debts owed to the IRS, federal student loans or other federal government claimants (or from alimony or child-support payments).
This means you may want to settle federal debts using other assets before you are depending upon your Social Security benefits in retirement, but it also suggests that if you have transferred other assets, for example into a Trust for your children, you dont have to worry about private creditors.
13. Social Security income is taxes at less than other income
If your taxable income is less than $25,000 or $32,000 for a couple filing jointly, you owe no income tax on your Social Security benefits. Above that amount, the taxable amount of your Social Security benefits increases with income to a maximum of 85%. However, since withdrawals from a Roth IRA dont count as taxable income, it can be advantageous to start withdrawals from non-Roth retirement funds, holding Roth withdrawals until you start collecting benefits.
14. Dont Rely on Estimates
In making plans for your retirement, dont rely on the estimates from the Social Security Administration about your likely future retirement benefits. The administration does not factor in either inflation or any general average increase in wages. Since both are likely based upon historical trends, your future benefits are likely to be higher for any age than the estimates provided by the SSA.
15. Marriage and Social Security
People who divorce after 10 years of marriage and who then remarry normally cannot later receive spousal retirement benefits based upon an exs benefits. But there is a big exception: people who remarry after age 60.
If you are a divorcee and the love of your life is not a big earner while your ex was wealthy, you may want to hold off on the nuptials until you pass age 60. That way, you can get spousal benefits in retirement of 50% of your exs benefit amount, and if he or she expires before you, youll get the full spousal benefit too.
16. Higher earning spouses should delay collecting for the sake of their significant other
If you retire early, you lock in a low retirement benefit amount, and thats all your spouse will get for life if you die. On the other hand, if you dont retire early, but should happen to die before reaching full retirement age and filing for your benefits, your surviving loved one will nonetheless receive a widows benefit of whatever your full-retirement benefit would have been at 66.
17. Medicare Part B can pose risks when it comes to delaying filing for Social Security beyond 66
One potential problem with delaying collecting Social Security beyond 66 is that Medicare Part B costs can rise considerably faster than inflation. For people with modest taxable retirement income, Medicare Part B premium increases are limited by Congress to the increase in Social Security benefits in a given year. If you are deferring collecting those benefits, and Part B costs jump, that jump is permanent and youll be paying it, and incremental future increases, for life. If you had already been collecting Social Security, the Part B increase this year would have been limited to just 1.7%the amount Social Security benefits were raised.
18. Spousal and survivor benefits are calculated based upon a spouses full-retirement benefit amount
There is no advantage to be had in delaying collecting either of these types of benefits beyond your own reaching of full-retirement age.
19. Both spouses can draw spousal benefits on the others account
In cases where both spouses have similar earnings histories, and are expecting to receive similar benefit payments, it could be advantageous for each to file for spousal benefits on the other spouses Social Security account, allowing both of them to postphone collecting on their own accounts until age 70.