Social Security
KEY POINT: When you choose to retire does not need to be when you choose to file for Social Security benefits. You may decide to retire at 60 (living off other money, which might include a retirement plan at work, a Roth IRA outside of work, or other money that you may have outside of retirement accounts), but not take your benefits until age 70. The person who has saved diligently over time and invested wisely will have many options as they approach the later years of life.
Social Security is an insurance program that involves a great deal more than just retirement benefits
Benefits can include
- life insurance (when you have a child, Social Security turns into a life insurance policy for most families)
- long term disability
- survivor (someone dies)
- retirement (includes spousal and ex-spouse benefits)
The extent to which those benefits apply to you will be based on many variables, but primarily it has to do with how long you have been paying into the system (or your spouse) and how much. Go to socialsecurity.gov, open an account, and print off your Social Security Statement to review your situation. Verify it’s accuracy, and take the time to review the benefits that apply to you now and into the future. This is worth your time!
Think of Social Security as a program to help you avoid poverty, not as an investment program
This will help you make long term rational decisions (this is a numbers game) that will serve you well instead of short term emotional decisions that will not. The goal should not be to get Social Security benefits as early as possible before the money or you run out (don’t let others scare you into this kind of thinking). The goal should be to apply for benefits at the right times (delaying is almost always better) to avoid running out of money at a later date. There is an old saying, “There is one thing worse than being broke, being old and broke!” Timely decisions on your Social Security benefits can help you avoid being old and broke!
It is critically important to get your education from the right sources while avoiding the wrong ones
Wrong sources? Friends and family who say things they heard from others while not really knowing the facts. Another wrong source? The Social Security Administration in Washington D. C. I would recommend NOT contacting the 800 number there to seek information. High turnover of personnel gets you people who lack the knowledge on the issues and this information is way too important to leave in the hands of someone who has been working in the office for a few weeks or months. The right sources? Read the book, Get What’s Yours and contact your local Social Security Office making sure to speak to people who are well versed on the issues and have been working there for many years (over a decade would be nice). Socialsecurity.gov is also a good resource. ALWAYS verify information with other reliable resources before making decisions on your benefits. There is a great deal of money at stake!
For individual retirement benefits, you will need to earn 40 credits (you earn 1 credit per quarter for the year, which is 4 in all per year), which equals 10 years (does not need to be consecutive) to qualify for most of the benefits (there are exceptions for younger people where 6 credits may be enough to receive survivor benefits)
The Social Security administration will take the top 35 years of yearly income (based on wage inflation, which simply means it compares income in relation to the time in which you earned it) to identify your benefit.
STEP 1 is to make sure you get your 40 credits on the books.
STEP 2 is to get 35 “good” years (full time employment instead of small part time work) of employment in the system.
If you work 30 years for example, you will have 5 years of $0 amounts credited to your account, which will reduce your benefit. Track your progress over the years and know your numbers!
It is wise to be patient and knowledgeable when considering when to take a benefit (you can take a benefit for a while, drop it, and take another benefit if it serves you better)
You can only take 1 benefit at a time, but it is quite possible that you will have multiple benefits available to you at any given time. Which one do you take and when? That is a very important question that you will need to answer and knowledge of the program will guide you toward the best answers based on your particular situation. In most cases, it is wise to wait on your benefit to allow it to increase. Your retirement benefit will increase by a guaranteed 8% per year (with inflation adjustments) starting at your Full Retirement Age (FRA) and running until age 70. That is a big deal as you attempt to lock in the biggest benefit for you and/or your surviving spouse. Plan accordingly!
Take the time to understand the spousal benefit (and ex-spouse benefit) and use them when applicable at the right time
The spousal benefit (a benefit off of your spouse’s benefit, not yours) can dramatically increase a family’s income in retirement when used properly. The ex-spouse benefit applies to people who were married at least 10 years and are currently single. In almost all cases, it is UNWISE to use the spousal benefit prior to your FRA (age 62 for example). Be patient, which is a message you will hear throughout this recap. Also, the spousal benefit provides you the chance to delay YOUR benefit (waiting until age 70 and taking your benefit while dropping the spousal benefit would be an example), making your benefit much larger for the foreseeable future. Know your options!
In the majority of cases, it is not wise to take your Social Security benefits prior to your FRA (ranging from ages 65 to 67)
By taking your benefits early, you are forever reducing the monthly and yearly amounts AND you could fall into the deeming category (for example, if you take a spousal benefit before FRA you will get your benefit or the spousal benefit, whichever is bigger and this is identified as deeming and deeming is a dirty word in the Social Security world). This goes back to being patient and thoughtful before filing for a benefit. Yes, if you need the money to survive, you may have to take your benefit at 62, but if that is not the case, waiting is the smarter move for the long term.
It is worth your time to better understand your Medicare benefits prior to age 65
Here are the basics. Part A, B, and D are government programs that you can sign up for starting 3 months prior to age 65. They are relatively inexpensive with small deductibles. It is recommended that you pick up a supplemental policy (Part C) to fill the gaps (holes where you would end up paying a bunch of money out of pocket) that exist in Part A and B. The supplemental policies belong with private insurance companies. These policies might be referred to as Medicare Advantage or Medigap Insurance. Take your time and identify the right supplemental policy that fits your particular situation. There are many out there and prices vary dramatically based on what is offered and the deductibles. Consider all variables before finalizing your decision. Continue your education on Medicare by going here: medicare.com.
Take the time to understand how your benefits are taxed, IT IS IMPORTANT
Here are the basics. Each state has their own approach to how Social Security benefits are taxed (Iowa no longer taxes Social Security benefits). Learn more about your particular state here: http://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/. The federal government will tax 0%, 50%, or 85% of your benefits based on the amount of the benefits you are receiving AND how much other income you have coming in at the time. You want to have a tax plan to help reduce how much you pay in taxes based on what accounts you draw from when that time arrives. Reaching out to a trusted accountant at that time could be a wise and money saving approach.
Social Security is not going away!
Do not let others (media, family, and friends) scare you into thinking the Social Security program will go bankrupt and leave you high and dry with no benefits. Will there be changes in the future? Sure. There have been changes in the past and the program will continue to be modified over time. Congress is currently considering getting rid of the file and suspend option and that will affect spousal benefits. Will it happen? Nobody really knows, but it would be wise to pay close attention to any discussions regarding these benefits that are happening in Washington D.C. today and for the foreseeable future. Stay flexible and stay informed!
| Social Security Basics | What YOU can do |
| Top 35 years. 40 credits (10 years) = eligibility. $1,220 = 1 credit. $4,880 = 4 credits. | Do your best to work 35 "good" years. |
| Social Security is an insurance program to help you avoid running out of money. | Social Security is insurance against poverty in old age. |
| There are many benefits. Understand them based your particular situation. | Read Get What's Yours to understand your benefits. |
| Benefits: retirement, spousal, ex-spouse, survivor, child, dependent, life, and disability. | Know when your benefits are available. |
| Identify the retirement numbers (62, FRA, and 70) as you figure out when to apply. | Most people are wise to wait until age 70. |
| Timing and patience play a very important part when it comes to your benefits. | Go to socialsecurity.gov to learn more. |
| Decisions in many cases will impact on others. Be patient and think long-term . | Consider others when making a decision. |
| Taxes withheld at 7%, 10%, 15%, or 25% if requested. A trip to the accountant is wise. | Consider other income when withholding taxes. |
| Make rational decisions while avoiding emotional triggers that could cost thousands! | Choose resources and "experts" wisely. |
| 0%, 50%, or 85% of your benefits are taxed. All income is considered. | Speak to a CPA as needed. |
| The state of Iowa has stopped taxing your Social Security retirement benefit. | Each state is different. Learn the rules in your state! |
| Social Security Beyond the Basics | What YOU can do |
| Survivor benefits start at 60 for a spouse and could be 50 based on a disability. | Be patient as you make an informed decision. |
| Taking a spousal benefit before FRA will hurt your future benefits. | Avoid the spousal benefit before Full Retirement Age. |
| Deeming occurs when you take a spousal benefit early. It is not good! | Avoid deeming. It is that simple. |
| You earn an 8% guaranteed yearly return on your FRA benefit by waiting til 70. | Wait as long as you can (up to 70) in most cases. |
| Waiting until 70 locks in the biggest benefit for the surviving spouse. | Consider your spouse and survivors before filing. |
| You can only take one benefit at a time. Retroactive benefits go back 6 months. | You can be 6 months late and still get all of your benefit. |
| A divorced spouse can receive a spousal benefit. Must be married 10 years and are single. | Check on their benefit to see your benefit. |
| You need to have been married at least 1 year before spousal benefits are available. | Know the rules. It's important! |
| Your spouse must file so you can file a spousal benefit (restricted application). | One spouse must file to get the spousal benefit. |
| Must be married 9 months to collect on the Widow/Widower survivor benefit. | Know the rules. It's important! |
| Must be married 1 second to receive the survivor benefit for a child and spouse upon death. | Know the rules. It's important! |
| Medicare Basics in the year 2015 |
| Part B (medical insurance) premiums will cost most people $104.90 per month. Yearly deductible is $147. |
| Part D (prescription drugs) average premium in 2014 was $33.13 a month. Deductible varies. $320 is max. |
| Part A (hospital insurance) is usually free. You must have Part B to have Part A. |
| The Part A deductible per each inpatient hospital stay in 2015 is $1,260. More costs kick in after 60 days. |
| Medicare Advantage (Part C) is optional. It covers what Part A and B don't. Average cost is $1,300 per year. |
| Select Medicare Advantage within 6 months after turning 65. Guaranteed coverage on all health issues. |
| You must decide between Medigap vs. Medicare Advantage. Take your time and weigh your options. |
| Sign up period starts 3 months prior to age 65 and continues to 3 months after your birth month. |
| Part A, B and D are provided by federal government. Other options provided by private insurance. |
| In most cases, you can have your premiums deducted from your Social Security check. |
| Learn more on Medicare by going to medicare.gov. Seek advice and then verify it with people you trust! |
| Year of Birth | Full Retirement Age (FRA) |
| 1937 and earlier | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| 1943 - 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 and later | 67 |
| Benefits Examples | Female / 65 years old /35 employed years | Male / 51 years old /28 employed years | Female / 39 years old /24 employed years |
| Early retirement at 62 | $795 per month | $1,017 per month | $1,479 per month |
| Full retirement at 67 or 66 | $1,176 per month (66) | $1,445 per month (67) | $2,163 per month (67) |
| At 70 | $1,703 per month | $1,792 per month | $2,723 per month |
| Estimated Future Earnings | $41,195 per year | $0 per year | $72,165 per year |
| Maximum Family Survivor Benefits | $1,731 per month | $3,227 per month | $3,160 per month |
| 1 Surviving Child | $804 per month | $1,350 per month | $1,312 per month |
| 1 Surviving Spouse | $1,703 per month at FRA | $1,350 per month or $1,800 per month at FRA | $1,312 per month or $1,750 per month at FRA |
| Same Age Options | |||||
| Age | Amy / Age 62 | James / Age 62 | James and Amy take their benefits at age 62. | James takes his benefit at FRA and Amy takes the spousal benefit at her FRA. | Later, Amy takes her benefit at 70 as she drops the spousal benefit. |
| 62 | 880 | 1840 | $880 + $1,840 = $2,720 per month | $2,300 + $1,150 = $3,450 per month | $2,300 + $1,500 = $3,800 per month |
| FRA | 1100 | 2300 | $32,640 per year | $41,400 per year | $45,600 per year |
| 70 | 1500 | 3130 | $913,920 after 28 years at age 90 | $165,600 total after 4 years | $912,000 after 20 years. Total after 24 years at age 90 is $1,077,600 ($912,000 + $165,600) |
| Same Age Better Options | ||||
| Age | Amy / Age 66 | James / Age 66 | James files and suspends at FRA and Amy takes the spousal benefit at her FRA. | James and Amy take their benefits at 70 and Amy stops taking the spousal benefit. |
| 62 | 880 | 1840 | $1,150 per month | $3,130 + 1,500 = $4,630 per month |
| FRA | 1100 | 2300 | $13,800 per year | $55,560 per year |
| 70 | 1500 | 3130 | $55,200 total after 4 years | $1,111,200 after 20 years. Total after 24 years at age 90 is $1,166,400 ($1,111,200 + $55,200) |
| 4 Year Age Difference Options | |||||
| Age | Amy / Age 62 or Age 66 | James / Age 66 or Age 70 | They (4 years apart) take their benefits at 62 (Amy) and 66 (James). | James takes the spousal benefit at FRA (66) after Amy files at 62. | James files his benefit at 70. Amy takes the spousal benefit at her FRA (66). |
| 62 | 880 | 1840 | $880 + 2,300 = $3,180 per month | $880 + 550 = $1,430 per month | $3,130 + 1,150 = $4,280 per month |
| FRA | 1100 | 2300 | $38,160 per year | $17,160 per year | $51,360 per year |
| 70 | 1500 | 3130 | $915,840 after 24 years | $68,640 total after 4 years | $1,027,200 after 20 years. After 24 years this method would = $1,095,840 ($1,027,200 + $68,640) |
| Tax Rate on your benefits | 0 | 0.5 | 0.85 |
| Single with $31,596 benefit and no other provisional income | $15,784 (half of $31,596) falls under the $25,000 threshold, no tax owed | ||
| Single with $30,000 benefit and other provisional income of $13,000 | $3,000 above the $25,000 threshold. 50% of that is $1,500. Taxes owed on $1,500 of Social Security income. | ||
| Single with $30,000 benefit and other provisional income of $33,000 | $14,000 above the $34,000 threshold. 50% of $9,000 is taxed and 85% of $14,000 is taxed. Total taxed = $16,400. | ||
| Married with $60,000 in benefits and no other provisional income | $30,000 (half of $60,000) falls under the $32,000 threshold, no tax owed | ||
| Married with $60,000 in benefits and other provisional income of $10,000 | $8,000 above the $32,000 threshold. 50% of that is $4,000. Taxes owed on $4,000 of Social Security income. | ||
| Married with $60,000 in benefits and other provisional income of $30,000 | $16,000 above the $44,000 threshold. 50% of $4,000 is taxed and 85% of $12,000 is taxed. Total taxed = $14,200 |