Social Security – Two main risks that face your retirement
Social Security was brought about in 1935 by President Roosevelt as part of the New Deal with America. At this time, it was an insurance against living too long. At that time, the average life expectancy was only age 62. You could not start taking benefits until age 65. Also, at this time, we had 42 people working for every one person receiving benefits. If you fast forward to 2020, we see that what we’ve ended up with is a very expensive retirement program, and instead of having 42 people working, now it’s down to only having three people work for every one person receiving benefits. Over the next 10 years, that number is going to drop from three down to two people working for every one person receiving benefits.
The first security check was issued back in 1937. It was issued to Ernest Ackerman, and he received a payment of 17 cents. This was not even a monthly payment. This was a one time payment. The first monthly payment came about January 1940 was paid to Ida May Fuller, and she started receiving a monthly benefit of $22 and 54 cents.
One of the things you need to understand is that even though Social Security is now a retirement program, it is not intended to be your main retirement program once you hit retirement age. The program was set up to only cover a portion of retirement costs. Unfortunately, we have a situation now where 40% of America is relying upon Social Security as their only source of income. It’s creating a problem, obviously, for those individuals who are having to rely on this small amount of money to cover all their costs.
As you look forward to your own retirement, know that Social Security is going to be a good benefit, but it should not be your retirement plan.
One of the other things you should be aware of is the role that the Social Security Administration plays in your Social Security. It’s very important that you get an account set up with a Social Security Administration. Why is it important that you do this? It’s because they’re going to provide you with some important information that you need to know to help you prepare for your retirement.
The first thing that they’re going to provide for you is your estimated benefits. Some of you may remember the period of time where we used to get annual statements in the mail telling us what our Social Security benefits were going to be. Well, that has not changed. Unless you’re age 60 and do not have an account set up with the Social Security Administration, you are not going to receive this statement showing what your benefits are. However, you can get access to this by going to ssa.gov, taking 10 or 15 minutes, and setting up an account.
The other thing that they’re going to provide is an opportunity for you to use their benefit calculator to calculate what your benefits could or should be based upon your future work experience. It gives you opportunities to put in different scenarios, different amounts, and then use those to help you calculate your benefits.
There are also great resources to help educate you to make sure that you understand how your Social Security works. So, please, prosperity nation, once you get done with this blog today, take some time to go to ssa.gov. Set up your account, so you can see where your benefits are, and so you can use their calculator to help calculate where your benefits could and should be and also to gain any other information you may need to help you answer some of your questions.
When we talk about Social Security risks, there are two main risks that we’re going to talk about. I’m going to talk about the risk of taking your Social Security at the wrong time. There’s a window that you can take Social Security out. Make sure you understand at what point you should take it out during this window. The second risk is that your Social Security will be taxable.
For the first risk, when can you start taking my benefits? You need to understand that the earliest you can start taking your benefits is age 62. The latest that you should start taking your benefits is at age 70. You can wait until after age 70, or you can never take them at all. However, if you’re expecting to take benefits from the Social Security Administration, the recommendation is you should never wait past age 70. Why is that? Because if you do, you’re getting no additional benefit. Whereas up until age 70, you are going to get a benefit for waiting until that age to start taking your benefits.
Another common question: What happens to my benefits if I take them early or late? It’s very important to understand that if you start taking your benefits at age 62, your benefits are going to be reduced. Full retirement age is an important number that you need to know for yourself. For those of you who are reading, your full retirement age is going to be somewhere between age 66 and 67.
What does full retirement age mean? That means that is the period of time that you’re entitled to 100% of your benefits. If your benefits were $1,000, and your full retirement age was age 66, you would be entitled to $1,000 at age 66. If you take the benefits early—say start at age 62, so four years early—your benefits are going to be reduced by almost a half a percent per month. Instead of getting the thousand dollars, what you’re going to get is just over $750.
It’s very important as you look at this amount that you realize not only is this going to be the amount you’re going to have to take throughout the remainder of your lifetime, but if you have a spouse that’s dependent upon these benefits, they are going to be affected as well by the reduced benefits because you took your Social Security early.
What happens if you wait until age 70? If you wait until age 70, there’s some great news. If you wait until then, you can get an 8% increase per year on the amount of Social Security you earn. Instead of getting $1,000, if you were to retire at age 66, you would get $1,320. That’s an 8% annual increase. If you go past age 70, there’s not going to be an increase, and this additional increase will also be available for your spouse if you’re married at the time of your death and if they’re getting any benefits from that.
What are some factors that you need to consider before you start taking your benefits? One of the first ones is you need to consider your health. If you’re in great health, you expect to live to life expectancy, and see no reason unless there’s some type of unexpected event that this doesn’t happen, then you’re going to take your Social Security at a different time than someone who may be struggling physically. Or, that they’re in a situation where they don’t expect to live past maybe age 70, maybe even 65, and they’re going to start taking their benefits at a different time than someone who is extremely healthy.
The other one you need to consider is your wealth. If you’ve got substantial money, and you don’t need Social Security, it’s going to be in your best interest to wait as long as you can.
The third is your current need. This is where we see far too many people in today’s society having to take their Social Security early—because they have no other option. Maybe they lost their job when they were in their early 60s, and they have no other way to get income besides going on to Social Security. If there’s a current need, it may warrant you having to pull the money out early even though, if you were to wait, you would end up with more money over time.
The fourth one is the spousal need. Again, remember, if you’re married, your spouse is going to receive a portion of your benefits if it exceeds the amount of their own benefits they’re entitled to. it’s very important that you consider this in your own lives and in your own situation.
In fact, I had a client who had made tons of money throughout his life. He’s a multimillionaire. During that period of time, he had paid substantial amounts into Social Security. At age 62, it became very important to him to start taking the money out. He wanted to get it as soon as he possibly could. Well, by doing this, he created two problems.
Number one, he reduced the amount of income that he’s going to get over his lifetime, yethis wife is 15 years younger than he is. When he passes away, the assumption is that she would live for a number of additional years, especially since women are supposed to live longer than men. Based upon life expectancy, she may live 20 or 30 years beyond his life, and she is dependent upon his Social Security benefits.
Well, because she has a second marriage, she’s not going to get a substantial amount of wealth. This could have been a great way for him to give her additional money that would help her since the majority of his assets are going to his kids. It’s very important that you consider your spouse when you start taking your own Social Security benefits.
One of the other questions that I often get asked is, isn’t it six of one and a half dozen of another if I start taking money at age 62? Yeah. It’s going to be reduced.
Based on life expectancy, don’t I end up with the same amount of money? Well, if you take average life expectancy where you include infant mortalities and accidents that happen when you’re in your 20s or 30s, the average life expectancy is age 78. But once you get to retirement age, if you’ve lived that long, that number changes and increases substantially.
For a male, the average life expectancy becomes age 84. For a female, that is age 88. If you start taking your benefits at age 62, instead of your full retirement age—which I’m going to use in this example, at age 66, again, for some of you that may be as high as age 67—the break even point is somewhere between age 77 and 78.
If you start taking the benefits at age 62, versus waiting until age 70, the break even point is somewhere between 80 and 81. If you start taking benefits at your full retirement age versus age 70, the breakeven is 82 to 83. So, it is not six of one half dozen, the other based upon life expectancy.
In every one of these situations, you’re better off to wait until age 70 if you can possibly wait that long. If you’re married, realize that one of you has over a 25% chance of living into their 90s and may even go into their hundreds. If you’ve got a situation where your wife or your husband depends upon your benefits, you’re definitely leaving money on the table if you start taking your benefits early, rather than waiting until age 70.
How does Social Security calculate my benefits? The first thing you need to understand is that if you’re at full retirement age, you will have needed to have a minimum of 40 quarters of earnings. Now what qualifies for a quarter of earnings? Any quarter that you’ve made over $1410. That’s inflation adjusted. For 2020, any quarter that you made over $1410 counts towards a quarter for qualifying for Social Security.
If you made $6,000 a year, but it was all made in one quarter—the first quarter of 2020, you made $6,000. For the year of 2020, you would qualify for four quarters because they would allocate the first $1410 to quarter one, second, $1410 to quarter two, so on through three and four. And with $6,000, you would have sufficient money to cover all four quarters. You need to have 40 quarters or 10 years of earnings minimum to qualify with this minimum amount of earnings.
The other thing they’re going to use is your 35 highest years of earnings. They’re going to take all of your working years and pick out the 35 highest. If you didn’t work 35 years, you’re going to have zero in some of those years, and then that’s going to be used to help determine your benefits.
There’s also an inflation adjustment for your annual earnings, so it increases a few thousand dollars each year. This is because Social Security is using this to determine how much of your income is going to be eligible to apply towards your 35 years for calculating your benefits. You also should be aware that Social Security is progressive. If you have less income, then you’re going to have more benefits than those who have higher income; it’s going to be allocated to a higher percentage of your earnings.
Let’s say that you made $2,000 a month, your Social Security benefits are going to be calculated based upon 55 to 75% of this pre-retirement income. What happens if you were to make $10,000 a month? Well, that number and that calculation is not going to be the same. It’s not going to be based upon 55 to 75% of the earnings of someone making $10,000 a month. It’s progressive, trying to help those who have less income be able to have more access to the funds for themselves so that they can have a more consistent retirement based upon the fact because they will not have had a chance to save as much money themselves.
What is the current Social Security payment? As of 2020, the average Social Security payment is $1470. Now, if you wait until full retirement age and you have 35 years that are maxed, your highest benefit would be $3,011. If you wait until age 70, your highest amount will be $3,790. You can go into the ssa.gov, establish your account, go in and see where you compare to the numbers that are being shown here. But the average amount is $1470.
Well, what happens if you keep working? This is another issue that many people have, especially if they start taking benefits at age 62. They don’t realize that working is going to affect their benefits. In fact, if you start taking Social Security before full retirement age, any amount that you make over $18,240 per year, is going to reduce your Social Security benefits by $1 for every $2 over that amount.
Let’s assume that you make $28,240. That’s $10,000 over the limit. Your Social Security is going to be reduced by $5,000. The year you reach full retirement age, be aware that you can earn $48,600 during that year up until you start taking Social Security, and that your benefits will only be reduced to $1 for $3 of earnings.
Once you hit full retirement age, it’s nothing you need to worry about. So be aware if you’re going to pull money out of your Social Security early and you want to continue to work, it’s going to affect your benefits because it’s going to reduce the amount that you’re going to be entitled to during that year. The reduced benefits will be applied to your future years, but it’s not going to help you during the year that you’re actually performing the work.
Who can benefit from my Social Security?
This is something that you all need to understand and that most people don’t. Social Security is not just about you. I’ve mentioned before that your spouse can benefit from your Social Security. If you’re someone like myself whose wife stayed home most of our married life, she’s going to rely upon half of my Social Security benefits once she gets to retirement, but then upon my death, she will be able to get 100% of the benefits that I was claiming prior to my death. Other people that can get benefits off of your Social Security are your children if they’re under age 18. If you’re retired, taking Social Security, maybe you’ve got a younger spouse, and end up with a child in the home, that individual can also get benefits off of your Social Security.
Your ex-spouse, many of you may not be excited to know that ex-spouses can claim benefits off of your Social Security. They may be doing it without you knowing. It’s not something that the Social Security Administration discloses, but your ex-spouse may be entitled to benefits off of your Social Security, as well as your parents. If your parents have been dependent upon you and you pass away, your parents may be entitled to some survivor benefits as a result of the facts and circumstances surrounding their dependence upon you.
The second risk is that your Social Security will be taxable. When it comes to talking about Social Security tax, this is an area that many people often say it’s one of those taxes very much like an estate tax. Why do we have to pay taxes on an estate? When we paid taxes on all the income that we earned during our lifetime that created this estate? Or maybe, why do I have to pay taxes on a used vehicle that I purchased when the taxes were paid when the vehicle was sold brand new to the first person who purchased the car?
When we talk about Social Security taxation, it brings about a lot of ways people do not understand why taxes would be applied. Hopefully as we go through the blog today, you can get a better understanding of why this is the case.Although it may not seem like it’s fair, it’s the reality of allowing a program to continue to sustain itself like Social Security has been able to do.
From the time President Roosevelt started Social Security in 1935 clear until 1983, there was no tax on the Social Security benefits. However, in 1983, laws were put into place to allow there to be tax on the benefits themselves.
Why did this happen? Because starting back around 1977, Social Security started having some financial issues. There was too much of a demand for the amount of money that was coming into the program. So the government looked at various options.
For a six year period of time, they tried to solve the financial issues that the program was facing. Finally, in 1983, a number of changes were made, one of them being that Social Security would be subject to taxes based upon a person’s income level and based upon other facts and circumstances. By doing that, from 1983, clear forward now till 2020, many Americans have had to pay tax on Social Security benefits. In 2020, about 40% of Americans pay tax on some piece of their benefits.
What are the guidelines that govern whether or not that you pay tax on your benefits? The first principle I want to talk about is provisional income. This is how they calculate the income that would possibly be subject to tax. When we talk about provisional income, we’re talking about three different types of income.
Number one is your regular taxable income. If you’re in retirement, this may be dividends, interest retirement accounts, any income that’s coming out, that’s taxable. You’re going to take that income and add your tax-free interest income. If you have municipal bonds, you’re going to add that income into the calculation. Then you’re going to add one half of your Social Security. When you take these three numbers and add them up, this is your provisional income, and this is what’s going to be used to determine whether or not you have to pay tax on your Social Security benefits.
What are the thresholds that would require someone to have to pay tax? If you are single and you make over $25,000 a year, you’re going to have a portion of your Social Security benefits tax. In fact, from $25,000 to $34,000, 50% of your Social Security benefits will be taxed. If you have provisional income above $34,000, then 85% of your Social Security benefits will be subject to tax.
For a married couple, the number is $32,000 on the bottom, and the top number is $44,000. So from $32 to 44,000, you will pay tax on 50% of your Social Security benefits. If your provisional income is over $44,000, you will pay tax on 85% of your Social Security benefits.
What about a married couple who is filing separately? Well, if you’re a married couple who is filing separately, you need to realize that the chances are you’re probably going to have to pay tax on most of your Social Security benefits. You will be subject to the 85% tax rule based upon the way it is structured for a married couple who is filing separately.
I often get asked when I talk about these numbers—since they were the original numbers that were established back in 1983—why does the government not adjust these for inflation? Why have these numbers not gone up? The biggest reason is because they realize they need the income coming from this tax to help keep the Social Security program financially stable. So they’ve not adjusted it.
My guess is that what’s going to happen is that it’s never going to get adjusted upward. What I expect to see is, when Social Security once again has these financial troubles which are expected to be somewhere around 2034 or 2035, that the government will probably lower these numbers and may even make it to where retirees have to pay tax on up to 100% of their Social Security benefits. Unfortunately, this tax is definitely not a fair tax. What it’s done is taking money out of your pocket.
For many of you, one of the options could have been just reducing your benefits, but that would not have gone over very well. Someone suggested that. In fact, many times when politicians suggest cutting any type of Social Security benefits, they do not last in politics very long.
What did they do? They did it on the backside, realizing that maybe people would not realize that they were still losing benefits, and also realize that for the poor people who were dependent upon Social Security as their main source of retirement income, most of them would not be affected because they would also still have their standard deduction, and they would not have a bunch of additional taxable income that would create a provisional income above the basis.
Well, what’s the problem if our Social Security gets subject to tax? The biggest problem that we have is that retirees have ended up running out of money five to seven years faster than it otherwise would have. It’s definitely something that you need to look at.
What’s the solution? How can we get our Social Security out of this taxable bucket?
The best way is to do planning to where you can get your other assets into the tax-free bucket. If you’ve followed my blog for any length of time, you know that we talked about the power of zero, and this is planning that requires a three bucket system. We have a taxable bucket that should have only six months of income inside the bucket. This is for emergencies. This is where you’re going to put your liquid money.
You’re also going to have a tax deferred bucket that for a married couple should have less than $500,000 and for a single individual should have less than $250,000. The reason for this being that if you have more money in this bucket, you will have tax because your required minimum distributions will exceed your standard deduction. It will also create provisional income which will cause your Social Security to be taxed.
The third and final bucket is that tax-free bucket, and that’s where we want to get the assets in retirement, to where we have the appropriate amount of money in that bucket, so that all of our sources of income are not going to be taxed.
This is where we’re going to have our Roth IRAs or any Roth conversions. You may have a Roth annuity inside of this bucket, a life insurance retirement plan (something we talked about on one of our previous blogs), and also the right amount in your tax deferred bucket that again, if your distributions do not exceed the standard deduction that you’ve been given, that money is going to become tax-free to you. Your Social Security will also then become tax free because you do not have provisional income.
My recommendation to you, prosperity nation, is that if you’re in a situation where you have a lot of tax deferred income going into your retirement, that you start doing, planning now, in these historically low tax rates, so that you can get money into that tax-free bucket to help alleviate any potential tax you would have on your Social Security that may cause you to rise out of money five to seven years faster.
The second segment I want to talk about is Medicare. It’s important to talk about because there are some key things that you need to know as you approach a retirement regarding Medicare.
The first thing I want to talk about briefly is the history of Medicare, which was brought about in July of 1965. It is the largest health insurance program in the United States. The program provides benefits for about 58 million people a year, and it’s currently growing at about 3.6 million new people being added to the system each and every year. Medicare processes over a billion healthcare claims per year. It is a huge organization.
It’s one of the biggest issues that we have facing us as a country regarding the cost of the program as more of the baby boomers come into the program. And as health costs continue to increase. We’re faced with a situation where Medicare could become a major issue for the US government and our ability to cover all the costs related to it.
Medicare is broken down into four separate parts. They’re part A, Part B, Part C, and Part D, which is pretty easy to follow and pretty easy to remember. Part A is your hospital insurance coverage. As long as you have qualified for Social Security and as long as you met the 40 quarter or the 40 credit period requirement, this is not going to cost you anything. You’re going to be able to get Part A without paying anything out of your pocket for this, and this also applies to any spouses that may be claiming upon your benefits.
Part B and D are different. Part B is your supplemental medical insurance. This is going to cover your visits to physicians and any outpatient costs. The cost of this to you individually is about $144.60 if you’re paying the standard amount. This amount can increase, and that’s a monthly cost, but this amount can increase based upon your income.
There is a payment you’re having to pay for this. Part D, which is the medical drug care coverage, also has a cost that you’re going to have to pay. However, that is being provided through third party providers.
Part C is a Medicare Advantage plan. This is where Medicare has partnered up with third party insurance companies. You can wrap all these benefits up through a third party. You need to understand these basics just so you’re aware of the different parts of Medicare and how each of these work.
The biggest issue that you have, and the most important thing I want you to take away about Medicare, is that it’s very important that you do not miss signing up for Medicare prior to age 65. For most of you, you’re only going to qualify for Medicare at age 65. If you’re disabled or if you have chronic kidney disease, you will be able to get benefits earlier. For most of you, the age that you’re going to qualify for Medicare is going to be age 65. It’s very important, if you want to get benefits starting at age 65, that you apply for these benefits somewhere around three months prior to your birthday.
If you’re already getting Social Security benefits, you will be automatically enrolled in Medicare. For many of you, especially if you may not want to start claiming your Social Security benefits until you’re age 70, you will not be automatically enrolled in Medicare. You need to go in and do it yourself.
If you do have some type of group health coverage from either yourself or your spouse, you can delay the filing. There’s a special enrollment period for you. But if not, you’ve got a seven month window, three months before your birthday month and three months after that if you wait till after your birthday to apply, or you’re going to have delayed benefits.
You to make sure you get in. If you don’t, there’s going to be a penalty. It’s a 10% per year penalty for filing late. Every member, if you have group health insurance is provided by either your work or your spouse’s work, you do not immediately have to apply for Medicare although you may want to apply for part A anyway because it’s not going to cost you anything. If you do not have this coverage, it is very important that you get in, so you do not have this late filing penalty.
The other issue that you have is if you wait and you don’t file timely, there is an enrollment period. If you miss your birthday enrollment period, the late enrollment period—if you don’t have other insurance is from January 1 to March 31—your coverage is not going to start until July. Not only are you penalized with a 10% per year penalty, you also have to wait until the enrollment period and you’re going to have to have a delay on when you receive your benefits.
It’s very important if you’re approaching Reaching age 65 that you contact the Social Security Office. One of my biggest recommendations is for all people to make sure they’re setting up an account at ssa.gov. This is where you’ll be able to check your Social Security benefits. You’ll also be able to stay in contact with the Social Security Administration to make sure you don’t make major errors as you plan for your future retirement because when you do, you can end up costing yourself substantial amounts of money. No one wants to have a penalty that’s going to last them for the rest of their lives and, if their spouse is claiming benefits, will last for the rest of their spouse’s life as well.
This is a small portion of what you need to understand for your Social Security. I wanted to cover the main areas, and especially the importance of realizing that taking benefits early is not six of one and a half dozen of another. It can become very detrimental, and you can end up leaving tens if not hundreds of thousands of dollars on the table based upon life expectancy of yourself, as well as a spouse if you’re married.
Please make sure that you spend some time looking into your own Social Security. What we found is that people spend more time planning their next vacation than they do planning their Social Security. We’d really like to see that change. It’s very important that you mitigate this risk, especially as you go into retirement. Make sure that you maximize the benefits you’re entitled to, and then use that to help offset any other retirement assets you’ve built up so that you can live the lifestyle you’re expecting.