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6 Social Security Traps to Avoid
On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received a check for $22.54, according to the Social Security Administration [Reference: https://www.ssa.gov/history/idapayroll.html ]. She was 65 years old at the time. She passed away at 100 years of age. Ida May Fuller had worked for three years under the Social Security program and paid a total of $24.75 in payroll taxes. Over time, she collected $22,888.92 in Social Security benefits. Today, nearly 70 million people receive some form of assistance from Social Security [Reference: https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/ ]. Most Americans will never receive the return on 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 retirement resources, we can take proactive measures to maximize benefits while avoiding the pitfalls that poor choices can create. With that in mind, let's review potential financial Social Security traps that could cost you money. You collect Social Security benefits too soon. You may begin receiving your Social Security retirement benefits at age 62…at a reduced rate. You probably know this, but let's review some details. 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%; 66 is about 6.7%. In casual conversation, it's common for folks to ask, "When is the right time for me to begin receiving Social Security benefits?" Financial advisors will usually respond with a less-than-definitive, "It depends," because many variables factor into the answer, both objective and subjective. If you have questions, call your financial advisor, who will tailor thoughts and recommendations to your specific circumstances. You collect Social Security benefits prior to your full retirement age while still working. If you are under your full retirement age for the entire year, the Social Security Administration (SSA) will deduct $1 from your benefit payments for every $2 you earn above an annual limit. For 2019, that limit is $17,640. In the year you reach full retirement age, SSA will deduct $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. SSA only counts earnings before the month you reach your full retirement age. Beginning with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn. In many cases, the price of collecting Social Security benefits while working and younger than full retirement age can be costly. [ Reference : https://www.ssa.gov/planners/retire/whileworking.html .] You are unaware that your Social Security benefits may be taxed. IRA and 401(k) contributions may be deducted from income. However, Social Security taxes paid by an employee are not deductible. But that doesn't necessarily translate into tax-free Social Security income. If you file a federal income tax return as an "individual" and your total income (excluding Social Security benefits) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits. Earn more than $34,000 and up to 85% of your benefits may be taxable. If you file a joint federal income tax return, the threshold rises to $32,000 and $44,000, respectively. [ Reference : https://www.ssa.gov/planners/taxes.html .] You decide to defer the Social Security 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. [ Reference : https://www.aarp.org/retirement/social-security/questions-answers/maximizing-spousal-social-security-benefit/ .] Remarriage and your Social Security benefit: It's complicated. You may already be aware that divorced spouses are eligible for Social Security benefits tied to their former marriage. Eligibility is determined by these criteria: You were married for at least 10 straight years. You are at least 62 years old. Your ex-spouse is eligible for retirement benefits. You are currently unmarried. However, if a divorced spouse remarries, he or she loses the rights to their former spouse's benefits unless that new marriage ends, whether by death or divorce. [ Reference : https://www.elderlawanswers.com/how-do-divorce-and-remarriage-affect-social-security-benefits-14386 .] How many years have you worked? Most people understand this simple concept: the longer you wait to take Social Security (up to age 70), the higher the benefit will be (spousal benefit may be an exception–see #4). Another basic concept is that higher wage earners can expect to receive a higher benefit. But did you realize that your monthly benefit is also based on your highest 35 years of earnings? What if you haven't worked for 35 years? The SSA will include $0 for each year with no income when determining benefits, which reduces your amount. If you have worked at least 35 years but some were low-earning years, keep in mind that those years will be averaged in, creating lower benefits versus continued employment at higher wages. Are you still working in your 50s or 60s? Great! Those afterschool jobs in high school or other years when your income may have been low will be removed from the benefit calculation, year for year that you've exceeded 35 years of income. Again, your benefit is based on your highest 35 years of earnings. [ Reference : https://www.ssa.gov/planners/retire/stopwork.html .] Thinking about the monthly Social Security benefits you receive may pale in comparison with the new journey you begin at retirement, but it's important that you are aware of the Social Security financial component. 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 benefits or are uncertain how to proceed, be sure to contact your financial advisor. In addition, always consult your tax advisor regarding current and prospective tax scenarios. Finally, your local Social Security Administrative office can be quite helpful.
Todd Pouliot, AIF Tpouliot@mygatewaymoney.com Accredited Investment Fiduciary Gateway Financial, LLC 9821 Olde Eight Rd Suite M, Northfield, OH 44067 Phone 330-752-8170 www.mygatewaymoney.com
P.S. As your advisor, I am pleased to serve you. If you or they have any questions, please contact me. Send me an email at Tpouliot@mygatewaymoney.com or give me a call at 330-752-8170.
Researched and drafted by Charles Sherry and Horsesmouth.
Gateway Financial is an Investment Advisor registered with the State of Ohio.