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Advice on Social Security Benefits

Apr 1st, 2011
by jblankenship.
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I get a lot of questions about when to take benefits, how to use File & Suspend most efficiently, and when to begin Spousal Benefits.  And unfortunately, I am often at a loss for giving a specific answer to the individual, because I just don’t have enough information.

NY - Hyde Park: Franklin D. Roosevelt Presidential museum
Image by wallyg via Flickr

Social Security planning has very many factors that must be considered – for example:

  • It’s important to consider earnings if you’re filing early and continuing to work (see Social Security Earnings Tests for more information), as this can impact the amount of benefits you actually receive.
  • Your health status and longevity are critical to the equation as well – since delaying strategies often rely on your longevity to achieve payback (more information in the articles Your Payback from Social Security and Coordinating Social Security Spousal Benefits).
  • Of course, your marital status is important to the equation as well.  If you’re married, you have to think about Spousal Benefits and Survivor Benefits in addition to your own benefit.  And if you’re divorced or widowed, additional considerations must be brought into the equation as well.
  • Probably the most important of all – do you need the money right now?  Too often this factor is overlooked in our zeal to “get our money back”.  As you’ll see in this article on delaying benefits, it can be very worth your while to delay receiving benefits – but again, this shouldn’t be done blindly.

Each individual’s circumstances has other factors to consider as well.  Your overall retirement plan has to be the context against which these factors should be considered.

As you take these factors and others into account, it’s important to perform break-even analysis on your benefits at various ages, along with that of your spouse (if you have one).  Then it’s up to you to decide what makes the most sense in your situation.  If you have a trusted advisor that you can work with to help you with your analysis, all the better.

And lastly, if I can help you with this analysis, this is what I do for a living.  As always, I am happy to help you understand the nuances of the various programs and all – the only thing I ask of you is that you pass the word along to your friends and acquaintances.  It’s my hope that when questions about Social Security and other financial issues come up, I can help.

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What Your Social Security Statement Is Telling You

Mar 25th, 2011
by jblankenship.
1 comment
Confusing signal
Image via Wikipedia

We covered the Social Security annual benefit statement in depth in another article, but there is a portion of the statement that is a constant source of misunderstanding – the projection portion at the top of page 2.

If you’ll take a look at this portion of the statement, you’ll see a projection of your Social Security retirement benefits, at Full Retirement Age (whatever that is for you), at age 70, and at age 62.  Also listed are the amounts that you would receive for Disability Benefits, as well as amounts that your family would receive upon your death as survivors.  What gets missed for many folks is the part at the top which reads:

At your current earnings rate, if you continue working until…

With that short phrase comes a great deal of confusion and misunderstanding.  What this means is that, when you receive this document, assuming that you are something less than Full Retirement Age (FRA), the statement reflects a projection of your future earnings from now until those projected ages (62, FRA, and 70) – and those amounts provided are based upon that projection.

If, for example, you chose to stop working at age 62 and delay receiving benefits until FRA, the benefit that you’ll receive will likely be less than the amount shown on your statement… because you did not continue earning at your current rate to FRA, as the projection assumes.

Another example is where you continue working, but your income has been reduced, due to layoff or other dramatic change in your employment.  With the jobs outlook being the way it has been over the past few years, it’s not hard to imagine a situation where this might be the case.

There are several calculators available on the Social Security website that can help you to get a clearer picture of your actual benefit if your projected earnings will be something different than what you’ve experienced up to the present (or actually, up to two years ago, since that’s all the more that is generally covered with the statement).

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Boosting Your Social Security Benefit

Mar 18th, 2011
by jblankenship.
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As we’ve discussed elsewhere, your Social Security benefit is calculated based on your highest 35 years of earnings over your career, indexed to the current year.  So what impact can continuing to work past age 62 (or later) have on your Social Security benefits?

Dark clowds above the Social Security. Clock ?...

Image by Arjan Richter via Flickr

 

Any year in your earnings history that had very little or no earnings covered by Social Security works against you – since the calculations assume 35 years of earnings.  If you only had, for example, 30 years of earnings on your record and five “zero” years, these years with no earnings will reduce your average earnings that are used for calculating your benefit amount.  Continuing to work, even for a minimal amount, will eliminate these zero years from your record for calculation.

In addition, if you’re earning a higher salary relative to your earnings record, some of the lower years’ earnings can be eliminated from your calculation record as well, thereby boosting your Social Security benefit by increasing the overall average.

Lastly, when you get your annual statement from the Social Security Administration, a projected benefit amount is reported.  If you read the fine print, the projected benefit amount assumes that you continue to work up to the retirement age indicated, with your earnings remaining roughly the same as your most recent year.

If you retire at age 62 and wait to age 66 to begin receiving benefits, the amount of benefit that was projected for you at age 62 will be lower because you will have added zero years to the end of your working career.  The estimate assumed that you continued working at (presumably) a high earnings rate relative to the rest of your record.

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Proposed Social Security Wage Base Increases

Mar 4th, 2011
by jblankenship.
2 comments

chicken on the way by runran

October 19, 2011 update: the expected wage base increase has been confirmed as $110,100 for 2012.  For more information, see this article.

The Social Security Administration has released the proposed figures for the increase in the wage base for taxation for 2012 and projected some figures for the years up to 2015.  This is the limited amount of income against which Social Security withholding tax is applied.

For 2009 through 2011, the wage base has been static – at $106,800 for each year.  The amount did not increase for these years since the average wage index (AWI) actually decreased from 2008 to 2009, and the modest increase in the index from 2009 to 2010 did not make up for the decrease in the prior year.  For 2011, the AWI is expected to increase once again, by 3.08%.  This sets the projected wage base for 2012 at $110,100, up a total of $3,300.

Future wage bases have been projected for the years up to 2015 as well:  for 2013, the base is projected at $113,100; for 2014, $117,600; and for 2015, $122,700.

Keep in mind that these are, at present, only projections.  The actual figures will be set in the fall, typically in October or November.

Also – in 2012, the temporary 2% reduction in the Social Security withholding tax will expire, so if the projected wage base of $110,100 does go into play, then the maximum amount of Social Security withholding that you can be assessed for the 2012 tax year will be $6,826.20, up from $4,485.60 in 2011.

For more information, see this article at Social Security Owner’s Manual.

Photo by runran

Social Security for the Self-Employed

Feb 25th, 2011
by jblankenship.
1 comment

self employed by TheeErinAs a self-employed small business owner, you have lots of plates to keep spinning, and lots of additional costs that you never dreamed of when you were employed by someone else (like health insurance, for example).  Another cost that you have to deal with when self-employed is Self-Employment tax.

Self-Employment tax (SE tax) is essentially where you are paying both the employER and the employEE portion of the Social Security withholding tax.  This means that, in most years, you are taxed at a rate of 12.4% on your first $106,800 of income (double the amount you’d have withheld if you were employed by someone else).  This doesn’t count the 2.9% that you also have to withhold for Medicare tax – this is another matter altogether.

Note: for 2011, the rate is reduced by 2% due to the provision in the 2010 Tax Act to stimulate the economy.  The rate is presently scheduled to go back up in 2012.

With this in mind, you might wonder if there are ways that you could reduce the tax…?  One way might be to incorporate your business and reduce your income by taking dividends for a portion of the otherwise taxable income.  By doing this, you would eliminate the SE tax, and then pay employER withholding and employEE withholding only on each paycheck that you provide yourself.  The dividends would not be subject to Social Security tax, since they are not wages.

It’s important to note that such a strategy will have two important factors for you to consider:

  1. Your earnings record will reflect the new, reduced amounts for income, so your future Social Security benefit will be reduced as well
  2. You must be careful to pay yourself a reasonable wage, otherwise the IRS will consider your dividends to be taxable as income.  It might seem clever to reduce your wages to a very low amount (or eliminate them altogether), but this will come back to haunt you when the IRS gets ahold of your return.

Incorporating your business may be a valid strategy to help reduce your tax costs – for other reasons beyond Social Security tax.  But you’ll need to consider all of the consequences before you do this – one of the most important factors being that you will want to increase your retirement savings in order to make up for reduced future Social Security benefits.

Photo by TheeErin

Your 2% Opportunity in 2011

Dec 31st, 2010
by jblankenship.
1 comment

opportunity center by {Guerrilla Futures Jason Tester}By now you’ve heard the news from the 2010 Tax Act – one of the provisions is that during calendar year 2011, the Social Security withholding tax is reduced from 6.2% to 4.2%.  This means that you have an additional 2% of your income, up to the $106,800 limit, available to you to do with as you wish.  This is your opportunity to make a splash!

I think it would be a very good idea to bump up your 401(k) deferral by 2% if you aren’t already maxed out.  If you have maxed out your 401(k), you could use the extra money to contribute to your Roth IRA, or put some money into your taxable investment account.  No matter what, since this money was originally intended to be for retirement (if it had been withheld for Social Security, it would have gone to *someone’s* retirement), you should put it toward some variety of savings or debt paydown.

It’s not often that you get the opportunity to take control of your Social Security withholding, and many folks are chomping at the bit to do just that.

Don’t waste your opportunity – this is the chance you’ve been waiting for!

Photo by {Guerrilla Futures | Jason Tester}

Social Security by the Numbers

Dec 17th, 2010
by jblankenship.
3 comments

mixed numbers by Pink Sherbet PhotographyHere are some Social Security numbers I recently ran across that I found interesting.  The figures are from the current information available as of October, 2010:

The average retired worker receives $1,172 in monthly Social Security retirement benefits, and the average couple receives $1,892.  The average disabled worker receives $1,066 in Social Security disability benefits each month, and this amount increases to $1,803 for a disabled worker with a spouse and child.

The average widow or widower receives a total of $1,106 in Social Security survivor benefits per month, whereas a younger widow or widower with two children receives an average monthly benefit of $2,391.

Each month, over 34 million people receive Social Security retirement benefits, and over 4 million are receiving survivor’s benefits as a widow or widower.  Over 8 million people are receiving disability benefits from the Social Security system each month, as well.

Photo by Pink Sherbet Photography

Earnings Tests in the Year You Begin Benefits

Dec 10th, 2010
by jblankenship.
3 comments

outer limits belfastAs you may already be aware, there are limits to the amounts that you can earn while receiving Social Security benefits.  This factor is covered in detail in this earlier article – Social Security Earnings Tests.

What isn’t clear is just how these earnings impact your benefits in the year that you first begin receiving your Social Security benefits…

If you’re at FRA (Full Retirement Age) or later when you begin receiving your benefits, you have no earnings limit at all.  And if you’re younger when you begin your benefits (as the earlier article outlined) up to the year you reach FRA your benefit will be reduced by $1 for every $2 that you earn over the limit ($14,160 for 2010 and 2011).  During the year you are FRA (before you reach the actual FRA), your benefit will be reduced by $1 for every $3 that you earn over the FRA limit ($37,860 for 2010 and 2011).

What’s important to know is that, prior to starting your benefits, no matter when you start them prior to FRA, you can earn as much as you like.  The earnings limits only apply AFTER you’ve begun receiving your benefits.  In the case of the years prior to FRA, your benefit will be reduced when your monthly income is greater than $1,180 per month, for every month that you are receiving Social Security benefits.  This is just a pro-rated application of the annual limit of $14,160 for 2010 and 2011.

The same pro-rate method is applied for the year of FRA – the monthly limit is $3,155 for 2010 and 2011.

Hope this clears up the Earnings Limit issue during the year you begin receiving benefits.

Photo by geograph.org.uk

SSA Revises Withdrawal Policy

Dec 8th, 2010
by jblankenship.
6 comments

On December 8, 2010, the Social Security Administration published a revision to their “withdrawal policy”, which we talked about in detail in the article “The Ultimate Do Over”.  It’s important for you to know what has changed about this rule, especially if you have been counting on this in your planning for Social Security benefits.  You can see the actual text of the SSA’s announcement 20 CFR Part 404 by clicking here.

What’s Changing?

Essentially SSA has decided that this rule, as it stood, represented a little too good of a deal, even though very few people ever took advantage of it.  The rule, in brief, allowed an individual to begin taking retirement benefits at any age, and then at any point in the future the individual could pay back all of the benefits (without interest) and re-set his or her beginning date for receiving benefits.  This strategy allowed the individual to receive benefits and invest them, then pay back the entire amount (but keep any interest earned or growth) and then receive a higher benefit due to the credits for delaying retirement.

Under the new rules, you can still use this strategy, but you can only wait for 12 months before you pay back your received benefits.  This doesn’t mean that you have to re-set your benefit and continue receiving benefits at the 12 month or less stage – you could pay back your benefit and withdraw from receiving benefits until much later if you wish.

So, the key here is that you couldn’t, for example, begin receiving benefits at age 62, then at age 70 pay it all back and re-set.  You’re limited to only 12 months of received benefits before you pay it back.  In the example, you could receive benefits at age 62 until you’ve received 12 months’ worth, then stop receiving benefits and pay back what you received – then delay reinstating your benefit until FRA or age 70 or whenever you like.  Or, at age 63 you could pay it back and re-set to a benefit for your new attained age.

Another thing that has changed is that you can only do this payback (known by the SSA as a “withdrawal of application”) one time in your life.  Previously, there was no limit as to how many times you could do this.

File and Suspend Changing – but not a big change

The last significant change that came about today is regarding the File and Suspend tactic.  Don’t worry, this one is still available – what changed is that you can no longer enact a “payback” of received benefits (like with the “do-over”).  File and Suspend is only allowed when this is your first application for benefits, meaning that you have not received any benefits in the past (although you could suspend after FRA and voluntarily forego accrued benefits).

Of course, the greatest benefit of the File and Suspend tactic is the ability to establish a “beginning date” on your record, so that then your spouse and dependents can begin receiving benefits based upon your record.  This remains unchanged.

The Impact of Zero Years

Dec 3rd, 2010
by jblankenship.
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zeroRemember when we talked about how your Social Security Benefit is calculated?  Your highest 35 earning years during your career are put into a formula, and the earnings are indexed, then averaged by dividing the result by 420, the number of months in 35 years.  And if you have less than 35 years of earnings, those years become zeros…

So, you can guess what might happen when you have years with zero earnings in your record… naturally your average is going to be reduced (dramatically) by any year when you had zero earnings.

Let’s say you have 35 years of earnings at the maximum amount, which will give you (for 2011) a FRA benefit of $2,626.  But if you only had 30 years at the maximum earnings amount, your benefit would be reduced to $2,531, an annual reduction of $1,140.  Taking this further, if there were only 20 years of earnings at the maximum amount, your FRA benefit would be reduced to $2,293, for an annual reduction of $3,996.

This comes up when an individual chooses to retire early, or has years in which he or she has not earned during his or her career, such as when raising children or going to school.

Photo by geograph.org.uk
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