MoneyMonday: Social Security Overview

Welcome to this workshop, Social Security Overview, the basics of our national retirement system. I’m Janel Cross, one of your MoneyNav coaches.

If you’ve attended other sessions, you’ve been introduced to the three stages of financial wellness. If this is not familiar, plan to join an Intro to MoneyNav session offered at the beginning of every month. Or look for the Money Milestones course which explores these stages in detail.

This session, Social Security Overview, is a Stage 3 course.

One of my favorite quotes is, “Being rich is having money, being wealthy is having time.” Financial Freedom is the stage when you enjoy the rewards of discipline and good decisions you’ve made along the way. It’s the place where you are no longer dependent on your paycheck. In other words, retirement.

But, even when you stop working, you still need to generate a paycheck. One source of your retirement paycheck is Social Security income.

Meet Ida May Fuller. This lovely lady was the first to receive a SS check in 1940 at age 65. Her check was for $22.54.

In 1940, when the SS system began, life expectancy was 61 for men and 65 for women.

Before receiving her first check, Ida May paid $24.75 in SS taxes. She lived to age 100 and collected nearly $23,000 in benefits over her lifetime.

I guess the system was doomed from the start and Ida May is to blame.

Social Security reform is at the center of many political debates, and many speculate about when the system will be bankrupt.

While nothing is guaranteed, in fact, you may have seen the disclaimer on your Social Security statement that warns of the shortfall in the system, it is our belief that Social Security will continue to be an important source of retirement income for the foreseeable future.

With that in mind, here are some benefits of our nation’s retirement system.   You cannot outlive your income. If you’re alive, you will get your check. It is adjusted for inflation which means your check increases, even if only by a little, throughout your retirement. And it’s guaranteed. This guarantee is backed by our nation’s tax system which is the program’s funding source.

But will Social Security alone be enough to fund your rewarding retirement? The odds are the answer is NO. While it varies for everyone, most will find that SS provides about 30-50% of their monthly income.

Your benefits are based on the wages you’ve earned. It’s a good practice to check the wage history on your SS statement.   You need to work for 10 years to be eligible. Technically, you need 40 credits of work history. You earn one credit for each calendar quarter worked. So, those 10 years don’t have to be consecutive.

Your benefit is determined by your highest 35 years of earnings. If you haven’t worked for 35 years, you’ll have a 0 in some years. For this reason, it can be helpful to work part-time in your first few years of retirement.

A quick note on statements. Many of us no longer receive statements in the mail but your benefit information is available online at SSA.gov. Establish a login as soon as possible. When it comes time to apply for benefits, you can save yourself a trip to the local SS office by applying online.

You can apply for benefits as early as age 62. We each have a different Full Retirement Age based on our year of birth. Recent social security form has increased the Full Retirement, and this is a trend we will continue.

While delayed satisfaction doesn’t come naturally to most of us, there is good reason to delay your application for benefits. Namely, more money. In fact, from age 62 to age 70, you receive an 8% pay raise for each year you wait to start benefits.

Given that nearly 70% of recipients are receiving reduced SS benefits and that almost 1.8M of those recipients are over age 90, it seems the significance of this 8% pay raise is under-appreciated.

In fact, those 8% raises mean that the difference between your paycheck at age 62 versus age 70 is over 75%

If you take just one thing away from this presentation, I hope it’s an understanding of what you give up when you take benefits early. Here’s a dollars and cents illustration.

Assume this is the social security benefit schedule by age for Jane. If she applies at age 62, her benefit is $1,500 per month. But if she waits until 70, her benefit is over $2,600, an increase of 76%

For most folks, a portion of their Social Security benefits will be subject to tax. There are two tax situations to be aware of. First, income tax on benefits. No matter when you apply and whether you continue to work, part of your check may be subject to income tax depending on your overall tax situation.

About 60% of recipients pay taxes on their benefits. The good news is regardless of your tax situation, you’ll never pay tax on more than 85% of your SS check. In fact, most folks pay tax on only half of their benefit amount.

The income levels used to determine how much of your check is subject to tax change annually so consult a tax advisor for specific information regarding your situation.

The second tax situation is the impact of working in retirement, or more accurately after you’ve started benefits. An important note here… this situation applies to benefits received BEFORE Full Retirement Age, which is another reason to consider waiting to collect.

If you begin benefits before FRA and earn over the annual limit set by the IRS, you will experience a withholding of your benefits.   $1 for every $2 earned above the limit will be withheld.

In the year you reach FRA, the limit increases and the withholding is $1 for every $3 earned over the limit.

But, if you wait until FRA to apply, you can earn as much as you want without any withholding.

One note before we leave this topic. This is NOT a tax. It’s a withholding. Any amount withheld will be considered in recalculating your benefit when you do reach FRA resulting in a small pay raise.

Let’s discuss when you can apply it in different situations. We will start with individual taxpayers. Benefits are available if you’ve collected 40 credits, or 10 years, of work history. Your check is based on your highest 35 earning years. We will refer to this as a worker’s benefit. You can apply as early as age 62 or as late as age 70. Your FRA age is based on your date of birth.

If you are married for at least one year, you are eligible to receive 50% of your spouse’s worker’s benefit. We call this a spousal benefit. To collect, the worker must first apply for their benefit. If the spouse applies at age 62, they receive a reduced benefit. If they wait until FRA, they receive 50% of the working spouse’s benefit amount. Note there is no benefit in waiting to apply for a spousal benefit beyond FRA as there are no Delayed Retirement Credits.

Note, if you are married and also worked, you are eligible for two benefit amounts… a spousal benefit AND a worker’s benefit. If you apply before your spouse applies, you are only eligible for your worker’s benefit. If your spouse later retires, and your spousal benefit is higher than your worker’s benefit, your check will increase to a higher amount. We can easily get in the weeds here but just remember you will receive the highest amount you’re eligible for.

If you are divorced at least two years before applying and were married at least 10 years, you are eligible for an ex-spousal benefit. This works just like the spousal benefit – you receive 50% of your ex-spouse’s benefit. A few key things to note:

First, you cannot remarry before age 60. Your ex-spouse does NOT need to apply for benefits before you can collect. Benefits are reduced if you apply before FRA like other benefit types. If you delay beyond FRA, there are no delayed retirement credits so no need to apply later than your FRA. Also, it doesn’t matter if your ex-spouse has remarried. And, most importantly, your ex-spouse will NOT be notified if you apply.

I want to emphasize this one because many folks are not aware. I met a woman who was married for 40 years before divorcing. She had not worked prior to the divorce and did not have enough credits for a worker’s benefit. She was working an entry-level job when I met her at age 66. She had also been diagnosed with Parkinson’s disease.

When we checked, we discovered her ex-spousal benefits were almost equal to what she was earning in her job. This allowed her to cut back to part-time and improve her quality of life.

So, let’s break down the important pieces one more time.

First, you cannot remarry before age 60.

Your ex-spouse does NOT need to start their benefits before you can collect.

Benefits are reduced if you apply before FRA.

If you delay beyond FRA, there are no additional increases so no need to wait longer than FRA to apply.

It doesn’t matter if your ex-spouse has remarried.

And, most importantly, your ex-spouse will NOT be notified if you apply.

Another lesser-known benefit is the survivor’s benefit or widow’s benefit. If you were married at the time of death and had been married for at least 9 months, you are eligible.

An important distinction here. Widow’s benefits are available as early as age 60 albeit at a reduced amount. You are eligible for the full benefit accumulated by your deceased spouse when you reach your own FRA. Like other spousal benefits, there are no increases beyond FRA so no need to wait to apply beyond FRA.

If you are widowed, remarried, and employed, you could be eligible for as many as three benefits. So, let’s break this down one more time.

If you apply between the ages of 60 and 62, you are only eligible for the widow’s benefit. You can continue to collect the widow’s benefit as long as you desire. And, if you are eligible for other benefit types, you can let those increase.

But, keep in mind, in order to change from a widow’s benefit to another benefit type is not automatic. You will need to reach out to SS to submit an application for a different benefit amount.

As you can see, there are many moving parts in our nation’s retirement system, so it’s important to avoid an automatic “take it as soon as I can” decision.

In addition to different benefits like widow’s benefits, there used to be special application strategies called File & Suspend and Restricted Applications.

I think it’s important to comment on these situations in case you’re getting advice from family and friends.

File and suspend allowed folks to collect a spousal benefit before the worker started benefits. But this ended in 2015.

The restricted application allows you to apply for the lesser of benefits for which you are eligible while allowing other benefits to increase at 8%. This is being phased out and is only an option for folks born before 1/2/1954 and not yet 70.

If you worked for federal, state, or local government, you’ll need to know whether the Windfall elimination or Government Pension Offset provisions apply to you. These are reductions in SS benefits for folks eligible for a pension from a job where they did not pay Social Security taxes.

In any of these specialized situations, it’s important to consult an advisor and contact the Social Security office.

We are covering a lot of ground. And, as you can see, this is a complex topic. But I want to spend our last few minutes emphasizing how important it is to analyze claiming strategies in order to make the most of this valuable benefit.

Let’s consider John and Jane. John is 6 years older than Jane. He has an FRA benefit amount of $2,291 and a life expectancy of 79 years. Jane has an FRA benefit of $2,024 and a life expectancy of 82 years. To keep it simple, let’s say both John and Jane worked. And even though they both are eligible for a spousal benefit; we will consider only their worker’s benefits in this illustration.

If John and Jane both apply for benefits at age 62, you can see that their checks are reduced from their FRA amounts. If they live to ages 79 and 82 respectively, they will collect $533,977 in benefits. You can see this is significant income over the couple’s lifetime.

Now let’s say John and Jane meet with a financial advisor to analyze their options. The advisor suggests only Jane applies for her benefit at age 62. This allows them to get some money now. But John waits until age 70 to start benefits.

At age 70, John’s benefit is $3,433 which is significantly higher than his age 62 check. They will collect $597,117 in benefits, over $64,000 more.

Note, this assumes John and Jane live to ages 79 and 82 respectively. If they live longer, the difference between this delayed strategy and the “apply as soon as possible” one is even larger. But how long are you going to live? That’s the million-dollar question.

Instead of trying to predict life expectancy, you might think about the needs of the last survivor. Since Jane is 6 years younger than John and women commonly live longer than men, let’s assume John pre-deceases Jane.

When a member of the couple passes away, the smaller of the two Social Security checks stop. In the “apply as soon as possible” scenario, Jane is left with a benefit of $1,612 for life.

Had John waited to apply until age 70, however, Jane’s widow’s benefit would be $3,433/month, a significant difference.

Are there any situations where applying early is a good idea? Yes, there are several including if a person has health problems that impact life expectancy or have a family history of shorter life expectancy. Note, when analyzing your benefits, most advisors will determine the “breakeven” ages when one scenario is more beneficial than another.

Also, in cases where folks lose their jobs close to retirement age, applying for early benefits might be necessary.

But delayed benefits are likely more valuable for healthy folks with a family history of longevity. Also, if you have a younger spouse or plan to keep working. If you do not have long-term care insurance, delaying benefits might be important for a surviving spouse. Also, waiting for the maximum check is important for folks who have not saved and invested as much as they need. Finally, don’t forget about the importance of widow’s benefits which can allow you to build up your worker's benefits.

Well, you made it to the finish line. As we wrap up remember:

• know your estimated benefits which might require a visit to www.ssa.gov.
• this is not an automatic decision. talk to an advisor to find a strategy that meets your needs.
• contact the SS office if you think a special situation applies to you and consider delaying your application if you plan to work in retirement. Be sure to understand how your benefits might be taxed.
• And finally, if you are a widow or know someone who is, make sure they talk to an advisor.

With that, I’ll remind you that a great next step in your financial wellness journey is to complete your MoneyNav assessment. This questionnaire takes about 5 minutes and results in a series of To Dos, or best next steps, that are built into your personalized MyMoneyNav dashboard.

You can also schedule to meet 1-on-1 with a coach.

And we hope you will continue to join us here for MoneyMondays. Visit moneynav.com/moneymondays for upcoming sessions and to sign up.

On behalf of the entire MoneyNav team, thanks for joining me! If you have questions on this topic or another, please reach out. We look forward to connecting with you.