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Social Security: What You Don’t Know Could Cost You

Social Security: What You Don’t Know Could Cost You

| June 14, 2019
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You’ve been contributing to Social Security your whole life, right back to your first official paycheck. Between you and your employers, you’ve doled out 12.4% of your annual income. By now, that’s become a substantial amount, and one that could make your 401(k) look like chump change. Don’t you want to maximize your benefits so you get every penny that’s rightfully yours?

Unfortunately, with a system that is as complicated as Social Security, people make all sorts of incorrect assumptions about how it works. Some are minor while others are way off base and can even be financially devastating. Let’s look at some common Social Security myths and set the record straight so you don’t leave money on the table.

Myth #1: Social Security Is Running Out Of Money

Many of us, especially those of us several years from retirement, are worried that Social Security won’t be around by the time we reach this milestone. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2020 and the system will rely on incoming interest payments to make up the deficit until 2035. At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. (1)

Unfortunately, you can’t control whether the Social Security program fails or succeeds. Your best plan of action is to educate yourself and plan ahead accordingly. Create an account on the Social Security website so you can stay on top of your current benefits and know where you stand. There is plenty that could happen between now and 2035 that could impact the program, so don’t believe the assumption that there will be no money left for you by the time you retire.

Myth #2: The Money You Contribute Is The Money You Receive

Many people incorrectly believe the amount of Social Security taxes they’ve paid into the program is being stored up for them and that is what they will get back once they retire. That is simply not true. What actually happens is that taxes pulled from individual paychecks are pooled together and used to support those currently receiving benefits. Your contributions are supporting retirees, and when you retire, the money others pay into the system will support you.

In 1960, the number of contributing workers-to-beneficiaries was 5:1. (2) In 2017, it was 2.8:1. (3) So while the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. As time goes on and the life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than what you thought they would be.

Myth #3: Everyone Contributes Equally To Social Security

Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), with an earnings cap of $132,900. If you earn that amount, and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,960.80. (4) If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out.

Myth #4: You Should Claim Social Security At Age 65

Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount you receive.

Full retirement age (FRA) changes based on the year you were born. For those born before 1943, FRA was 65 years. For those born between 1943-1954, FRA is 66 years. Starting in 1955, two months a year is added until the FRA becomes 67 for those born in 1960 or later. (5)

If you wait until reaching full retirement age to begin collecting Social Security benefits, you will receive your full Primary Insurance Amount (PIA), which is the full benefit you have earned. If you decide to collect early, your benefit will be reduced by 6.67% per year until your FRA, up to three years. (6) Beyond that, the benefits will be reduced by 5/12 of 1% per month. Remember that the earliest you can collect Social Security retirement benefits is 62.  

Myth #5: Your Benefit Amount Is Fixed

As we just learned above, collecting your Social Security benefit before you reach your Full Retirement Age will result in you forfeiting a percentage of what you have earned and accepting a lower payment. This is obviously before consideration of the additional years you would be getting the decreased benefit. Nevertheless, did you know that for every year beyond your FRA that you delay taking benefits, the value increases by 8%, all the way up until age 70? There is nowhere else you can get an 8% return guaranteed by the U.S. government! (7) This means that your benefit amount is not fixed, and depending on when you begin to collect, you will either leave money on the table, receive exactly what you’ve earned, or even make out with some extra.

Myth #6: Earning An Income Will Not Affect Your Benefits

This is one of those myths that is partly true. Once you reach full retirement age (FRA), it is true that your benefit amount will not be affected by your other income. However, that changes if you begin collecting your benefit while below your FRA and have another source of income. There is a set limit that, when surpassed, your benefit is reduced.

For 2019, that limit is $17,640 if you are not yet in the year in which you reach FRA. For every $2 you earn above $17,640, your Social Security benefit will be reduced by $1. During the year that you reach FRA, the limit is $46,920. When you exceed that during your FRA year, your benefit will be reduced by $1 for every $3 you earn. (8) Then, as soon as you reach FRA, all limits are lifted. You can earn as much as you want, and it will have no effect on your Social Security retirement benefits. These benefits are not “lost,” however. If your benefits were reduced because you earned too much prior to reaching FRA, you will get these benefits back when your payment is recalculated to account for the reduction associated with excess earnings.

Myth #7: You Can Change Your Mind

A shocking 38% of people incorrectly believe they can simply switch their claiming strategy with no repercussions after they’ve made their official choice. The truth is that you can withdraw your claim and reapply at a future date, however, this is not done without consequence. (9)

The Social Security website states that you may withdraw your claim only once within your lifetime, and it must be done within 12 months of the original date you applied. Furthermore, you must repay all the benefits you and your family received, including all benefits your spouse or children received, whether they are living with you or not. (10) If you miss that 12-month window, you can suspend your benefits, but only if you have reached FRA but have not turned 70.

Myth #8: Your Claiming Strategy Affects Your Ex-Spouse

Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. With that being said, there are criteria that need to be met in order to be able to claim benefits based on an ex-spouse’s record. You must have been married for 10 consecutive years, have not remarried (unless your later marriage has already ended by annulment, divorce, or death), and have divorced at least two years before applying. If you meet these criteria, you are entitled to either your full benefit or up to half of your former spouse’s benefit, whichever is greater. (11)

Myth #9: You Will Receive Your Benefits As Soon As You Apply

Social Security, like most other complex programs, requires some time to process and begin. It is generally recommended that you file for benefits around three months before you need your first payment. However, your application can only be processed a maximum of four months before benefits are scheduled to begin. This means that if you are planning on starting as soon as you are eligible, at age 62 and one month, you cannot apply before you are 61 years and 10 months old. (12) Keep in mind that your first benefit payment will always be 1 month behind the start date. Therefore, if you apply in order to start your benefits at 65, you will get your first check in the first month after your requested start date, at 65 years and one month.

Myth #10: Social Security Is A Headache

While it may seem like there is a lot of stress involved with making sure you optimize your Social Security benefit, the fact is Social Security remains a major piece of your retirement puzzle. It was designed to replace 40% of an average worker’s wages, (13) and that’s money you don’t want to miss out on. However, there is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional who can provide you with confidence and make the whole process much less overwhelming.

You Don’t Have To Be An Expert; You Just Have To Know Who To Ask

Here at Sirius Wealth Management, our goal is to help those who are planning for retirement develop a personalized financial plan to address their unique needs and desires for their golden years. We believe that an integral part of this plan is your Social Security benefit. We work hard to educate you on your opportunities, answer your questions, and offer objective guidance. If you are preparing for retirement and want to partner with someone who is passionate about helping you maximize your Social Security benefit and pursue your ideal retirement, call 636-449-4890 or email david.domian@lpl.com to schedule an appointment.

About David

David has been working in the financial services industry since 1980 and specializes in financial planning with a focus on retirement planning. His planning concentrates on four specific goals:  the accumulation of wealth, the reduction of taxes and volatility in retirement, the necessary strategies to deal with the risks of longevity, and the passing of an estate in a private, tax-efficient, and protected manner. David holds designations as a CFP® CERTIFIED FINANCIAL PLANNER™, ChFC® Chartered Financial Consultant, CLU® Chartered Life Underwriter, and AEP® Accredited Estate Planner®.

David has been married to his wife, Sue, for over 41 years, and together they have four children and eight grandchildren. Dave is a big believer in family and still has family dinners almost every Sunday with most of his kids, grandchildren, and even his 97-year-old mother. Dave and Sue have lived in St. Louis all their lives. He enjoys spending time outdoors, especially fishing with his grandchildren; he knows they will only be young for so long and you have to live in the moment. This year will be Dave’s 18th annual cross-country motorcycle trip with three college friends; together they have traveled through over 40 states on these memorable road trips.

Dave and Sue support many charitable organizations, including the MS-Society, Cystic Fibrosis, the Lupus Foundation, St. Louis Men’s Group Against Cancer, and the Mary Culver Home for vision-impaired women, where his mother lives. Their support comes in an unusual way: Dave and Sue donate a BBQ (including a pig roast, cooked, carved, and served on site), which is auctioned off at one of their live events. This popular auction item is a great way for Dave and Sue to have fun and do some good in the community. Dave also serves as a board member on the Estate Planning Council of St. Louis.

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(1) https://www.cbsnews.com/news/when-will-medicare-social-security-run-out-of-money-to-pay-all-obligations/

(2) https://www.ssa.gov/history/ratios.html

(3) https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2018/fast_facts18.pdf

(4) https://www.ssa.gov/oact/cola/cbb.html

(5) https://www.ssa.gov/planners/retire/retirechart.html

(6) https://www.ssa.gov/planners/retire/applying2.html

(7) https://www.ssa.gov/planners/retire/1943-delay.html

(8) https://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2019.html

(9) http://time.com/money/4762608/social-security-strategy-retirement/

(10) https://www.ssa.gov/planners/retire/withdrawal.html

(11) https://blog.ssa.gov/ex-spouse-benefits-and-how-they-affect-you/

(12) https://www.investopedia.com/ask/answers/102814/how-soon-do-i-need-start-my-application-social-security-retirement-benefits.asp

(13) https://www.fool.com/investing/general/2016/02/28/how-much-of-my-income-will-social-security-replace.aspx

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