Are You Planning On Social Security?

17534293 - social security card and money conceptThe future of Social Security is a concern for many, young and old. In the retirement planning course that Susan Roman and I teach, we always get questions about Social Security.
Actually, in these classes we often get many questions, most of which concern either investing or Social Security. Our one request is that the questions be general in nature, so that the answers can be helpful to the entire group. We figure that many of you, Cutter Family Finance readers, probably have similar questions, so this week, I am going to address some of those that concern Social Security.
The first question we often get is whether our retirees will be able to depend on Social Security as an income stream when they retire. Well, we have all heard that the Social Security fund will eventually run dry. We have also heard that global warming will eventually flood the world but that scenario does not seem real until we have a definitive “end date,” right? According to a summary of the 2016 annual reports from the Social Security and Medicare boards of trustees, the funds will be depleted by 2034. That gives us just 18 years of wiggle room. Now, by those estimates, in 19 years, retirees will still receive payments but the funds paid into the system from workers and employees will only account for just over three-quarters of the scheduled payments.
Therein lies the problem.
So, those close to retirement (within a decade or so) will probably not see a significant cut in their benefits but they might be affected in other ways, such as by having a larger portion of their benefits classified as taxable income. You see, when Social Security was implemented in 1935, those payments were never meant to be taxed. But, in 1993, Washington changed the rules. Depending upon your income in retirement, up to 85 percent of your Social Security benefit can be subject to ordinary income taxes.
Could they make it 100 percent? You betcha!
Those further from retirement will also likely see some other changes that will affect their benefits. Those changes could include increasing the Full Retirement Age, adjusting benefit calculations to be based on means, and/or changing the calculation for potential cost of living adjustments. Folks, this means that younger investors should plan for the possibility of decreased Social Security benefits. And frankly, this Social Security issue is not going away. For years the folks in Washington have been kicking the can down the street. Well, that street is getting shorter and shorter—now is the time to plan.
Part of our class covers a section on activities during retirement and the reality of getting a part-time job to fill a retiree’s new-found “freedom.” One student, Jane, at a recent class asked a great question regarding whether her employment status would have any effect on her Social Security benefits. The answer, I explained, depends on whether Jane had reached her Full Retirement Age.
The earliest a person can start collecting Social Security benefits is age 62. However, Full Retirement Age (FRA) is the age at which an individual can collect his or her full Social Security benefit, without being “penalized” for collecting early. A retiree’s FRA is based on his or her year of birth. The FRA for anyone born between 1943 and 1954 is 66. The FRA for anyone born between 1955 and 1959 is between 66 and 66 and 10 months. For those born in 1960 or later, Full Retirement Age is 67.
If an individual has reached FRA and earns income, then his or her Social Security benefits are not affected by any additional earned income (although an increase in a person’s overall income could trigger different tax ramifications). On the other hand, if a retiree has not reached FRA yet and is working, he or she will see a reduction in benefits paid. The benefit payment is essentially reduced a dollar for every two dollars of income earned. Think about this for a moment, because this could be significant, if not properly planned for.
Susan and I never get through a discussion in class about Social Security without someone asking when we recommend that people file. That’s the age-old question that receives the age-old answer: it depends.
You see, we find that many a retiree’s first instinct, especially when people hear that the Social Security fund may be running out, is to claim benefits as soon as possible, age 62, but this is often a mistake. If a retiree collects Social Security before his or her FRA, the benefit can be reduced by 20 to 30 percent, based on his or her FRA. Alternatively, a person can wait to collect, even once he or she has reached FRA, until age 70, and can earn delayed credits for doing so, or as I say, a pay raise. On average, waiting to file can earn an individual a 7 to 8 percent increase in benefits per year. In class, we also remind people that lifetime benefits can potentially also be increased with certain spousal claiming strategies available to some married couples.
Unfortunately (for many), last November, President Barack H. Obama signed into law the Bipartisan Budget Act of 2015, which includes a provision that could cost many couples tens of thousands of dollars. Why? Because President Obama and Congress have agreed to a plan that ends the popular “File and Suspend” claiming strategy for many married couples and is phasing out the “Restricted Application” claiming strategy available for eligible couples.
My general rule of thumb, as most advisors will agree with, is to wait as long as you can, assuming an average life expectancy. But in class, just as the questions must be general in nature, our answers must also be general in nature. As we remind our students, each person’s financial and family situations are unique, and so each person’s most advantageous Social Security claiming strategy is also unique.
It gets tricky out there folks, which is why we encourage you, just as we encourage all of our class attendees, to speak with a financial professional who is a retirement specialist to find out what is best for you.
Be vigilant and stay alert, because you deserve more.