By Pat Kerfoot, Special to bizNEVADA
Since it was signed into law by President Roosevelt in 1935, Social Security has become an important feature of retirement planning. Social Security provides the majority of income to most elderly Americans. For almost half of seniors, it provides about 50% of their income. For 20% of seniors, Social Security provides 90% of their retirement income.
Social Security can be a confusing topic for retirees. As you can see it provides a significant source of retirement income. The catch is that you only get one chance to get it right. You need to understand the available filing options and how the latest changes in the law impact your filing. Remember, Social Security is funded with your tax dollars, doesn’t it make sense to get the most benefits possible?
Social Security was intended to supplement retirement income not to replace other forms of retirement savings. Social Security replaces only about 39% of a worker’s income. In 2018 the average Social Security benefit was $1,413 per month. However modest these benefits are important. Without Social Security about 4 in 10 Americans aged 65 or over would have incomes below the poverty level.
- Social Security eligibility is based upon your work record. Qualifying for Social Security is based on “credits” earned. One credit is equivalent to $1,360 of earned income (2019). No more than four credits can be earned in any given year regardless of earnings. After reaching 40 credits, you qualify for individual benefits.
- Your benefit (Primary Insurance Amount) is based on your top 35 years of wage-adjusted income. The top Social Security benefit for a 65-year-old retiring in 2019 is $2,757.
- Married and Divorced Spouses (married ten consecutive years) are eligible for spousal benefits, subject to certain criteria, even if they don’t meet qualifications for individual benefits.
Once you start to receive benefits, you will receive cost of living adjustments, for inflation. Since 1975, the COLA is automatic based on the Consumer Price Index (CPI-W), and the average COLA has been 3.75%. The COLA for 2019 is 2.8% up from 2% in 2018.
Your Social Security Benefit (PIA) is determined by your Full Retirement Age (FRA), the age that you qualify for 100% of your Social Security benefits. Your FRA is based on your year of birth. For those born between 1943 and 1954, FRA is 66. For those born between 1955 and 1959, FRA is 66 and some additional months. For those born in 1960 or later, FRA is 67.
Choosing when to receive Social Security benefits is a very important decision! You can begin to receive benefits as early as age 62. However, your benefits will be reduced by 6.5% per year up to 30% total! On the other hand, if you delay taking your benefits past your FRA, the benefit will increase by 8% per year up to age 70! So, taking Social Security benefits at age 62 could decrease your payment by 30%, while delaying your benefits to age 70 could increase the benefit by 132%.
If you start collecting Social Security benefits and then change your mind, you may be able to withdraw your claim and re-apply at a future date, provided that you do so within 12 months of your original application for benefits. However, all benefits must be repaid, and you may only withdraw your application for benefits once in your lifetime.
If you continue working after you start collecting Social Security benefits, you should know that some of your benefits may be withheld if you make more than a certain limit.
If you are younger than Full Retirement Age, in 2019 you can earn up to $17,640. After that point, your benefits will be reduced by $1 for every $2 you earn over the limit. In the year you reach FRA you can earn up to $46,920. After this point, your benefit s will be reduced by $1 for every $3 you earn over the limit. After you have reached FRA, there is no reduction in benefits for earned income.
If you are married you will generally receive the greater of:
- Your own benefit based on your individual earning record, or
- The Spousal Benefit, up to 50% of your spouse’s full retirement benefit.
The spousal benefit is based on your spouse’s Primary Insurance Amount at his or her Full Retirement Age. If your spouse waits to file for benefits to receive delayed retirement credits, these credits will not increase the amount of your spousal benefit. Normally, you cannot collect on your spouse’s record until your spouse files for benefits.
Taxation of Social Security Benefits is a major concern in a retirement income plan. Originally, Social Security benefits were excluded from federal income taxation. (In fact, President Roosevelt had promised that Social Security benefits would never be taxed.) All that changed when the Social Security reform legislation passed in the 1980s. Currently, depending upon your income, up to 85% of your Social Security benefit may be subject to federal income tax. A well-designed retirement income plan may be able to reduce the tax burden on your benefits.
Social Security rules are subject to change. For instance, the 2015 Bipartisan Budget act made two important changes to Social Security filing rules by addressing two popular strategies, “File and Suspend” and the “Restricted Application.” These strategies allowed married couples to significantly increase their retirement income. The Budget Act addressed these loopholes resulting in the elimination of “File and Suspend” and allowing “Restricted Application” to exist for a limited number of beneficiaries for the next four years.
Social Security planning is an important part of any retirement plan! Mistakes are easily made and can be costly! An experienced planner can help you to understand important factors like the most advantageous time to begin benefits, tax implications, co-ordination of spousal benefits and other strategies to maximize your benefits. A properly executed Social Security income plan can possibly add thousands of dollars to your retirement income stream.
Pat Kerfoot CLU® ChFC® CFP® is the founder of Kerfoot Financial Services and has served the Las Vegas community for over 17 years. He regularly offers Social Security workshops and has taught hundreds of retirees to maximize their Social Security benefits. He can be reached at 702-684-7598 or patkerfoot@KerfootFinancial.com.