Social Security: Who, What, When, Why & How
Social Security is a federal insurance program that provides money to retired people and select others. If only it were that simple! But usually there are more questions than answers, so here is what you need to know.
Who is Eligible?
Retired workers who paid into the system are the most common qualified party. Workers are required by law to pay into the Social Security system via payroll deduction or at tax time if you are self-employed. If you were born in 1929 or later, you need to work at least 10 years to become eligible for Social Security. Four credits are earned for every year worked, and a total of 40 credits is required to qualify; but they don’t have to be earned consecutively.
If you have not reached the official qualifying retirement age to be eligible for Social Security, but have met the work requirement (40 credits) and are considered disabled under the Social Security medical guidelines, you can receive benefits. Something to consider is if you have qualified for long-term disability through an employer-sponsored plan, or individual plan, those insurance companies are generally incented to help you qualify for Social Security Disability to help relieve the financial burden they face if you are permanently disabled.
If you are the spouse or minor child of a retired or disabled worker who qualifies for Social Security benefits, you may be eligible to receive benefits as well. There are a lot of nuances to qualifying in this manner. In its simplest form, you may qualify to receive up to 50% of your spouse’s Social Security benefits, even if you never worked or didn’t qualify on your own. This is an additional amount above and beyond what your spouse will receive and one does not effect the other. You may not elect Social Security until your spouse reaches retirement age and they have filed for their own benefits. As an ex-spouse you may also qualify, if you were married at least 10 years, however slightly different rules apply. Your child may also qualify, if an eligible parent claims Social Security for their own benefit, but only if the child is younger than 18.
If you are the surviving spouse of a worker who qualified for Social Security retirement benefits (or disability benefits), you and your minor children may be entitled to benefits. Widows or widowers can qualify at age 60, at a reduced benefit, but may claim benefits until it makes sense to switch over to their own Social Security benefits. A good example is a widow claiming Social Security at age 60 and deferring her own benefit until age 70 (to maximize her benefit) at which time she would switch over. Similar to the dependents’ options mentioned previously, there are many nuances to this, as well as creative strategies to maximize your Social Security income in these situations, which a financial advisor can assist with.
What do I receive?
An easy way to estimate your traditional Social Security payments is to use the CommunityAmerica Social Security calculator. The basic inputs are based on your average annual earned income, age and Social Security retirement age, but it will also factor in a spouse and inflation rate. The bottom line is the maximum monthly Social Security benefit for a worker retiring at full retirement age in 2019 is $2,861. If you are married and your spouse claims his or her portion of your benefits, that would be an additional $1,430.
Keep in mind, Social Security benefits may be taxable. At the federal level, it depends on if your adjusted gross income (AGI), non-taxable interest and one-half of your annual social security benefits meet certain thresholds. If you file as an individual and receive below $25,000, then your benefits will not be taxed. Between $25,000 and $34,000, up to 50% may be taxable, and for income greater than $34,000, up to 85% of your benefits may be considered taxable income. If you file a joint return, you are safe at $34,000, up to 50% may be taxed between $32,000 and $44,000 and up to 85% above $44,000. Certain states may also tax your Social Security benefits including Kansas and Missouri. Of course you will need to consult a tax professional for final determination.
When should I take Social Security?
This is the big question because the answer is different for everyone. When you reach normal retirement age, you are eligible to receive full Social Security benefits. If you were born after 1959, normal retirement age is 67.
Assuming you have flexibility in when you elect, the questions you should ask are what your life expectancy will be, what your future tax rate will be and what will you lose by withdrawing earlier than you could? According to the Social Security website, a man reaching 65 today, can expect to live on average until age 84 and a woman, on average, to age 86.5. Therefore, generally speaking, if you plan to outlive the general life expectancy, then waiting to receive benefits is the more lucrative solution. If, however, you don’t expect to hit average life expectancy, or don’t want to risk it, taking benefits early may be a better option.
How do I file for Social Security?
This is the easy part. Once you reach eligibility and decide to file, you may elect your benefits online or by calling the Social Security administration directly. Keep in mind, once you elect, you are unable to make changes (with a few exceptions).
Will it last?
Social Security was created just after the Great Depression as a means for older, retired workers to continue to function financially when they no longer worked or earned wages. It still serves as a critical source of income for many older Americans; however its long-term existence is being threatened.
In 2018, the benefits paid out by Social Security were greater than what was paid into the program. Thankfully, the government currently has the means to cover the shortfall, but projections indicate this is only sustainable until 2034 unless changes are made to the program. Raising the retirement age, increasing the FICA taxable income limits and many other suggestions are on the table. While it is hard to foresee the Social Security program going away altogether, it is very feasible that it may not be as big of source of retiree income in the future. Accounting for this in your financial plan is the smart way to go.