FINANCIAL INSIGHTS Share on facebook Share on twitter Share on linkedin Share on email When investing in a highly politicized climate, tune out the political noise and focus on the fundamentals. Focusing on the fundamentals while political investing is the real driver of investment returns. Mark Twain once said, “Never
Social Security Planning: Choice of a Lifetime
Social Security planning! Three words that strike fear, anxiety, and confusion to many pre-retirees. It’s no longer as simple as, “when I retire, I’ll turn on my Social Security Benefits and be OK.”
Not to sound to dramatic, but Social Security planning is the choice of a lifetime. The decision of when and how to start your social security benefits is one of the most important financial decisions you will ever make. However, like I mentioned, not to sound dramatic, just think about it. You have paid into the Social Security system for your entire working career, maybe up to 40 years. Then when you retire, you’re finally starting to pull income from the system until you die for maybe 20 years. Consequently, someone in their 80’s has been a part of the social security system for about 60 years of their lives!
Of course, it’s one of the most important financial decisions you will ever make. What other system will you be spending so many years dealing with? Just like any other major financial decision you make, you need a plan. That’s where Social Security planning comes in.
The Social Security Planning Problem
Confusion and fear over Social Security planning is not unique. You’re not alone. Even a lot of financial advisors don’t understand the basics of Social Security planning. For most retirees Social Security retirement benefits will represent about 33% of their retirement income!
Just as proper planning is needed for retirement, investments, and insurance you need a plan to optimize social security income as well. All components working in tandem will help increase your chances of success during retirement.
The Social Security Planning Solution
Where can you find help with optimizing your Social Security Benefits and Social Security planning? The Social Security Administration will only provide basic information. They will not help with planning and they’re not permitted to give any advice or planning strategies. Furthermore, good luck booking an appointment anytime soon as the wait list for appointments is several months.
It’s up to you to find independent professional help. However, only about 15% of people have a financial professional who is providing them Social Security planning advice. At Patriot Advisory Group we’re part of that small group of 15% of financial professionals who are also Social Security Certified Advisors. Our extensive Social Security training through The National Social Security Association, LLC provides our clients with the tools to optimize social security benefits in conjunction with their other retirement income sources.
You can get started in understanding your Social Security benefits by requesting a complimentary Social Security Optimization report below. It’s never too early or too late.
Social Security Planning Basics to Help you Get started
Based on years’ experience constructing Social Security plans a few topics often come up during the process. Let’s review some of the basics. But, keep in mind that almost every situation is unique.
Start by getting your personalized Social Security Optimization report. As I mentioned above, filing for Social Security benefits is one of the most important financial decisions you will ever make. The decision you make on when and how to file can be the difference between thousands of retirement dollars for you, your spouse, and your dependents.
The first decision is when should you file? You can file as early as 62, but each year you file before your Full Retirement Age (FRA) will result in a permanent decrease in your monthly benefit, also known as your Primary Insurance Amount (PIA). In other words, filing early has its limitations. Filing later after your FRA can provide more opportunity as each year you delay benefits after your FRA you will receive Delayed Retirement Credits (DRC’s). To sum up, it’s your PIA at your FRA that earns DRC’s. So simple, right?
Filing early or filing later will also have an impact on:
I often tell our clients that electing when to start your benefits does not happen in a vacuum. It affects several other aspects of your retirement income which includes all other sources.
Common Social Security Concerns
Common Concern #1: Will Social Security be available when you need it?
This is a common concern usually at the top of the list when it comes to Social Security planning. Lots of information is out in the media and the internet regarding Social Security and solvency. The issue is the large amount of baby boomers retiring and starting to pull benefits out of the system vs. the working population that’s funding the system.
Too many boomers and not enough workers. What does that mean for Social Security? As of now the reserve trust can pay full benefits through the year 2034, if nothing is done about the reserve strain starting at about 2035 benefits will be payable at about 79% of the promised amount. So Social Security retirement benefits will be there for you, there’s just a possibility it will be reduced by 20% in about 14 years. But a 20% reduction in your benefit amount can be a hit on your retirement plan so you should plan accordingly.
The reality is legislation is likely to intervene to maintain the solvency of the Social Security Trust, some policy proposals that may be introduced include:
Common Concern #2: Will you be around to optimize your benefits?
You may worry you won’t live long enough to reap the benefits you’ve earned. Longevity must be considered. Most retirees underestimate their life expectancy.
For a married couple that’s 65 or older, there’s a 50% chance of one spouse reaching the age of 87 and a 25% chance someone will be well into their 90’s. Life expectancies are increasing nationally and that should be considered when planning for retirement, especially for couples. So chances are you or your spouse will be around to reap the benefits you have earned while working.
Now let’s discuss some of the basic terms and features that will be considered when you start constructing your social security plan.
Social Security Planning Terms and Features
Full Retirement Age (FRA): You can file anytime between age 62 to 70 but your full retirement age will be 66 to 67, depending on your date of birth. Your full retirement age will determine when you receive your full benefit amount. If you file before your FRA, the benefit amount will be reduced. If you file after your FRA, your benefit amount will be increased. The amount will be adjusted each year.
Spousal Benefits: Social Security will also provide for your loved ones. If you are married for at least a year your spouse can pull benefits from your work record and vice versa. Spousal benefits are 50% of the workers’ PIA and can start as early as age 62 (reduced).
One spouse must file for the other to claim benefits. The dependent spouse does not have to have any working record to pull benefits.
Surviving Spouse: When I conduct my Social Security planning workshops this is the topic where all the wives sit up, as they should. Surviving spouse benefits is a big part of wealth and income transfer at the death of the first spouse, which as you know statistically is the husband. When the primary insured dies what will the surviving spouse receive? How will surviving spouse benefits affect other income/benefits the spouse will receive? Planning for surviving spouse benefits should happen upfront as the plan is being designed, not when the death of that first spouse occurs.
Benefits for other family members: Other family members who may be able to receive dependent benefits are dependent children under the age of 18, disabled individuals as well as dependent parents. There is a “household maximum” that has to be considered when benefits are calculated for a family unit.
Divorced spouse benefits: If you are divorced, how do divorced spousal benefits work? This is a commonly misunderstood benefit that has several moving pieces to it.
- Married at least 10 years
- Currently unmarried (unless you are of a certain age)
- Ex-spouse must also file
Ex-spouse benefits have no family maximum so someone can be married previously multiple times for at least 10 years and each ex-spouse would qualify for spousal benefits.
Next, let’s review your filing options and considerations when filing.
Filing Options and Considerations
As you’re planning to file it’s important to know the terminology. If you file prior to or after your Full Retirement Age:
- It’s referred to as “Deemed Filing.”
- This is important because it not only activates your benefit but allows spouses, divorced spouses, and dependents to claim as well.
- If you file At or after Full Retirement Age, it’s considered standard filing.
File Restricted is a HUGE benefit if you qualify. This allows a spouse or divorced spouse to receive a benefit while their own personal benefit is being delayed and earning Delayed Retirement Benefits. You must have been born before January 1, 1954, to take advantage of this benefit. As of right now, there are only three more years this benefit can be taken advantage of. Once those retirees hit 70, they will no longer be able to take advantage of the restricted application concept.
If you or your spouse were born before January 1, 1954, and have not filed, PLEASE contact Patriot Advisory Group as you may have an opportunity of taking advantage of this HUGE benefit that will soon disappear.
How Taxes Influence Social Security Benefits
Taxes are the most important reason why you need a holistic retirement income plan that includes all income sources, not just Social Security planning. If you have a 401K, that benefit will be fully taxed, and your Social Security benefit can also be taxed as high as 85%! Does that make sense? You paid OASDI (office name of Social Security) taxes your entire working life and now when it’s time to reap that reward, they can tax your benefit up to 85%!
However, it’s up to you and your plan to determine how much of your benefit they will tax. They can tax 85% or 50%. I can safely say our clients would prefer not to overpay Uncle Sam.
At Patriot Advisory Group we specialize in developing a retirement income plan that helps reduce your tax burden. Tools such as ROTH IRA’s, Muni Bonds, and cash value life insurance to name a few.
A few other items that you may have to consider when it comes to Social Security planning are:
- Planning on working during retirement? Depends on when you file, if you file before FRA you will see a reduction in your Social Security benefits but when you reach FRA and beyond there is no reduction in benefit for any earned income you receive.
- Do you have a pension? The Windfall Eliminate Provision (WEP) may reduce your benefit amount.
- Government employee? The Government Pension Offset (GPO) may come into effect and reduce not only your benefit but possibly your spouses.
Hopefully, I was able to calm some of the fear, anxiety, and confusion that comes with Social Security planning. (Tip: The Social Security Optimization Report is a game-changer!) Most importantly, the need to have a Social Security plan in place is vital.
The ideal age to start your Social Security Planning is between 55-62. However, it’s never too early to start planning.
Think you can do it yourself? Of course you can! On the other hand, people who work with financial professionals like us, receive 17% MORE in Social Security benefits than those who do not.
To get started, visit SSA.gov and download your most current Social Security statement. Then, get your complimentary personalized Social Security Optimization Report. Finally, we’ll have a no-cost, no-commitment review of your Social Security Optimization report.
Take control and make sure you and your family receive what you deserve. After all, you earned it!
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