Retirement Roundup
Getting close to retirement and not sure what your Social Security Benefit is going to look like? It’s simple to take a look and get your plan on track.
What Do I Need to Know
It’s surprising that approximately 9 out of 10 people that I speak with about retirement planning have no idea what to expect from good old generous Uncle Sam once they hit the golden age. They don’t know how retirement benefits are calculated, how much they are likely to get based on their work record, what happens if they retire early or wait to retire, if their benefits will be taxed or how to handle spousal benefits. Well, I’m here to tell you that unless you have a real rich uncle ready to bankroll your retirement, you had better have a look at what Social Security is really going to do for you.
How Are My Benefits Calculated
Social Security benefits are typically computed using “average indexed monthly earnings.” This average summarizes up to 35 years of a worker’s indexed earnings. The IRS applies a formula to this average to compute the primary insurance amount (PIA). The PIA is the basis for the benefits that are paid to an individual at full retirement age. You need to have a minimum of 10 years of work on the books in order to qualify for benefits, and the calculation is based on your top 35 years of working income. If you have less than 35 years of work, then years up to 35 will be calculated as Zero. This will not help your annual benefit amount. (Click here for more information from SSA)
How Much Will I Get
For most of us, Social Security payments will replace approximately 40% of our working income. This comes as a shock to most people who think that their benefits will cover most if not all of their living expenses in retirement. Think again. Unless that uncle comes through or you want to drastically cut your standard of living in retirement, you better figure out how you are going to bridge the gap between your government allocation and your actual needs. Now that’s the essence of what we do around here, but before you can get to that, you have to figure out what the shortfall is going to be. Although I am a proponent of detailed budgeting, a commonly used calculation for projected expenses in retirement would be 80% of your pre-retirement income, as certain costs are reduced in retirement, while others increase. Subtract your Social Security income from the budget number to determine the shortfall.
So how do we find our Social Security payment? Simple. Every year, the Social Security Administration (SSA) sends out a “Social Security Statement” which details your earnings record and the estimated payments you are likely to receive (subject to legislative changes) each year from age 62 (earliest retirement) to age 70 (latest retirement) Depending on your birth year, your full retirement age may be anywhere from 65 to 67. For every year you retire earlier than your full retirement age you lose 8% of your payment, and for every year you delay up to 70, you gain 8%. These increases and decreases are prorated monthly, depending on when you file. You can not retire before age 62, and you receive no additional benefit by waiting beyond 70, as there will be no additional increases coming thereafter. Reviewing your statement gives you the opportunity to make any corrections to your earnings record and get what you are entitled to. Ultimately the calculations will render the same net end value of payments made to you, if you don’t make it beyond the actuary’s estimate of life span that is. Beat the odds and you beat the man. Payments will last as long as you do.
| Year of birth | Age |
|---|---|
| 1937 and prior | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| 1943-54 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 and later | 67 |
If you can’t find that Social Security Statement, and I never can when I’m looking for it, the best thing to do is to go right to the source. The Social Security Administration (SSA) offers an opportunity to sign into their website to access this information 24 hours a day, 7 days a week. (Click here for more information). Go to the sign in / up tab and in a couple of minutes you have access to your information. On your page is a handy slider bar that lets you know how much your payment will be at any age between 62 and 70. Quite handy for determining whether or not you are going to be able to knock off the clock at 64 or if you have to wait until 70.
How Much Will They Take
Many factors affect how much of your money you will get to keep. Be aware that there will be deductions for Medicare Part B, (Click Here), and depending on your age and income, you may be taxed on up to 85% of your Social Security payment (Click Here). Additionally, if you remain gainfully employed after you file for benefits, you may face a deduction based on the following as of 2022:
If you are under full retirement age for the entire year, the IRS will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2022, that limit is $19,560.
In the year you reach full retirement age, they will deduct $1 in benefits for every $3 you earn above a different limit. In 2022, this limit on your earnings is $51,960. The IRS only counts your earnings up to the month before you reach your full retirement age, not your earnings for the entire year. (Click Here for More Info)
Somehow, this doesn’t seem quite fair now does it? Taking back the money I was promised and worked so hard and long for? Additionally, the solvency of the system has been used as a political bludgeon for years with the surplus set to be gone after 2034 . This absolutely does not imply that Social Security Benefits will cease after this point, rather that any shortfall will have to be covered from sources other than payments that have been received from workers. One proposed method of extending the solvency of the program would be the reduction of 25% of benefits paid. That doesn’t sound very good to me. My common sense solution would be to raise the limit on income subject to the Social Security tax beyond the current level of $147,000.00, According to information from the Peter G Peterson Foundation, eliminating the cap on social security taxation would eliminate 68% of the 75year Social Security shortfall. Read complete article here. For any forward budgeting calculations, I would base any projections on 75% of stated benefits as a buffer against any upcoming legislation affecting the payout calculations. Better safe than sorry.
So how much will they take? Possibly quite a bit. Being aware of what you are going to get and what they will claw back from you is critical in developing a plan that won’t let you down when it’s time to claim those benefits.
What About My Spouse
If your spouse has worked a minimum of 10 years, he or she would be entitled to a Social Security benefit based on their own record. The IRS does however allow for spouses to claim benefits on the work record of their beloved significant other if they do not qualify on their own, or if their earnings were significantly below their spouse’s. The benefit can be as much as 50% of the amount you receive, depending upon the age they are when they file. (Click Here For Additional Information) You should compare your spouse’s self earned amount with the spousal benefit to determine the best course for you. There are many claiming strategies to examine, and we won’t do that in this issue, however be aware that if spousal benefits are claimed, they won’t be available until the primary (you) files for benefits. This is a change in the law during the Obama years which eliminated a policy called “File and Suspend”. This allowed for an individual to file for benefits, activating the spousal benefits, and then suspend those payments until a later date allowing for the spouse to receive payments in the interim. This is now gone, so now your spouse has to wait for you. In my case, my spouse is three years older than I am, and doesn’t qualify on her own record, so she will have to wait three additional years to get that first government check. Yes, elections have consequences.
Keep in mind that these claiming selections are for the most part permanent. There are certain circumstances where you can “repeal” your decision within the first year, but they will want all the money back. Also, the surviving spouse will be entitled to the higher of the two social security payments, but not both, so if you file early for a reduced benefit, that will be the maximum benefit your spouse will receive once you are gone. These are very important decisions and I suggest you consult an expert in Social Security claiming strategies before you make your final call on claiming your benefits. You should be ready to file six months prior to your desired retirement date to make sure you get everything done in time.
Conclusion
People tend to avoid the subject of Social Security for a number of reasons. It seems confusing, it’s complicated, it’s a long way off, I’m sure I’ll get enough to get by, my accountant will handle it, my lawyer will handle it, my spouse will handle it, etc. etc. There really isn’t that much you need to know, but what there is, you need to know it in order to get that retirement plan up to snuff. Having a good idea what your benefit amounts are going to be is a critical step in developing strategy to fund your retirement. There will likely be an income gap that you will have to overcome. We can’t be sure what our legislators will do, however we are all ultimately responsible for maintaining our own existence at whatever standard of living we choose. Will benefits be cut? Will they change the tax code? Nobody knows. Take into account that you will have deductions from your benefit, and may have to pay taxes as well. If you follow this site and build an income portfolio that allows you to live your retirement dream, I can just about guarantee that you will pay some taxes on your benefit amount. That’s all OK if you plan for it. You can even make quarterly advance tax payments to lessen the impact at year end. Claiming decisions are critical and for the most part, permanent. Don’t wait until the last minute to start considering your claiming strategy. Know what your options are and make your best decision. If you are 5 years or less away from retirement, you are late. Get going. Figure out what you are going to need and make that plan a reality. You can do this, now do it……
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