Social Security — The Million Dollar Asset

Perhaps the biggest retirement decision you will make will be when to start Social Security benefits. For those who consistently earned six-figures, SS benefits represent upwards of a million dollars of potential income! So it’s definitely worthwhile to know not only the basics but also a few SS gotchas.

Most people know the fundamental things about SS such as “it’s income for life” and “you get a higher benefit the longer you wait.” These two ideas are actually the key principals you need to know.   Implementing them along with the rest of your retirement strategy – when to retire, how much to spend, how aggressively to invest – can be an interesting challenge.

Here are some key facts and principals on Social Security:

  1. SS isn’t just for retirees: Although we most commonly think of SS as a retirement benefit, SS can also provide disability benefits and survivor benefits (aka life insurance).
  2. Disability is a non-trivial risk: The SSA estimates that about 30% of workers will draw SS disability at some point in their lives – many of those in their late 50’s or early 60’s. This is astonishing given that SS disability requires “full and permanent disability” not just a gimpy knee or bad back.
  3. Dying young with children: Survivor benefits can come into play in two general scenarios. One, when a younger worker dies their minor children and spouse can collect survivor benefits. For a high-income worker this could be over a $4000 monthly benefit for his family. Children age out at 18 (or 19 if in HS) and the surviving spouse when the youngest child turns 16.
  4. Dying leaving a spouse: A second common scenario is when the primary earner passes away in their later years leaving a spouse to take over their benefit. This scenario illustrates why it is usually beneficial for the highest earner to delay starting SS benefits.   Not only is it their benefit but also the survivor benefit.
  5. Spousal benefits are important: Depending on your situation, the SS spousal benefit is really great or really unfair. Each worker gets the higher of their own benefit based on their earning history or one-half of their spouse’s own benefit. So for someone like my Mom who raised four children but only worked a few years outside of the home, the spousal benefit was “pure homemaker bonus.” For the person who makes around half of their spouse’s income, they pay all those years of payroll taxes but receive the same SS benefit as if they hadn’t worked. Is this fair? Let me just say if you want to take away money from the Mothers who raised us, you’re picking the wrong battle.
  6. Payroll taxes: Social security taxes are 6.2% up to $128,400 of income in 2018. Medicare taxes are 1.45% with no income cap. The self-employed pay both the employee and employer contributions for a 15.3% combined payroll tax.

Each family situation is going to have some unique aspects. But the following are some common questions or even “gotchas” that could lead to unintended consequences:

  1. How do I know what my retirement benefit options are?

If you are over the age of 55 you should be getting your custom annual report from the SSA. You may have tossed it in which case anyone can access the same report online. Go to to set up access. As long as you know your name and social security number and can recall some personal trivia such as old addresses, lending banks, and models of cars you owned then you’ll be able to see some very interesting and important benefit information. One recommendation is to go ahead and set up this online account with SSA. Although unlikely, this will prevent anyone else from stealing your identity. Not only will the account holder be able to see your SS information but can also file for benefits online.

  1. How do I use the information in my SSA report?

The report includes estimates of what your monthly benefit will be if you retire as early as possible at age 62, at your full retirement age (currently age 66), and the latest age of 70 to begin benefits. If you are within a few years of retirement these projections should be fairly accurate. The report also includes the amount of disability benefit and survivor benefits you and your family may be entitled to.

For those who are decades away from retirement, a lot can happen both to your actual earnings as well as social security policy in the years before you retire so don’t put too much weight on these retirement benefit projections.

Note that the SSA report does not directly take into account your current (or past) marital situation. Nor does it adjust benefits for non-SS covered work.

Suppose that your age 66 monthly benefit is $2500 or $30,000 a year. The report will also show that if you take SS beginning at the earliest age of 62, your benefits will reduced by about 25% to $22,500. The report will also show that if wait until age 70 to begin your own benefit it will be about 32% higher or $39,600. The SSA estimates will be slightly different than those shown here as they assume you will also work to age 62, 66 or 70 that may or may not actually happen.

The spousal benefit will be one-half of your age 66 benefit. The spousal benefit does not increase if you delay your SS beyond FRA. The full spousal benefit is paid only if your spouse waits until at least her own FRA (currently 66). The spousal benefit is reduced if she starts the spousal benefits early with an age 62 reduction of 30%.

So what age do I choose??? Well, the good news is that really isn’t a “wrong age” as the adjustments to benefits are actuarially fair. That is, no matter what age between 62 and 70 you start benefits, the expected total benefits are roughly the same. Of course, if you have bad mortality prospects or very good genes that would sway you one way or the other. The “SS Choice” is one where practice and advice are almost complete opposites. For a number of reasons, the majority of workers begin SS as soon as possible – often at age 62 or immediately upon work retirement. The “sage advice” of financial advisors it to delay SS as long as possible. For the high-earner this usually means age 70; for the spousal benefit starting at age 66 is the highest you could receive. However, only a few percent of people actually wait until age 70 to start their SS benefits.

In general taking SS before age 65 (when Medicare kicks in) or age 66 (your FRA) is not an optimal decision. In particular for husbands who were the primary earner and a few years older than their wife, by filing for SS “early”, they are limiting not only their own benefit but also the survivor benefit if their wife outlives them.

  1. What is the highest benefit a couple could receive from SS?

Assuming you earned over the social security earnings cap ($128,400 in 2018) every year for the past 35 years, your full retirement benefit at age 66 would be about $2788 monthly (33,456 annually). Your spouse would be eligible to receive an amount equivalent to 50% of your age 66 benefit. These spousal benefits are in addition to your benefit assuming your spouse’s own benefit is not higher than the spousal benefit.

If you delay the start of benefits to age 70 your benefits will be 32% higher — $3680 monthly and $44,160 each year in today’s dollars. If you predecease your spouse she could switch from the spousal benefit to a survivor benefit equal to your own benefit.

  1. Can I take only my spousal benefit at age 62 and then my own at 70?

Nice try, but no. When you file for your own benefit you will also automatically be filing for a potential spousal benefit. If your spouse hasn’t begun their own benefit that you won’t be eligible (yet) for the spousal benefit. If your own benefit is greater than a spousal benefit, then you receive only your own.

One slight twist to the story is that you can take only your spousal benefit at age 66 (FRA) if your spouse has begun their own. You can then switch to your max own benefit at age 70. This is called a “restricted application.” Most commonly it is useful if the higher earner wants to hold out for their max own benefit but can go ahead and get up to four years of spousal benefits. Of course, this all hinges on the other spouse having a decent own benefit as the spousal benefit will be half of that amount.

  1. How many years do I need to work to be eligible for SS benefits?

To receive your own benefits you need to work at least 10 years. Even if you played nine years of pro ball making millions you’d still need that tenth year. Technically you earn a quarter of year credit with earnings as low as $1320. In practice, you can earn a full year credit with $5280 of earnings any time in that calendar year.

If you become disabled or pass away, then your SS benefits are base on your earning history even if you have less than 10 years of work.   These potential benefits are shown on your SSA report. However for SS Retirement benefits the SSA looks at the averaged of your highest 35 years of earnings – even if you worked much less than this due to raising the kids or otherwise being out of the workforce. Early career earnings are adjusted to today’s dollars in finding the average. I’ll spare you any more technical details and of course, the SSA calculates all this for you.

  1. Can you still be working and simultaneously receive SS benefits?

Yes, with a few qualifications. A worker can begin their own benefit as early as 62 but there are earnings limits until they reach their SS “full retirement age” (FRA) which is currently 66. Earnings above $17,040 in the years before FRA reduce SS benefits by $1 for every $2 above the earnings threshold. In the year you reach FRA, the income limit is $45,360. After you reach FRA, you can make as much money as you’d like and it won’t impact SS benefit payments. On-going earnings can increase your base SS benefit if it one of your highest 35 years of earnings.

Generally, you won’t want to start SS if you have earnings above the thresholds. An important exception is if you have minor children (or adult disabled child) who can draw child benefits once you start SS.

Another common confusing point is that you still pay SS taxes on work earnings even if the SS is sending you a benefit check.   That’s how it works!

  1. How does a marriage impact SS benefit?

One near-term impact is that you will become eligible to draw spousal and survivor benefits on your new love. Spousal benefits become available after one year of marriage along with other stipulations such as that you are 62+ and your spouse has begun their own benefits.

Survivor benefits eligibility occurs after nine months of marriage – and regrettably the passing of your spouse. The surviving spouse must be 60+ (or 50+ and disabled) to begin survivor benefits. There could be additional survivor or retirement benefits if you have minor children.

  1. How will previous marriages impact SS benefits?

If you are married for at least nine months and your spouse dies, then you are eligible for his SS retirement benefit. If you marriage lasts up to your 10-year anniversary and then is ended by divorce, then you are eligible for ex-spousal and ex-retirement benefit.

If you are divorced and remarry then you forfeit receiving spousal benefits based on your ex-spouse’s earnings. If you were widowed and remarry before age 60 you also forfeit survivor benefits from your deceased spouse’s earnings. If you remarry after 60 you maintain the survivor benefits from your previous spouse.

Hopefully, any potential marriage won’t let Social Security be the deciding factor in whether to wed. However, some combinations of being widowed or divorced, remarrying a relatively low earner, and remarrying before age 60 will result in significant loss of social security benefits.

  1. How does work that wasn’t covered by SS impact SS benefits?

Public school teachers in Nevada do not pay into SS so those earnings do not build up their own SS benefit. About 14 other states including CA do not have teachers as part of SS. Other public employees may also fall outside of SS. An important related story for these workers are under-funded public pensions – an issue I’ll take up another day!

There are two general situations. In the first the “teacher” is married and her spouse had a “regular job” where he has paid into SS and hence will be entitled to their own retirement benefit of, say, $2000 monthly. It appears that the Teacher had no SS earnings but could draw a spousal benefit of $1000. Unfortunately, the SSA will take into account her pension and reduce her spousal benefit by two-thirds of her pension check. This will likely offset any spousal benefit. For example, if her monthly pension is a modest $1500 then two-thirds of this or $1000 will offset her spousal benefit. The offset also applies to widow benefits; if he passes away then the full widow benefit of $2000 is reduced to $1000.

What if the Teacher also worked for several years in SS covered employment – an after school tutoring business or selling real estate in the summer? The first $895 of your typical monthly earnings (Averaged Indexed Monthly Earnings or AIME in SSA lingo) would normally be 90% matched by your SS benefit. The next few thousands of AIME are matched at 32% and then higher amounts at 15%. If the Teacher had worked 20 years in SS-covered employment then her first match is only 40% not 90%! For each year beyond 20 she works the percentage goes up by 5% until at 30 years there is no reduced percentage. A year of “substantial earnings” is $23,850 in 2018. The maximum “penalty” for not always paying into SS is $447.50 a month.

  1. How are SS benefits taxed?

For everyone, SS benefits are at least 15% tax-free. For most higher-income households SS benefits will be 85% taxable income. The formula for couples is that if adding one-half their SS benefits plus other taxable income such as retirement withdrawals plus tax-free income (muni’s) are over $44,000, then SS is taxable income up to 85%. In the range of $32,000 to $44,000 SS is taxed only up to 50% and for “provisional income” below $32,000, SS benefits are completely tax-free. Single people have the same structure with the breakpoints at $25,000 and $34,000.

Got all that? Of course, I am glad to discuss your particular SS situation along with the associated retirement decisions. Give us a call!


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