Social Security Planning: Why It Requires More of Your Attention

Social Security has gotten a lot of attention in the media recently.  As a result, I answer questions from clients regularly that primarily ask, “Will Social Security exist when I retire?” The answer is yes, of course, for two main reasons:  

1) The federal government owns a printing press for currency as was demonstrated spectacularly during the COVID crisis; and 

2) the younger workers (which is a rather large group of people making more money than you did) are paying more into the system.   

Thus, it is important to be aware of the rules that surround your benefit. Too often, folks file for Social Security without doing any planning whatsoever.  We cannot stress enough the importance of understanding how your benefit will impact you.

I came across this good article recently, which is an excerpt from a new book titled Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track by Mark Miller. Mr. Miller is a journalist and author who writes for publications such as Reuters and The New York Times. If you’re like me, you don’t have time to read an entire book on the subject. Instead, I recommend reading the article, “How Social Security Benefits Are Calculated and When to Claim”.   

I’ve summarized the key points below:

What is the overall theme of this article?

1. Social Security is the only source of guaranteed lifetime income for most Americans. Let that sink in.
2. Social Security is especially important for women who tend to outlive men and also tend to earn less during their lifetimes, resulting in a smaller benefit.
3. The same is true of citizens of color who overwhelmingly hold jobs that do not provide a 401(k) program when compared with white citizens.

Why is Social Security so Valuable?

1. Your future benefit is funded by you and your employer and all the folks younger than you contributing to the system.  Each working citizen contributes up to 15.3% of their gross wages toward Social Security each year.  That’s a large number.
2. It is savings that accrues for many years and provides steady income for you after you can no longer work.
3. The program provides a cost-of-living adjustment as you age and draw on your benefit.  As inflation increases, so does your benefit.  The same is not necessarily true of your personal savings.
4. Higher wages from the workers behind you continue to fund Social Security as the cost of living increases from year-to-year and decade-to-decade.

How are Social Security Wages Calculated?

1. The benefit is calculated based on your earnings in dollars during your working years.
2. In order to receive Social Security, you or your spouse must work for at least 10 years past age 22.
3. If you did not work or earned less than your spouse, you will be eligible for an increased Social Security benefit based on the higher-earning spouse’s benefit.  If that spouse passes before you do, you will receive their benefit after their death.

When Should I File My Claim?

1. You may file as early as age 62, but that is generally not recommended unless you have no other source of income or unless you are in poor health and anticipate passing away before you can claim your full benefit.
2. You may wait until age 70 to file a claim.   Waiting results in a much larger benefit.  This is particularly important for a spouse with lower income who anticipates outliving the higher-earning spouse.
3. If you live a long time, a higher benefit will be much more necessary as your income will most certainly be eclipsed by your spending.

Social Security and Taxes: How Propel Can Help

Keep in mind that your Social Security benefit will almost definitely be taxed if you have any other source of income – IRA distributions, taxable dividends and capital gains, part-time job. Incurring additional taxes during a time when you are winding down work or have limited income can really eat into your savings.  

We highly recommend running a tax estimate BEFORE you decide to file your claim.  You can work with your tax preparer to determine the consequences of filing for Social Security.  If you do your own taxes or if your tax preparer simply prepares tax returns and does not engage in proactive planning, our firm has invested in software specifically designed for financial planning clients.  This exercise can give us a general idea of the impact of your benefit on your tax situation.  Please contact your advisor for more details on how you can implement the right tax strategy for you

- Danielle Woods, Financial Advisor and Attorney, daniellewoods@propel-fa.com