Opus News & Insights

Navigating the Social Security Maze
Thursday, February 12, 2015

Key Questions to Consider

Determining when to start receiving Social Security benefits should be an easy decision, but often it is not.  There are a myriad of methods to collect benefits, all producing dramatically different income streams for the remainder of your life.  This piece outlines common questions surrounding Social Security.  We understand there are exceptions and complexities to almost all personalized scenarios.  Please contact us directly to receive a recommendation tailored to your specific circumstances.

What is full retirement age for Social Security?

The full retirement age is 66 for people born between 1943-1954, and gradually rises to 67 for those born in 1960 or later.  Early retirement benefits are available at age 62 at a reduced rate.

Do my Social Security payments increase if I delay taking benefits?

Yes, payments increase by approximately 6.5% per year between ages 62 and 66, if you delay payments.  Additionally, benefits are increased by approximately 8.0% per year, if you delay payments between ages 66 and 70.  Although your benefit rate increases, significant income is foregone each year that you delay benefits.  For example, if you delay receiving a $22,000 annual benefit at age 62, that same benefit will pay approximately $41,000 per year at age 70, inflation excluded.   However, you would forego over $175,000 in cash payments by waiting until age 70.

Since my annual benefit rate increases, should I always delay taking payments?

Not necessarily.  Numerous current financial articles address the decision to take benefits early or delay.  We often find that the mainstream articles simply add up cash payments received from different benefit start dates.  Therefore, as life expectancies have increased, most articles advocate  delaying payments.  However, we find that their analysis ignores two important topics.  First, from a lifestyle perspective, we place much greater emphasis on receiving cash flows at a younger age, in your sixties rather than your eighties and nineties.  Second, we find that their analysis often ignores a rate of return that can be earned from receiving benefits early.  As a result, we make recommendations based upon a number of factors, not just total cash received.

So, when should I begin Social Security benefits?

There are many factors to consider when determining to start receiving Social Security benefits, especially if you are married.  However, a general rule of thumb is that your breakeven year is approximately 15-20 years from the first date of payment.  For example, let’s assume you are trying to determine whether to start Social Security benefits at age 66 or 70.  If you begin benefits at age 66, that would be the correct financial decision if your life expectancy is less than approximately age 81 (66+15).  From a strict cash flow basis, you would delay benefits if your life expectancy exceeds approximately age 81.  Again, the decision involves many quantitative and qualitative factors that should be examined on a case-by-case basis.

Can my lower-earning spouse really receive 50% of my benefit?

Yes, a lower-earning spouse can collect up to 50% of the benefits of the higher-earning spouse; this is in addition to the amount received by the higher-earning spouse.  Importantly, you cannot collect on the spousal benefit until the higher-earner files for his or her Social Security payments.  If the lower-earning spouse takes any benefits prior to full retirement age, they will not be able to attain the full 50% benefit of their spouse.  Many couples utilize a “File and Suspend” strategy that allows the lower-earning spouse to collect the 50% spousal benefit while the higher-earning spouse waits until age 70 to collect payments.

Should I try to maximize the survivor benefit?

Typically.  For most married couples, articles recommend maximizing the benefit of the higher-earning spouse as long as possible.  In almost all cases, a surviving spouse will get 100% of the higher-earner’s benefit upon the higher-earner’s death.  As life expectancies continue to increase, it has become more common to utilize this strategy in case one spouse lives well beyond 80 years old.

Should I always delay taking Social Security if I’m working?

Typically.  If you are between ages 62 and 66, collecting Social Security and working, $1 in Social Security benefits will be deducted for each $2 you earn above $15,480.  Although often misunderstood, this forfeited money is not really lost because your Social Security benefit is recalculated and increased at full retirement age.  There are no Social Security deductions once you reach full retirement age (currently age 66), regardless of income.

Will the Social Security system go bankrupt?

Highly unlikely.  Social Security benefits are paid by two sources, payroll taxes and the Social Security Trust Fund.  The Trust Fund was initially accessed in year 2010, the first year that benefits paid exceeded payroll taxes.  Most projections predict the Trust Fund will be depleted between years 2030 and 2035.  Importantly, even after the Trust Fund is depleted, payroll taxes will still fund approximately 75% of benefits.  Lawmakers will need to increase payroll taxes and/or reduce benefits to fund this gap.  We are firm believers that Social Security will persist much longer than public opinion, as it would be political suicide for lawmakers to vote against Social Security.

How will lawmakers keep Social Security solvent?

Lawmakers have a variety of tools at their disposal, but the solution will likely include a combination of higher taxes, lower payouts, higher retirement ages, and means testing to reduce payments to the wealthy.  History has demonstrated that changes to Social Security will likely be announced years in advance and won’t be retroactive.  In fact, most experts believe that individuals who are age 55 and older will not experience any changes to the benefits currently in place, even if reforms are enacted.

Are my Social Security benefits taxed?

Yes, as much as 85% of benefits to married couples are taxed when their income exceeds $44,000 ($34,000 for individuals).  Even at lower income levels, up to 50% of benefits are taxed.  It is widely believed that these percentages will increase when Social Security reforms are enacted.

Key Takeaways

  • Although benefit rates increase if you delay taking payments, you forego significant income during each year that you wait.
  • In almost all cases, a surviving spouse will receive 100% of the higher-earner’s benefit upon the higher-earner’s death.
  • Although projections predict the Social Security Trust Fund being depleted around 2030, we believe Social Security will persist much longer than public opinion indicates.
  • Up to 85% of benefits are taxed, and future changes, i.e., increases to benefit taxation is a likely lever lawmakers will pull to shore up the system.
  • Social Security decisions are complex and require case-by-case analysis.

Please call us at (513) 621-6787 for more information or a recommendation tailored to your specific circumstances. 

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