Chapter 3 - “Social Security”

In this episode, podcast host and author of “Control Your Retirement Destiny” covers Chapter 3 of the 2^nd edition of the book titled, “Social Security.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 3 – Podcast Script

Hi, this is Dana Anspach, the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of the books Control Your Retirement Destiny and Social Security Sense. CYRD was initially published in 2013, and the 2nd edition came out in 2016.

Why a 2nd edition? Well in Nov. 2015, some of the Social Security laws changed. The 2nd edition incorporates all these changes. The good news is that in this podcast, where we cover Chapter 3 on Social Security, everything we’ll talk about uses current rules.

And, even better news, the book has incredible 5-stars reviews on Amazon. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

Ok, let’s get started. In this podcast, I’ll be covering the highlights from Chapter 3 on the topic of “Social Security.”

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I never set out to be an expert on Social Security. So how did it happen? From 2008 to 2017, I wrote an online advice column called MoneyOver55. My most popular topic was Social Security. I had so much content online on this topic that email questions came pouring in, not only from consumers but also from other financial professionals.

To this day, many of my colleagues call or email me with Social Security questions. While I was working on revising this chapter for the 2nd Edition of this book, I received one of those calls. It was from a friend of mine, a financial planner in Colorado.

She had a client, whom we’ll call Diane. Diane is a widow. Her husband, Paul, had passed away at 57.

Diane is now age 62. She is no longer working - but she had worked for most of her life. Here’s how SS works for Diane.

She is eligible for either her own Social Security retirement benefit, or a survivor benefit, which will be based on her deceased husband Paul’s work record.

Diane wasn’t exactly sure how it all worked, but she heard that she could collect a survivor benefit as early as age 60. Naturally, at 60 she went to the Social Security office to learn more. They told her she could collect this survivor benefit now, but that she would get more if she waited until age 62. Technically this was true.

Just before her 62nd birthday she went back to her local Social Security office. They told her now that she was 62 she could collect her own retirement benefit amount, which would be $1,791 a month. But they also said if she waited until 66 she could collect a widow benefit based on Paul’s Social Security, which would be $2,706 per month.  (This higher widow benefit is based on the amount Paul would have received if he had lived and filed at his age 66). Technically this information they provided to her was also true.

So, what was the problem with this information given to Diane?

If Diane decides not to do anything and to wait and claim a widow benefit at her age 66, she will forfeit up to $200,0000 that she can get over her lifetime.  This $200,000 is measured in today’s dollars.

$200,000!

How can she get so much more?

There are claiming strategies that the workers at the local Social Security office were not aware of. It’s not their fault. It takes years to understand all the claiming choices available - and this is not what your Social Security office worker is trained to do.

So what can Diane do to get $200,000 more?

Well, normally when you file for Social Security benefits you are deemed to be filing for all benefits you are eligible for. Diane is eligible for her own retirement benefit or a survivor benefit. It makes sense that the Social Security office will check and see which one will pay her more if she files right now. But, widows and widowers have a very special option – they can file something that I call a restricted application. This means they can CHOOSE to apply for only one benefit type – either their own or the survivor benefit – and that preserves their option to later switch to the other benefit type.

“Whoa,” you might be thinking. This sounds complicated. It is.

Let’s put some numbers to it. At age 60, if Diane would have filed for her survivor benefit she would have gotten $1,767 per month. She didn’t because they told her she could get more by waiting until age 62.

At 62, she can get $2,025 per month as a survivor benefit. When she files, if she restricts her application to only that benefit type, her own retirement benefit remains untouched. Now, she collects $2,025 per month, her survivor benefit amount, plus inflation adjustments, all the way to age 70. At age 70, she files for her own benefit which by then, will be $3,674 per month.

Now let me clarify. She doesn’t get both her survivor benefit and her retirement benefit at the same time. At age 70, when she begins to receive her $3,674 monthly retirement benefit, her survivor benefit stops.

And why is her own benefit so much at age 70? Because you get a lot more per month if you wait until age 70 to start benefits. In her case, it works well, because while she is waiting until she is able to collect on the survivor benefit.

Following a claiming plan puts a lot more money in Diane’s pocket over her retirement years.

This is just one example of how knowing the rules can increase your retirement income.

The rules we just talked through, that apply to Diane’s situation apply to all widows and widowers. In this podcast we’re going to cover more rules for survivors. In addition, we’ll cover the following: something called your Full Retirement Age, a special rule that applies to government workers, rules for ex-spouses, what happens if you continue working while receiving benefits, and last, we’ll look at how Social Security benefits are taxed. And believe it or not, we’re going to cover it all in about 15 – 20 minutes.

We’ll start by looking at survivor benefits.

In the last podcast on Chapter 2, we introduced a couple, Wally and Sally, whom we follow throughout the book. Wally and Sally have a few Social Security choices that they were not aware of.

In version one of their retirement plan, they planned to retire at ages 65 and 63, and each planned to start their own Social Security retirement benefits right away. Can they do better?

Yes.

Wally and Sally are making a classic mistake in how they look at Social Security. They are each looking at their own benefits independently of each other. They do not understand how survivor benefits work.

Because so many married couples don’t understand how survivor benefits work, many older widowed Americans have a monthly income much lower than it could have been. We don’t want that to happen to Wally and Sally. And I don’t want that to happen to you either.

Here’s what Wally and Sally need to know. When one of them passes, the survivor continues to receive the larger of either benefit amount. So if Wally passes, and his monthly check was bigger than Sally’s, then Sally can continue to get Wally’s check and her check stops. You don’t receive a survivor benefit in addition to your own benefit.

For married couples, this can be very powerful. If you file for benefits early, at age 62, you get a reduced monthly amount for life. This means a reduced survivor benefit also. If you wait and file for benefits at age 70, you get a much larger monthly amount. This larger amount is now  the survivor benefit for either spouse.

Wait, you might say, “I can’t afford to wait until age 70.” That’s what Wally and Sally thought.

Wally and Sally didn’t know that they could save money in taxes and get more Social Security if they took money out of their IRA starting at age 65 while having Wally wait until age 70 to begin his Social Security retirement benefit.

By doing this, the survivor benefit at Wally’s age 85 is projected to be $48,000 a year. If Wally starts his benefits at age 65, as he originally planned, the survivor benefit at age 85 is only $34,000 a year.  That’s a big difference.

And, in the meantime, they don’t have to scrape by! They can withdraw a little extra from their IRA – because later they’ll have a larger Social Security benefit later, and need a little less from the IRA later.

How much of a difference does this make for Wally and Sally? In the case study in the 2nd Edition of the book, if Wally and Sally each claim benefits the year they retire, over 20 years they estimate they’ll receive about one million four hundred and seventy-five thousand in total Social Security benefits.

What happens if they follow a special claiming plan? They get one million seven hundred and thirty-six thousand over that same 29 years.

That’s $260,000 more total dollars from Social Security over their projected lifetimes.

Granted, that’s $260,000 stretched out over almost thirty years. To be mathematically correct, we must translate that number into today’s dollars. This is a concept called “Present Value”. A dollar twenty years from now is not worth as much as a dollar today – so present value is a math formula that translates dollars in the future back to what they would be worth today. In today’s dollars, following a delayed Social Security plan is worth over $100,000 to Wally and Sally.

Wally and Sally’s case, and Diane’s that we went over earlier, are just two examples of how a smart plan can help you get more out of Social Security.

There are many rules to consider. And, in November 2015, some of the rules changed. For example, if either you or your spouse, were born on or before January 1, 1954, you need to take a close look at your ability to use something called a restricted application for spousal benefits.  The Wally example in the 2nd edition of the book was born March 15, 1952, so this special rule applies to him – and while he delays his own retirement benefits he is actually able to collect a spousal benefit! Pretty cool.

For the 3rd edition of CYRD, which I am currently working on, Wally will be born two years later, and the new case study will reflect an updated plan for people that are not eligible for this type of restricted application.

Now let’s move on and talk about Full Retirement Age. Many Social Security rules hinge around this magic age. And it varies based on your date of birth. For those born January 2, 1943, to January 1, 1954, your Full Retirement Age is 66. If you’re born outside that range, you can look up a Full Retirement Age chart on the Social Security.gov website, or find it in either my Control Your Retirement Destiny or Social Security Sense books.

There are many reasons why Full Retirement Age is so important. If you start benefits before Full Retirement Age, your benefit amount is reduced. If you start benefits after Full Retirement Age you get an increase that is called a delayed retirement credit.

If you were born on or before 1/1/1954 Full Retirement Age also impacts your ability to file a restricted application.

If you are born before 1954 and divorced and want to file for a spousal benefit on your ex-spouse’s earnings record, while preserving your ability to later file for your own retirement benefit, then you should not file until you reach your Full Retirement Age.

Full Retirement Age also impacts your ability to work and receive you Social Security benefits.

For example, if you start your benefits before Full Retirement Age, you will be subject to something called the earnings limit. That means if you earn too much money, some of your Social Security benefits must be paid back. What is too much? In 2018, the earnings limit is $17,040 per year or $1,420 per month. This limit is indexed to inflation so it usually increases each year. There is also a special rule, and a much larger earnings limit that applies during the calendar year that you attain Full Retirement Age.

The good news - Once you reach Full Retirement Age, you can earn any amount and collect your Social Security. Yippee!

Another rule I must cover is a rule that impacts many teachers, law enforcement officers, firefighters, postal workers, and other folks who may work for a government agency. If you work for an agency that has its own pension system AND you do not contribute to Social Security, you are unlikely to get the amount of benefits that show up on your statement.

For those of you in this situation, the technical terms for the rules that apply to you are the Windfall Elimination Provision, and the Government Pension Offset. Since you don’t pay into the Social Security system there are special rules in place to prevent what is called double-dipping.

However, many people have worked at jobs where they did pay into Social Security, and then worked for an agency where they don’t pay in. This is fine. The problem is when this situation occurs, the numbers you see on your Social Security statement are probably not accurate. Too many people in this situation see the numbers on their statement and naturally assume they’ll receive that plus their pension. If you have years of work under a system where you didn’t pay in to Social Security, don’t count on what you see on your Social Security statement.

Now, on to ex-spouse’s. A few minutes ago, I mentioned the ability to file for a spousal benefit based on an ex-spouse’s work record. Here’s how it works.

If you have a marriage that was at least 10 years in length, both spousal and survivor benefits are available based on your ex’s work record. This does not reduce the benefit they receive. And, if your ex has remarried, it does not impact their new spouse’s ability to get spousal or survivor benefits. Crazy huh? You know what this means? If someone was married 5 times for 10 years each, they could have 5 ex’s all collecting a spousal benefit. These spousal benefits are usually most applicable to you if you didn’t work much, or if you were born 1/1/1954 or earlier.

The last topic to cover in this podcast episode is how Social Security benefits are taxed.  

Here’s how it works - If Social Security is your only source of income, you pay NO taxes on it. That sounds great. Except, if you’re like most people, you’d prefer to have other income in addition to Social Security.

If you have other sources of income, up to 85% of your benefits may become subject to federal income taxes.

I say up to 85% because, well, we’re talking about the IRS here, and it’s not simple. Your income flows into a formula – and the formula spits out the portion of your benefits that will be taxed. Because of how it all works, with smart planning, many middle income retirees with savings of less than $1M, may be able to pay a lot less in taxes by drawing out of their IRA first, and waiting until age 70 to begin Social Security.

We’ve now covered widow and survivor benefits, your Full Retirement Age, the earnings limit, what to watch out for if your work for an entity where you don’t pay into SS, rules for ex-spouses and we’ve briefly looked at how benefits are taxed.

Please, don’t take anything I’ve said as personal advice. The rules are complex and the right choice for you depends on a lot of factors. Hopefully, you’ve learned there may be more to look into before making an off the cuff decision.

In the Chapter 4 podcast, we dive deeper into taxes, and look at how Wally and Sally can reduce their tax bill in retirement.

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Thanks for joining me for this podcast summarizing Chapter 3 of Control Your Retirement Destiny. To learn more, get a copy of the book on Amazon, or to work with a professional retirement planner to put together your own customized plan, visit us at SensibleMoney.com.