One of the most neglected retirement decisions is how and when to claim your Social Security benefits. Many people take their best guess instead of meeting with a financial advisor and building a strategic plan. I can’t stress enough--Social Security is too important to base your choice on what people are saying around the water cooler.
Almost 90% of people 65 and older are collecting Social Security, making it an important topic for nearly every retiree. Let’s look at some common questions people have.
What role does Social Security play in retirement?
Social Security plays a foundational role in retirement income. When it was established by Franklin D. Roosevelt in 1935, it was designed to replace part of a retiree’s income, but not all of it. Social Security was intended to work as one leg of a “three-legged stool” in retirement, meaning Social Security would complement company pensions and personal savings to provide a comprehensive retirement plan.
Today, the average Social Security benefit is less than $20,000 per year, which is not enough for most retirees to live on. As companies have all but eliminated employee pensions, the third leg of the stool--personal savings and investments--is more important than ever. It’s also imperative for retirees to understand Social Security and maximize their benefits.
How do taxes play a role in Social Security?
Social Security was not meant to be taxed when the program was created nearly 90 years ago. However, taxes were imposed and increased throughout the years. Today, the Social Security Administration estimates more than half of beneficiaries are subject to taxes. Here’s the breakdown:
Up to 50% of your benefits may be subject to income tax if:
- You are an individual with a provisional income between $25,000 and $34,000 per year
- You are married and have combined provisional income between $32,000 and $44,000 per year
Up to 85% of your benefits may be subject to income tax if:
- You are an individual with a provisional income more than $34,000 per year
- You are married and have a combined provisional income more than $44,000 per year
At Asset Preservation Tax & Retirement Services, we emphasize the importance of tax planning as part of a holistic retirement plan. You may be able to avoid crossing those income thresholds by utilizing a tax-advantaged account like a Roth IRA, which allows for tax-free withdrawals in retirement. Talk with your financial advisor to create an efficient plan that minimizes the taxes you’ll pay.
How can I maximize my benefit?
Many Social Security strategies were eliminated in 2015, however, there are still important factors to consider, especially for couples. Couples do not have to file for Social Security at the same time; they can stagger their benefits. This means one spouse can collect their benefits at Full Retirement Age while the other allows their benefit to grow. (Your benefits will grow 8% each year between Full Retirement Age and age 70.)
When one spouse passes away, the surviving spouse receives the larger of the two benefits. Because of this, couples may want to consider collecting on the smaller of the two benefits early while allowing the larger one to continue growing until age 70. That way, when one spouse passes away, the surviving spouse will have more income to live on.
What is the future of Social Security?
The future of Social Security is uncertain. The fund is running out because so many baby boomers are collecting their benefits, and there are fewer workers paying into Social Security. The Social Security Administration predicts it will run out of reserves by 2034 and only be able to pay 78% of retirees’ full benefits. Your retirement plan should include Social Security, but it should not be dependent on it. You should create a plan so that you are able to live without it. Remember your three-legged stool, and be sure you have a plan that covers Social Security, any company pensions and personal retirement savings to get you through retirement.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.