By Dave Coen
Open up Google. Search “What do I need to know about Social Security?” Did you get the same 3,480,000,000 results I got? It’s unreal how much information is at our fingertips. But what that means is that we need to be careful what information we consume. Because when it comes to financial matters, one incorrect assumption or detail can be financially devastating.
It’s no secret that Social Security is complicated. But it’s such an important piece of your retirement income plan that we want to clear up some Social Security myths so you can have the right information in your hands when you’re ready to make decisions.
Myth #1: Money’s Running Out
There have been rumors floating around for years that Social Security won’t be around by the time we retire. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2020 and the system will rely on incoming interest payments to make up the deficit until 2035. At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. (1)
Unfortunately, you can’t control whether the Social Security program fails or succeeds. Your best bet is to educate yourself and plan accordingly. Create an account on the Social Security website so you can stay on top of your current benefits and know where you stand. There is plenty that could happen between now and 2035 that could impact the program, so don’t believe the assumption that there will be no money left for you by the time you retire.
Myth #2: Social Security Is Like A Savings Account
Since you and your employer are contributing a hefty amount to Social Security each paycheck, it’s easy to see how people think it’s like a savings account, where the money you contribute is the money you receive. But it’s not. What happens is that taxes pulled from individual paychecks are pooled together and used to support those currently receiving benefits. Your contributions are supporting retirees, and when you retire, the money others pay into the system will support you.
In 1960, the number of contributing workers-to-beneficiaries ratio was 5:1. (2) The most current data tells us it is now 2.8:1, with a prediction of 2.2:1 in 2035. (3) So while the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. As time goes on and the life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than what you thought they would be.
Myth #3: All’s Fair In Love And War (And Social Security)
Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), with an earnings cap of $132,900. If you earn that amount, and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,960.80. (4) If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out. Before you hate your neighbor, remember that there is a cap on his Social Security benefits so it would be unfair to also ask him to contribute more but not benefit more.
Myth #4: 65 Is The Magic Number
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount you receive.
Full retirement age (FRA) changes based on the year you were born. For those born before 1943, FRA was 65 years. For those born between 1943-1954, FRA is 66 years. Starting in 1955, two months a year is added until the FRA becomes 67 for those born in 1960 or later. (5)
If you wait until reaching full retirement age to begin collecting Social Security benefits, you will receive your full Primary Insurance Amount (PIA), which is the full benefit you have earned. If you decide to collect early, your benefit will be reduced by 6.67% per year until your FRA, up to three years. (6) Beyond that, the benefits will be reduced by 5/12 of 1% per month. Remember that the earliest you can collect Social Security retirement benefits is age 62.
Myth #5: Your Benefit Amount Never Changes
As we just learned above, collecting your Social Security benefits before you reach your full retirement age will result in you forfeiting a percentage of what you have earned and accepting a lower payment. This is obviously before consideration of the additional years you would be getting the decreased benefit. Nevertheless, did you know that for every year beyond your FRA that you delay taking benefits, the value increases by 8%, all the way up until age 70? There is nowhere else you can get an 8% return guaranteed by the U.S. government! (7) This means that your benefit amount is not fixed, and depending on when you begin to collect, you will either leave money on the table, receive exactly what you’ve earned, or even make out with some extra.
Myth #6: Staying In The Workplace Longer Doesn’t Make A Difference To Your Benefits
This is one of those myths that is partly true. Once you reach full retirement age (FRA), it is true that your benefit amount will not be affected by your other income. However, that changes if you begin collecting your benefit while below your FRA and have another source of income. There is a set limit that, when surpassed, your benefit is reduced.
For 2019, that limit is $17,640 if you are not yet in the year in which you reach FRA. For every $2 you earn above $17,640, your Social Security benefit will be reduced by $1. During the year that you reach FRA, the limit is $46,920. When you exceed that during your FRA year, your benefit will be reduced by $1 for every $3 you earn. (8) Then, as soon as you reach FRA, all limits are lifted. You can earn as much as you want, and it will not affect your Social Security retirement benefits. These benefits are not “lost,” however. If your benefits were reduced because you earned too much prior to reaching FRA, you will get these benefits back when your payment is recalculated to account for the reduction associated with excess earnings.
Myth #7: You Can Change Your Mind
A shocking 38% of people incorrectly believe they can simply switch their claiming strategy with no repercussions after they’ve made their official choice. The truth is that you can withdraw your claim and reapply at a future date, however, this is not done without consequence. (9)
The Social Security website states that you may withdraw your claim only once within your lifetime, and it must be done within 12 months of the original date you applied. Furthermore, you must repay all the benefits you and your family received, including all benefits your spouse or children received, whether they are living with you or not. (10) If you miss that 12-month window, you can suspend your benefits, but only if you have reached FRA but have not turned 70.
Myth #8: Your Claiming Strategy Affects Your Ex-Spouse
Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. With that being said, some criteria need to be met to be able to claim benefits based on an ex-spouse’s record. You must have been married for 10 consecutive years, have not remarried (unless your later marriage has already ended by annulment, divorce, or death), and have divorced at least two years before applying. If you meet these criteria, you are entitled to either your full benefit or up to half of your former spouse’s benefit, whichever is greater. (11)
Myth #9: Your Benefits Become Active As Soon As You Apply
Social Security, like most other complex programs, requires some time to process and begin. It is generally recommended that you file for benefits around three months before you need your first payment. However, your application can only be processed a maximum of four months before benefits are scheduled to begin. This means that if you are planning on starting as soon as you are eligible, at age 62 and one month, you cannot apply before you are 61 years and 10 months old. (12) Keep in mind that your first benefit payment will always be 1 month behind the start date. Therefore, if you apply to start your benefits at 65, you will get your first check in the first month after your requested start date, at 65 years and 1 month.
Myth #10: Social Security Is A Headache
While it may seem like there is a lot of stress involved with making sure you optimize your Social Security benefit, the fact is that Social Security remains a major piece of your retirement puzzle. It was designed to replace 40% of an average worker’s wages, (13) and that’s money you don’t want to miss out on. However, there is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional who can provide you with confidence and make the whole process much less overwhelming.
Get Your Information From The Right Source
Trust me, you don’t want to mess around with your money. My goal is to educate you and provide you with the right information that will empower you to make decisions in your best interest.
If you are preparing for retirement and want to partner with someone who is passionate about helping you maximize your Social Security benefits and pursue your ideal retirement, get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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Registered Representative with Cetera Advisor Networks LLC, Member FINRA/SIPC. Advisory services offered through SageView advisory group, LLC. Cetera is under separate ownership from any other named entity. CA insurance license #0G82578
This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought.
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(2) https://www.ssa.gov/history/ratios.html
(3) https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
(4) https://www.ssa.gov/oact/cola/cbb.html
(5) https://www.ssa.gov/planners/retire/retirechart.html
(6) https://www.ssa.gov/planners/retire/applying2.html
(7) https://www.ssa.gov/planners/retire/1943-delay.html
(8) https://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2019.html
(9) https://time.com/money/4762608/social-security-strategy-retirement/
(10) https://www.ssa.gov/planners/retire/withdrawal.html
(11) https://blog.ssa.gov/ex-spouse-benefits-and-how-they-affect-you/
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