Johnson County Estate Planning

Can You Increase Your Social Security Benefits?

“All you have to do is type ‘maximize Social Security’ into Google or any other search engine and you will get hundreds, if not thousands, of hits.”

The desire to get the largest possible benefits from Social Security is a relatively new phenomenon. For decades, people received their monthly benefit check and that was it. However, in the late 1990s, a new law let seniors over age 66 work without any reduction in benefits, says the article “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security” from Tuscon.com. The law led to loopholes that became known as “file and suspend” and “file and restrict.” In a nutshell, they allowed retirees to collect dependent spousal benefits on a spouse’s Social Security record, while delaying their own benefits until age 70.

Congress eventually realized that these loopholes violated the basic concept of the program. Benefits to spouses were always known as “dependent” benefits. To claim benefits as a spouse, you had to prove that you were financially dependent upon the other spouse to collect benefits on their record. However, the loophole let people who were the primary wage earner in the family claim benefits as a “dependent” of the other spouse. Five years ago, Congress closed that loophole.

More specifically, Congress closed the ability to file-and-suspend. It also put file-and-restrict on notice. If you turned 66 before January 2020, you could still wiggle through that loophole, and there are some people who are still eligible. That’s where the term “maximizing your benefits” originated.

Can you get a bigger Social Security check, if you don’t fit into the exception noted above? The only real strategy to maximizing your benefits is simply to wait. The equation is pretty simple. If you wait until your Full Retirement Age (FRA), you will receive 100% of your benefit rate. If you can wait until age 70, you’ll receive 132% of your benefit.

In some households, the higher income earner waits until age 70 to file for retirement, so that the surviving spouse will one day receive higher surviving spouse benefits.

But that’s not the best advice for everyone. If you or your spouse suffer from a chronic illness, it may not make sense to wait.

If you or your spouse have lost your jobs, as so many have because of the pandemic, then Social Security may be the safety net that you need, until you are able to return to some kind of paid employment.

There may be other reasons why you might need to take your benefits earlier, even earlier than your FRA. Some households start taking their Social Security benefits at age 62, as a way to augment other income.

If you don’t already have a “My Social Security” account set up on the Social Security Administration’s portal, now is the time to do so. The Social Security Administration stopped sending annual statements years ago, but you can go into your account and download the statements yourself and start planning for your future.

Reference: Tuscon.com (Feb. 10, 2021) “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security”

Do I Have to Pay Taxes during Retirement?

“Some retirees may be surprised to learn that a portion of their Social Security benefits could be subject to federal income taxes.”

Paying taxes when you aren’t working but are instead receiving income from a lifetime of working and Social Security is a harsh reality of retirement for many people. Figuring out how much of your income will be consumed by taxes is a tricky task, according to the article “What You Need to Know About Taxes and Your Retirement” from Next Avenue. Ignore it, and your finances will suffer.

Most households will pay about six percent of their retirement income in federal income tax, but that number varies greatly, depending upon the size of their retirement income. The lowest income groups may pay next to nothing, but as income rises, so do the taxes. Married couples with an average combined Social Security benefit of about $33,000, 401(k)/IRA balances of $180,790, and personal financial wealth of $87,000 could find themselves paying 10.5% to 20.9%.

Income taxes and health costs are most people’s biggest expenses in retirement. Income taxes are due on pensions and withdrawals from tax-deferred accounts, including traditional IRAs, 401(k)s, 403(b)s, and similar retirement accounts. The same goes for tax-deferred annuities. Required minimum distributions must be taken starting at age 72.

Roth IRA and 401(k) distributions are tax free, since taxes are paid when the funds go into the accounts, not when they are withdrawn.

If you have investments in addition to your tax-deferred funds, like stocks or bond funds, you also pay taxes on the dividends and interest paid to you. If you sell them, you’ll likely need to pay any capital gains taxes.

Learning that a portion of your Social Security benefits are subject to federal income tax is a shocker to many retirees, but about 40% of recipients do pay taxes on their benefits. The higher your income, the more taxes you’ll need to pay.

There may also be state taxes on your Social Security benefits, depending on where you live.

However, here’s the biggest shocker–if you work part time, you may forfeit benefits, temporarily, if you claim before your Full Retirement Age, while you are working. Claiming before FRA means that your benefits are subject to earnings limits—the most you can make from work before triggering a benefit reduction.

Social Security withholds $1 in benefits for every $2 earned above the annual earnings limitation cap. If you reach your FRA after 2020, that’s $18,240. If you reach your FRA in 2020, the annual exemption amount is $48,600.

Pension, investment income and any government benefits, like unemployment compensation, don’t count towards earned income.

Benefits that are withheld will be returned to you once you hit FRA when Social Security bumps up your monthly benefit to make up for the withholding, but this takes place over time.

Reference: Next Avenue (Sep. 17, 2020) “What You Need to Know About Taxes and Your Retirement”

When Social Security Makes the Most Sense

“When should you sign up for Social Security? It is a good question. Many seniors grapple with that decision, and understandably so, since the age at which you claim benefits will dictate how much money you will receive each month during retirement.”

There’s an unfortunate tendency to focus on how to get the most out of Social Security in total benefits, but that’s not always the right approach to determine when to apply for Social Security. Everyone has the same eight-year window—from age 62 to 70—when they can start applying for benefits, as explained in the article “Why Claiming Social Security at 65 Is a Smart Bet” from The Motley Fool. The year you were born determines when Social Security sets your Full Retirement Age, or FRA.

Whether you take Social Security at age 62, which is the earliest you can take it, or at 70, after which you’ve maxed out on monthly benefits and there’s no reason to delay, depends on many different factors. For example, do you expect to live a long time based on your family history? If so, it may make sense to wait. However, if you have a number of health conditions and expect to have a shorter life span, then take your benefits early and enjoy them—you earned them.

The most common age for starting Social Security benefits is at age 62. A much smaller percentage of seniors wait until age 70 to collect benefits. Doing so locks in a higher benefit for life, but if you don’t live much longer than 70, the benefit doesn’t matter quite as much.

Going from one extreme to the other points to a choice in the middle: age 65. That’s when Medicare kicks in. Some people get these benefits confused. They think that once they are eligible for Medicare, they are eligible for full Social Security benefits. This is not true. However, 65 is still a good age to start taking Social Security benefits for a few reasons.

• You’re not taking Social Security at the earliest age possible, so you have had two years for your benefits to increase.
• You’re not taking Social Security at the latest age. Therefore, if you don’t live into your 90s, you’ll still have had those years to enjoy the fruits of your labor.

The numbers-crunchers at Social Security work to make sure that everyone gets the same lifetime benefits, regardless of when they file. The logic is simple: claim early, and get a smaller benefit, possibly for a longer lifetime. Delay your claim, and the same amount of money in total will come to you, just in fewer payments.

There is another advantage for claiming Social Security around the same time you switch over to Medicare. Your Part B premiums will be directly paid from Social Security benefits. That means you’ll have some protection against rising premiums. That’s because of what’s known as the “hold harmless provision.” It is a provision that attempts to limit how much of a bite Medicare premiums can take out of Social Security benefits. It’s not a perfect solution, but it’s a little bit of a help.

Reference: The Motley Fool (July 10, 2020) “Why Claiming Social Security at 65 Is a Smart Bet”

Working and Collecting Social Security Benefits

“For most Americans, Social Security plays an important role in maintaining retirement security. The benefit payments represent an income stream that is free of default, investment, inflation and longevity (outliving your money) risks.”

For decades, Americans have taken comfort from knowing that no matter what else happened with their retirement savings, they would be able to get Social Security benefits when they stopped working. Even better, the benefit grows with inflation and continues for as long as the person or their spouse lives, explains the article “How working changes your Social Security benefits” from The Sun.

Workers and spouses who qualify for Social Security have the option of starting to receive benefits at any time from age 62 to 70. Benefits received before reaching Full Retirement Age (FRA) will be smaller than those received after a worker reaches their FRA. These amounts are worked out in a series of complex calculations by actuaries to ensure that everyone receives their fair share. If you retire later, after FRA, the monthly benefit will be higher. If you wait until age 70, the monthly benefit will have reached its maximum level.

Less well understood is the effect of continuing to work, while collecting Social Security benefits. You can decide to stay in the workforce and apply for benefits. However, if you claim benefits before your FRA and your income exceeds certain levels, there’s a reduction in the full monthly benefit that you would otherwise receive.

This is known as the Retirement Earnings Test, or RET. It does not apply to earnings from investments and pensions, but it does apply to earned income.

Someone who will be younger than their FRA during the entire calendar year will lose $1 in benefits for every $2 they earn above $18,240 in 2020. There was a $600 increase from the 2019 earnings test.

For every two dollars you earn above $18,240, Social Security will deduct one dollar from your benefits. However, the money that is withheld will be added back into your benefits when you reach FRA.

Let’s say you earn $20,240 in 2020 and you’re 62 years old. You’ll temporarily give up $1,000 in benefits for going $2,000 over the earnings limit test. However, you will get it back.

What if you are reaching FRA in 2020? The earnings test limit is $48,600 in 2021, a jump of $1,680 from the 2019 limit of $46,920. In this situation, once your earnings reach $48,600 in 2020, $1 in benefits will be withheld from every $3 you earn.

The typical response to learning how the RET works, is that it’s a harsh penalty and why work at all?

Some people stop working altogether or work less to avoid the penalty. That is a mistake. By continuing to work, once a person does reach FRA, Social Security increases the monthly benefit amount for the rest of the person’s life. Any benefits lost in earlier years are recouped. Think of it as a rescheduling of payments, from pre-FRA to post-FRA. It’s not a penalty, but another means of saving for the time when you are not working.

Reference: The Sun (June 21, 2020) “How working changes your Social Security benefits”

If You Plan to Retire This Year, Be Prepared

“Many people are looking forward to 2020, simply because it's the start of a new decade. However, if you plan to retire in 2020, then you clearly have your own set of reasons to get excited for the year ahead.”

If you’re sure that you are going to leave the working world and start your retirement life in 2020, better not put in your notice at work until you’ve done your homework. The Motley Fool article “Retiring in 2020? 3 Things You Need to Know” covers three important steps.

If you were born in 1958, then this is the year you celebrate your 62^nd birthday—which means you are eligible to collect Social Security. However, if you do, your benefits will be reduced as you have not yet reached your “Full Retirement Age” or FRA. People born in 1958 need to be 66 and eight months to reach that important milestone. At that point, you can collect your full benefit. Collect earlier, and your monthly benefit is reduced for the rest of your life.

Born in 1954 or earlier? Full retirement age for you is 66, if you were born between 1943 and 1954. If if you were born at the tail end of this range, then you can collect your full Social Security benefit this year. However, it still may pay to hold off on claiming benefits.

The longer you can delay tapping your Social Security benefits, the better. From the time you reach your FRA until age 70, your monthly benefit grows by about 8% each year. Few investments today have that kind of guaranteed yield. Some advisors recommend tapping retirement accounts first and delaying Social Security benefits as long as possible. It’s worth taking a closer look to see how this can be of benefit.

If you are planning to retire, but you’re not 65, you’ll need to find and pay for health insurance until you celebrate your 65^th birthday. You can enroll in Medicare a few months before your 65^th birthday, but if you’re 62, then you have a three-year health insurance gap. Private health insurance is extremely expensive, there’s no way around it. Before putting in that letter to HR that you’re retiring, get some real numbers on this cost. If your employer will consider having you work part-time so that you can maintain your employer-covered health insurance, it may be a good idea.

If you’re closer to age 65, then COBRA is a consideration, although it may still be expensive. Typically, COBRA allows you to retain your existing health coverage if you change jobs, or are fired, for a certain amount of time. However, you have to pay for the full cost of health coverage.

If your gap is only three months, then COBRA might make sense. However, if your gap is a year or more, then you need to be realistic about health coverage options. Pre-existing conditions and a limited marketplace for individual coverage may make this the reason you keep working until 65. You should also check the rules of going from COBRA to Medicare—they may not be the same as going from an employee plan to Medicare.

The more prepared you are for retirement, the more you’ll be able to relax and enjoy this new phase of your life. If these three points have made it clear that you’re not yet able to retire, understand that it is better to work a little longer to reach your eventual goal of retirement, then to find yourself struggling to pay bills and jeopardize a lifetime of savings because of unexpected expenses.

Reference: The Motley Fool (Dec. 28, 2019) “Retiring in 2020? 3 Things You Need to Know”

How Does Enrolling for Medicare Work with Social Security?

“Social Security and Medicare are social safety programs that Americans pay into during their working years through taxes.”

These two programs are interrelated and both will have a definite impact on your finances when you are retired, reports U.S. News & World Report in the article “How Social Security and Medicare Work Together.” Both were designed to help seniors and distribute wealth to the disabled and their families. Social Security was created to help with financial support, and Medicare helps with healthcare costs, like doctor visits, hospital stays and other treatment. They are separate but intertwined in some ways. Understanding how they work together can be helpful, when planning for retirement and while taking benefits.

Eligibility for Social Security and Medicare Both are federal programs managed by agencies within the government. The Social Security Administration determines who is eligible for Social Security benefits and who is eligible for Medicare. The SSA also carries out many administrative functions for Social Security, which can get people a little confused.

To be eligible for Social Security, you must earn enough credits during your working years. The minimum number is 40 credits. One credit is equivalent to $1,360 in earnings in 2019, and you can earn up to four credits per year.

To obtain Medicare benefits, you must be 65 or older, although it is sometimes available to younger people with disabilities and those with permanent kidney failure who require dialysis or a transplant. There are several different parts, including Part A for hospital or nursing home visits and some home health care, Part B for doctor services, outpatient care, and medical supplies, and Part D for prescription drugs. Medicare does not cover all needed health services, however, including long-term care, dental visits, eye exams and hearing aids.

If you are eligible for Social Security, you can start taking benefits at any time between age 62 and 70. However, the longer you wait, the higher your monthly benefit will be. If you start taking benefits before your full retirement age, you’ll get a reduction in your benefits. If you wait until full retirement age, you’ll get an increased benefit. If you wait until age 70, you’ll get the maximum benefit.

Medicare coverage for seniors begins when they celebrate their 65^th birthday. If you’ve taken Social Security by the time you turn 65, then you’re automatically enrolled in Medicare Parts A and B, when you turn 65. If you haven’t taken Social Security yet at age 65, then you’ll need to contact the SSA to apply.

Medicare has to be paid for by the individual. The amount owed is different for everyone. It is based on the person’s retirement income and the health plan they select. Most people don’t pay a premium for Part A, and Part B premiums are income dependent. Part D is also based on income.

The SSA looks at income listed on tax returns from two years before the person is enrolled in Medicare. If they got a big bonus in 2017 and retired in 2019, their Medicare premium may be increased. People have to let SSA know they retired and what their earned income is.

If you are receiving Social Security benefits and enroll in Medicare, note that your premiums will be deducted automatically from your Social Security payments. It’s easy and convenient. However, if you aren’t yet taking Social Security, you’ll receive monthly or quarterly bills for premiums.

Reference: U.S. News & World Report (December 4, 2019) “How Social Security and Medicare Work Together”

What Women Need to Know about Social Security

“Understanding the rules about Social Security benefits and when to start claiming Social Security can be difficult. However, they’re critically important, especially for women—since women typically live longer lives than men.”

Deciding when and how to claim Social Security benefits depends on several different factors, all of which are unique to each person’s situation. For women, there are additional financial realities to be aware of, according to the article “3 Things Women Must Know About Social Security Benefits” from Next Avenue.

First, the Earnings Limit Test. Many people end up taking their benefits before they reach their FRA—full retirement age. However, for those who keep working and want to claim benefits at the same time, there is the Social Security Earnings Limit test, which may lower benefits, while you are working. Any retirement benefits over the limit are withheld, until you reach your FRA. They are eventually paid to you.

Here’s an example: Dolores is turning 62 in December 2019. She currently earns $55,000 working full time. If she goes part time, her income will drop to $35,000. Her idea is to start claiming Social Security benefits at the earliest age, when her benefits would be about $1,170. Note that if she waited until her FRA, age 66 and six months, she would receive $1,616.

However, the 2019 earnings limit is $17,640. She earns twice that, so her benefit would be reduced by $1 for every $2 she is over the limit. Her annual Social Security payment of $14,060 would be reduced by half of her excess earnings, or $8,680. She’ll get the benefits back when she reaches FRA, but while she is working, she won’t get as much as she might have expected.

Social Security Benefits and Taxes. The general rule for this is that if a household’s combined income exceeds a certain amount, a portion of the taxes are taxed. The limits for determining the income level are not indexed for inflation, so every year more and more retirees fall into this tax range.

For single women who have an income of $34,000 or more, as much as 85% of Social Security payments for the year will be considered income and taxed as ordinary income. Married women filing jointly with a combined income of $44,000 or more will also have up to 85% of their Social Security payments for the year reported on IRS Form 1040 as income.

Medicare Premiums and Social Security Benefits. Consider your Medicare Part B premiums, before you consider claiming Social Security benefits. The Social Security and Medicare programs are separate programs, but each has a bearing on the other. The Social Security Administration collects Part B Medicare premiums and automatically deducts premiums from Social Security benefits before you receive them. This is often a big surprise to women. Their benefits are reduced, and they may not have included this in their budget.

Medicare B is the part that pays for doctors and outpatient procedures. There are co-pays and deductibles. However, generally speaking, Part B pays for about 80% of covered services. The amount that is paid depends upon the overall household income. The standard monthly premium is $135.50 per month, or $1,626 for the entire year. That’s a per-person cost. If you have a high household income, you’ll pay more for Part B—the range is from $160 to more than $460 a month per person.

Like many other aspects of retirement, you’ll need to do your homework and understand how Social Security works to make the best decisions about your benefits.

Reference: Next Avenue (Nov. 19, 2019) “3 Things Women Must Know About Social Security Benefits”

Retiring? 61 Is NOT the Magic Number

Social Security rules and regulations are the key to the magic retirement age.

For some reason, many American have come to believe the magic number for retirement is 61 and they are wrong, according to The Motley Fool’s article “Americans’ Ideal Retirement Age–and Why It’s Not Realistic.” The article is based on a survey from Bankrate that reveals adults across the board think that 61 is the ideal age to retire.

Unless you can live without Social Security during retirement, 61 is not your magic number. Most American retirees can’t live on Social Security alone and those benefits have a major impact on the ability of most retirees to keep up with their bills.  However, eligibility doesn’t start until age 62. The people in the survey either didn’t know they can’t collect Social Security until they turn 62 or they are assuming they can get by without it.

The average Social Security benefit check is just more than $1,400, which adds up to about $17,000 a year. If you are among those who have little or no money set aside for retirement, that’s a lifeline.

A large number of working Americans are way behind in their retirement savings. It’s estimated that around 42% have fewer than $10,000 set aside for the future. How will they retire at all, much less retire at age 61?

Even if you can manage to keep working until age 62, filing at that age has its own issues. Today’s workers need to wait until their Full Retirement Age, or FRA, in Social Security’s terms, to receive their full monthly benefit. The difference is large enough to make it worth the wait.

 Assume that your full retirement age is 67, but you retire at age 62. Instead of $1,400, your monthly benefit would be $980.

 However, what if you are among those who really want to retire at 61? You’ll need to have started with saving and investing for retirement at a relatively young age and have been willing to take a very aggressive position in your investments. If you started at age 26, with a goal of retiring at age 61, and you are employed by a company with an employee sponsored 401(k), you’d have had to contribute $1,500 a month for thirty-five years to amass enough money—if your investments were earning a steady 7%.

As you prepare for retirement, meet with an estate planning attorney for advice on asset distribution, as well as power of attorney and healthcare directives.

Reference: The Motley Fool (July 18, 2018) “Americans’ Ideal Retirement Age–and Why It’s Not Realistic”