Social
Security Planning

Though the “best” time to turn on Social Security depends on unique circumstances, many are familiar with different rules of thumb such as “Always wait until full retirement age to claim retirement benefits, or you’re leaving money on the table!” and “always take retirement benefits as soon as you’re eligible, or you’re leaving money on the table!”

Be wary of statements like these. When it comes to Social Security and retirement planning, there should be very few, if any, “hard rules”. The only way to guarantee the greatest cumulative retirement benefit over a lifetime is to know when that individual will pass.

Otherwise, this is a complex decision that needs to be made with careful analysis of one’s unique situation. Social Security income not only has apparent cash flow implications but can also affect tax liability and medicare premiums. An important factor to consider is how long will it take to recover foregone income if retirement benefits are delayed until full retirement age. It is important that Social Security and retirement planning are done in conjunction with one another, in consideration of a complete financial plan.

GENERAL ELIGIBILITY

Social Security is a federal social insurance program consisting of retirement, disability, and survivor benefits. An individual becomes eligible to receive Social Security retirement benefits by accumulating 40 Social Security credits. A maximum of 4 credits can be earned in a calendar year. Credits are obtained based upon annual earnings. In 2021, 1 credit is earned for each $1,470 of wages. So, a person earning $5,880 in 2021, even if all of the wages are earned in one quarter, receives 4 Social Security credits for the year. In other words, you must earn $5,880 in 2021 to get the maximum 4 credits for the year.

CALCULATING BENEFITS

Once determined eligible to receive Social Security retirement benefits, average indexed monthly earnings (AIME) must be calculated. AIME is determined by averaging the 35 highest earnings years (adjusted for inflation) and then dividing by 12. If a person works less than 35 years, the missing years count as zeroes.

The next step in determining Social Security retirement benefits is calculating the primary insurance amount (PIA). The primary insurance amount is the retirement benefit an individual will receive at full retirement age. The formula for calculating PIA is below.

• 90% of the first $996 of average indexed monthly earnings, plus
• 32% of indexed monthly earnings between $996 and $6,002 plus,
• 15% of average indexed monthly earnings over $6,002

FULL RETIREMENT AGE

Full retirement age for individuals turning 62 in 2021 is 66 years and 10 months. If an individual commences retirement benefits prior to full retirement age, the PIA will be reduced based upon the number of months benefits are commenced prior to full retirement age. At age 62, the earliest age at which Social Security retirement benefits can be received, an individual will receive approximately 75% of the amount that would have been received at full retirement age.

The Social Security Administration estimates that, for those turning 62 in 2021, the benefit will be about 29.2% lower than it would be at full retirement age.

DELAYED BENEFITS

If an individual delays receiving Social Security retirement benefits beyond full retirement age, delayed retirement credits are applied up to age 70. For those born in 1943 or later, delayed retirement credits increase the primary insurance amount by 8% simple interest each year, and are prorated monthly if delayed for less than a full year. By delaying receipt of retirement benefits until age 70, an individual can receive 132% of the amount they would have received at full retirement age.

SPOUSAL BENEFITS

A worker’s spouse may be eligible for Social Security retirement benefits when the working spouse commences their own benefits. The spouse’s retirement benefits will be based on the working spouse’s earnings. Depending on the spouse’s age at retirement, the spousal benefit can be as much as 50% of the worker’s PIA.

Just like Social Security benefits based on earned credits, spousal retirement benefits can be claimed as early as age 62. The spouse will receive a reduced retirement benefit if Social Security is claimed prior to reaching their full retirement age. For example, if spousal benefits are claimed at 62, rather than 66 and 10 months, the benefit will be reduced and the amount received will be equal to 32.5% of the working spouse’s full Social Security retirement benefit.

If a spouse is eligible for a retirement benefit based on their own earnings, and if that benefit is higher than the spousal benefit, the retirement benefit is paid. Otherwise, the spousal benefit is paid.

Once you and your spouse start receiving social security benefits, upon the death of your spouse, you will continue to receive your benefit, or your spouse’s, but not both.

TAXES

At inception, Social Security benefits were not meant to be taxed. However, that ceased to be the case when Ronald Reagan signed into law the 1983 Amendments. The amount of Social Security income that is taxable is dependent upon the recipient’s income.

In 2021, single filers with income between $25,000 and $34,000 will have to pay income tax on up to 50% of received retirement benefits. A single filer with an income greater than $34,000 will have to pay income tax on up to 85% of received retirement benefits.

Couples filing a joint return with income between $32,000 and $44,000 will be liable for income tax on up to 50% of received retirement benefits. Those with income over $44,000 will be subject to income tax on up to 85% of their received retirement benefits.

Consulting with a Certified Financial Planner for Social Security and retirement planning can help you assess your cash flow needs in conjunction with strategic tax planning. It is important to understand the tax consequences of a decision prior to making it, rather than receiving a surprise at the end of the year.

MEDICARE

Social Security income counts toward modified adjusted gross income (MAGI) which is used to calculate Medicare brackets. If Social Security retirement benefits are turned on during a year when other income will be high, this may affect one’s Medicare bracket. Managing Medicare brackets requires forecasted planning as these brackets are based on MAGI from two years prior. For example, to set Medicare cost for 2021, Social Security will consider the tax return filed in 2020, that details 2019 earnings.

Social Security retirement benefits are one piece to a retirement puzzle. Analysis must be done with concern to cash flow needs, time to recover delayed income, and tax and Medicare implications. At Park Place Financial we are experts in guiding clients through the process of understanding the big picture of Social Security and retirement planning. Click here to schedule a no-pressure complimentary consultation or 15 minute phone introduction to discuss the pieces of your retirement puzzle.