Regardless of your opinion of our Social Security program, you can’t deny that it is an important source of income for many people in the United States. In fact, the Social Security Administration reports that in 2019, 69.1 million people received benefits from programs administered by the SSA. Of those, a whopping 5.7 million (over 8%) were newly awarded benefits in 2019. (Source: Fast Facts & Figures About Social Security)
That means an increasing number of people are receiving Social Security benefits every year. With so many people receiving benefits, many under unique situations, what may be true for one person may not be true for another. Social Security benefits seem to have their own unique mythology, and can be grossly misunderstood. Part of our job as financial advisors is to help clients understand what to expect and to prepare them for how this can affect their lives.
The first question is usually, “When should I take Social Security benefits?” That’s a great question (and one that we may address more in depth in our next webinar). But you should also know a few foundational things that may influence the answer to that question. So, let’s explore those first.
Things to Know at Every Age
Your Social Security Benefit Will Probably be Taxed. This depends on your filing status (Individual, Joint, or Married Filing Separately) and your “combined income.” Combined income means your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. If that all adds up to more than the (very low) limit, then part of your Social Security benefit will be taxed. For most people, you will probably pay tax on 85% of your Social Security benefits. You can anticipate this, and save yourself an unpleasant surprise, if you elect to have federal taxes withheld when you claim your benefits. (More info here: Income Taxes And Your Social Security Benefit)
You will pay for a portion of Medicare – and that is usually deducted from your Social Security benefit. Some people are surprised to learn this. While Medicare Part A (“hospital insurance”) is generally free for most people, Medicare Part B (“medical insurance”) involves a monthly premium. For most people, that’s $164.90 per month in 2023 (premiums can change from year to year). You may also be charged a higher premium if you have a “high” income OR if you delay signing up for Part B (you’ll be charged a penalty for as long as you have Part B – basically until you die).
The takeaways here are: SIGN UP for Part B when you turn age 65 to avoid paying a penalty for the rest of your life. Expect to pay a premium for the coverage and plan for it in your retirement budget. (More info here: Medicare Costs)
If you have a Pension, you may be subject to a reduction of your Social Security benefit and not know it. Teachers, this means you! I talk to so many unhappy educators who are not aware of this rule, which is very unfortunate. With a little planning, this can be navigated successfully, but if you don’t know about this, it can hurt you. So here’s the deal:
If you will be a recipient of the state pension program (in Texas, it’s usually TRS), your school district had the choice (probably long ago) of whether or not to participate in Social Security. Most districts elect NOT to do so, because they are already paying into the state pension plan. (There are a few exceptions to this, so ask your Human Resources folks if you are not sure – and don’t ask the Social Security office because they often do not know). If your employer elected NOT to participate in Social Security, you will likely fall under the dreaded WEP or GOP provision, which can reduce your expected benefit, no matter what age you decide to start taking it. (More info here: WEP Online Calculator)
Social Security does not reflect this on those statements of estimated benefits that you receive. So, if you are wondering how this may affect you, my best advice is to talk to your financial advisor. They can help you navigate this because there are several pieces that go into the calculations. Do this early in your retirement planning so you are not blindsided the year before you expect to retire!
Finally, ANY of these provisions can change at any time, depending on what Congress enacts. In other words, while Social Security benefits are “guaranteed,” they are not completely guaranteed… which might make you understandably nervous. As I tell clients, it’s highly unlikely that Social Security will ever completely disappear, because that’s political suicide and would likely cause an uproar no politician would want to face. However, the specifics of how benefits are calculated, at what age, how much you will receive, etc. – all of those details can and will likely change over time.
Bottom line, talking to a financial planner about your Social Security benefits can be extremely helpful, even if you don’t expect to start taking them for several years. I like to tell my clients, planning is power: the power to make your own choices rather than have choices forced upon you. Let us know if you’re ready to put that power to work for you. We’re here to help!