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I recently celebrated my 50th birthday.  I suppose it gave me pause to audit my first half century and wonder what my next 50 might look like.  Statistically, my life expectancy now resides around 82 years[i] so that might be a bit ambitious.  Sadly, when I posed an 82 over/under to my friends, I couldn’t get an over bet.  They are oblivious to my Monday thru Friday clean living.  God fearing aside, I also gave some thought to retirement – specifically when.
 
My retirement apprehension is shared by many of our clients and friends.  It usually boils down to the same two questions: how much do I need and when can I afford to?  We’ve previously touched on the how much[ii] so we’ll look at part of the when.  A portion of that equation is claiming Social Security.  Let’s review the basics.
 
How are Benefits Calculated
 
Social Security benefits are based on the top 35 years of indexed earnings and the age at which you start receiving benefits.  If you work less than 35 years, the SSA plugs in a zero for non-earning years, lowering your benefit.  But each year you continue to work, even after reaching your full retirement age (FRA)[iii], adds to your SS earnings record & possibly increasing future benefits.[iv]  Since I was born after 1960, my FRA will be 67.
 
The earliest you can claim benefits is age 62.  But it pays to wait: benefits increase 8% every year an individual postpones claiming up to age 70.  There is also a cost of living adjustment (COLA) for benefits – call it intentionally understated inflation.  For 2019, the COLA will 2%.
 
Social Security Earnings Test
 
First the good news: the earnings test disappears at full retirement age, meaning you can earn any amount of money without affecting your SS benefits.  And any benefits that were forfeited as a result of excess earnings would be restored in the form of a higher benefit once you reach FRA.  The earnings test excludes pensions, annuities, investment interest & capital gains.  However, employee contributions to a retirement plan do count as earnings if included in the employee’s gross wage.
 
Now the bad news: if you are under FRA, you would forfeit $1 in benefits for every $2 earned over $17,040.  For example: say you earned $40k and applied for SS at age 63, you would lose $11,480 in benefits.  (40,000 – 17040 = $22960/2).  In the year you reach FRA, a more generous earning test applies.  You can earn up to $45,360 before benefits are compromised.  And you would only lose $1 for every $3 over the $45,360 limit.
 
How Benefits are taxed    
 
Not to be confused with the SS earnings test, benefits can be taxed.  The good news is Indiana residents are exempt from SS state taxes.  For those filing jointly, SS benefits under $32,000 are not taxed. Benefits $32-44k are 50% taxed.  Over $44k, 85% of the benefits are taxed at your marginal tax rate.   Fair warning: the actual calculations can be tricky.
 
Claiming Early vs Full Retirement Benefits
 
This is a common question we field.  How long would have to live to receive equivalent benefits if you file at different ages.  For example, filing at age 62 the break-even age is around 76.  So, the longer you live past the break-even age, you more you effectively lose in benefits vs. waiting to FRA.   Conversely, delaying your SS benefit to age 70, your break-even age is about 79 – living beyond that you’ve effectively won the proposition bet with the government.  Obviously, there are factors to consider: financial need, health, genealogy and life style.  To run your own break even analysis: SS break even calculator.
 
Survivor Benefits
 
Given their longer life expectancies, women represent more than half of all SS[v] beneficiaries age 62 and over and 2/3rd of beneficiaries over 85.  Benefits are generally available at age 60 but at a lower level.  Normally, survivor benefits are 100% of the deceased worker’s entitlement. So, the longer I wait, the bigger the payout for Michelle and hubby #2.  Again, it depends on the age of the deceased and if initial benefits had been applied for.   An ex-spouse who had been married for at least 10 years may be entitled to the “widow’s limit provision’.
 
Social Security has always been a retiree hot button.  In fact, there’s been a recent TMI (The Molly Index) alert.   She shares a common worry that the Social Security Trust will run out.  While she may eventually be correct, I highly doubt it happens in our lifetimes.   Though the graph below paints a pretty grim picture.
 
 
The government has a few aces up it’s sleeve: the FRA will be raised, the payroll tax cap (currently $128,700) will be aggressively raised and the COLA will always be artificially minimized.   Benefits could eventually be cut - I’d like to meet the failed politician who proposes that.  But I’m not sure it’s worth the concern.  I’ll work in some capacity as long as I can (financial advisors never truly retire), delay taking benefits, nurture Catherine[vi],  and hopefully cash the over 82.
 
 
Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends.     Houlihan Asset Management.  Wealth Counseling/Asset Management. Copyright 2018
 
 
[ii] Houlihan, Dennis, “I Feel Like a Number “- Fiscal Fitness, January 2008
[iv] Franklin, Mary Beth, “Working Longer Makes a Huge Impact”, Investment News, November 2018, p.14  
[v] Franklin Mary Beth, “Why Social Security is Crucial to Women”, Investment News, November 2016, p. 21
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