Summary

Amy and Mike talk about the complexities of Social Security Retirement Benefits, focusing on its significance for retirees, the intricacies of claiming benefits, and the impact of taxation. They discuss eligibility requirements, the importance of timing in claiming benefits, and the potential shortfall of the Social Security Trust Fund, emphasizing the need for personalized financial planning.

Takeaways

Social Security is a crucial income source for most retirees. Understanding eligibility is key to maximizing benefits. Claiming decisions can significantly affect lifetime income. Delaying benefits can lead to higher monthly payments. Social Security benefits are indexed to inflation. Taxation of benefits can impact overall retirement income. Consulting resources like ssa.gov is essential for clarity. The Social Security Trust Fund faces potential shortfalls. Personalized financial planning is vital for retirement decisions. Claiming strategies should consider individual circumstances.

Chapters

00:00 Understanding Social Security Basics
06:29 Exploring Retirement and Survivor Benefits
11:10 Claiming Strategies: Timing is Everything
17:47 Calculating Benefits: The 35-Year Rule
20:23 Taxation of Social Security Benefits
22:06 Addressing the Social Security Shortfall
25:22 Conclusion and Next Steps

Submit a question: [email protected]
YouTube Channel – @OperationRetirementReadiness
Operation Retirement Readiness: www.operationretirementreadiness.com
Schedule a consultation with Mike: https://nextmissionfinancialplanning.com/contact
Schedule a consultation with Amy: https://www.instarfp.com/contact

Transcript

Mike Hunsberger (00:00)

For most retirees, Social Security represents a large portion of their income in retirement. That might not be as true for military retirees, but it’s still a source of significant income for many. Unlike many other Social Security benefits, this isn’t a one -size -fits -all decision. And when and how you claim can make a big difference in how much you’re going to make or you’re going to get over your lifetime.

Amy (00:25)

it could make a huge difference. And I find that most people don’t really understand how social security works, what their claiming decisions might look like and how to try to maximize benefits the way that they want to. So our goal for the next couple of podcasts is to give you the basics, talk about some of the nuances of social security. And then when you have a spouse, talk about the additional nuances if you’re married. And then finally, we’ll hit a few examples to help you try to understand the importance of your claims decision since you’ve been paying for it out of every paycheck since you’ve been working.

Mike Hunsberger (01:35)

So, Amy, as you said, people pay their payroll taxes each and every paycheck. But unless they’re close to retirement, they probably don’t give Social Security that much of a thought. Maybe once a year when the news comes out and says, hey, the Social Security Trust Fund is going to go run out of money in X amount of years, maybe they think about it for a day or two. And a lot of younger folks think it’s really not going to be there for them. you know, I think, and we’ll talk about this some, I think it will be around maybe at a potentially reduced rate, or maybe Congress does something about it to fix it. you know, before we get too far into that, Amy, can you just kind of give us an overview of social security and eligibility?

Amy (02:25)

Yeah, so social security is basically a safety net and it is designed to be a safety net for retirees, disabled individuals, and survivors of workers. We’re going to focus mainly on the retirement benefits since that’s what impacts the vast majority of people, but it’s also important to understand that there are other aspects of social security like disability.

So social security, like we mentioned, meant to be sort of a safety net. You’ve paid into the system through payroll taxes throughout most, not all, of your career. We should mention that there are some folks who don’t pay into social security. That’s well beyond the scope of this discussion. So for those who have paid in, eligibility for various benefits is determined by your work history, so how long you’ve worked, your age, and your disability status. So Mike, why don’t you give us an overview of a couple of those things.

Mike Hunsberger (03:31)

Sure. First, I’ll hit the work requirements. So basically, to be eligible for Social Security benefits, you need to have earned enough, quote unquote, by working and paying Social Security taxes. Basically, credits are based on your earned income for the year, either your wages or if you’re self -employed, that income.

In 2023, you earned one credit for every $1 ,470 in earnings, basically up to a maximum of four credits per year. So each quarter you can get that credit. The exact number of credits you need to qualify for benefits depends on your age and type of benefits you’re seeking. But in general, for retirement benefits, you need 40 credits.

which is equivalent to about 10 years of work to qualify for retirement benefits on your own record. Second piece of benefits is the age requirements. And you can start receiving those social security retirement benefits generally between the ages of 62 and 70.

If you and basically there’s this term called full retirement age and that’s set by law. But basically if you start receiving your benefits before your full retirement age, they’ll be reduced. And then you can also wait beyond your retirement age and they’ll be increased. So benefits don’t increase beyond age 70. So there’s no reason to delay beyond that.

But one key thing is you do have to file. So there are people out there who are beyond age 70 who have never filed for social security, so they’re not getting that money. And then one thing that’s important is that social security covers, again, several types of benefits, and each have a specific purpose. As Amy said, we’re not going to dive into all of them, but there are retirement benefits that will mainly talk about disability, survivor benefits, as well as Medicare is kind of tied into that. So, you know, maybe we do a future podcast on that. But again, the main point of these shows is going to be on the retirement benefits that folks are going to go for. So, Amy, any thoughts on that?

Amy (05:58)

Yeah, no, the only thing I would add, and I know that we’re to hit this later, is it’s a little confusing about when you might be eligible for benefits. And we didn’t get into the other kinds of benefits other than retirement. But if you have questions, the place to go is to your account at ssa .gov and sign up if you haven’t already signed up for your own account. And you can see what your benefits look like based on social security’s calculations. That’s the only thing I’d add right now, Mike. Otherwise, I think you hit it.

Mike Hunsberger (06:29)

All right.

Okay, let’s dive into the benefits then. Amy, can you talk about the specific retirement benefits and the survivor benefits?

Amy (06:39)

Yeah, so the retirement benefits are the most well -known part of social security. The idea is again to provide that, you know, sort of basic baseline income during retirement. You’ll hear the term full retirement age associated with social security oftentimes for anyone. So that’s it depends on what year you were born in. So anyone who was born 1960 or later, your full retirement age is age 67. So you have the option to start receiving benefits as early as age 62, but if you claim before your full retirement age, your benefits will be reduced. If you wait until after your full retirement age, you’ll get higher payments, at least until age 70. Like Mike said, there’s no benefit to waiting beyond age 70.

Survivor benefits. Okay, so we’ve talked about retirement benefits. Now we’re going to change gears. So if something happens to you and you’re you’re you’ve qualified, you have enough work credits to have survivor benefits for your family. Let’s say you pass away, you have a spouse and some children. Your surviving spouse and your children, other dependents sometimes, sometimes there’s dependent parents, things like that, may have access to social security benefits based on your record. And essentially it’s, you know, to again, help provide a safety net or a lifeline to families that are facing the loss of a primary wage earner in the house. So eligibility benefits, this varies based on the relationship, age, their work history. It’s a little bit complex. We’re not really gonna get too far into the details here, but again, go to ssa .gov to understand what your survivors would be eligible for.

Mike Hunsberger (08:40)

All right.

Yeah, as Amy hit earlier, social security, ssa .gov site is where you can find out your information. Social Security used to send annual statements out to everybody. So you knew where you were and you could see, you know, the what got credited for the previous year as far as how much you made and what your projected full retirement age earning or what your benefit would be.

But they stopped doing that and you do need to go to the website now to do that. and you know, like Amy said, complex decision process around this because there’s lots of different factors. And so you do really want to be educated before you claim. So, so let’s, let’s.

Talk more about some of those benefits, As we said, they’re key to many retirees’ income later in life. So you want to hit some of those?

Amy (09:39)

Yeah, I mean, I think one of the most important aspects of Social Security is the fact that it is actually indexed to inflation. for, you know, military, our pensions are indexed to inflation like Social Security. But if there are listeners who have a private pension, those typically are not indexed to inflation at all. So Social Security provides that baseline. It is going to be cost of living adjustment or cost of living adjusted, while most income sources are not. So that’s one aspect of the program.

Mike Hunsberger (10:18)

Yeah, that’s like you said, incredibly important because, just assume, 25, 30 year retirement type thing. But so say inflation rate is 3 % and you didn’t have a cost of living adjustment. Basically, after 24 years, that’s that social security check or that pension that’s not indexed to inflation would only be worth about 50% of what it was the first year you started. that could be a huge impact. again, and you’ll hear arguments that, hey, social security doesn’t really track with what a retiree’s expenses are based on how they calculate CPI. But it’s definitely better than not having any kind of cost of living adjustment at all.

Amy (11:10)

Yeah, it’s a huge deal.

Now in terms of claiming, if you’re single and you don’t have a spouse at all, it can be somewhat straightforward. It’s still complex, but it can be somewhat straightforward because you’re only taking into account one benefit. you know, your, when you look at your benefit online, it’s going to give you your benefit based on full retirement age. And that’s considered, you know, that’s your full benefit. The full retirement age, that’s set by Congress. It’s in law.

Again, for those born in 1960 or later, full retirement age is 67. For those born earlier than that, then it’s a little bit earlier, it’s somewhere between 66 and 67. You can look on ssa .gov if you’re not sure about what your full retirement age is. The key takeaway here is that if you claim before full retirement age, even just one month before full retirement age, it results in a permanent reduction in your monthly benefit.

So that’s a consideration for you. On the other hand, if you delay beyond your full retirement age, so even just a month beyond your full retirement age, you can actually get a higher monthly payment. So Mike, you want to walk us through that in a little bit more detail?

Mike Hunsberger (12:31)

Amy’s going to hit an example and walk through some specific numbers. But one thing I want to highlight is claiming is just based on your age and whether you qualify for benefits. Doesn’t mean you have to be retired. You do not have to have stopped working to claim your social security. Although if you’re under the full retirement age, it will be reduced subject to some income limitations. So you need to make sure if you’re claiming early and are still working, are you really going to get that benefit? If you hit your full retirement age, there are no earning limitations. So you can be 67, still working full time and claim your social security benefits. The other thing is just because you stopped working, say you retired early at 60 or 62, doesn’t mean you have to claim Social Security can often make sense if you have assets or other income coming in to delay as long as possible. And that’s somewhat the advantage of waiting till age 70 that you can do even if you’ve already stopped working.

So Amy, you want to hit an example of some actual numbers so people can understand?

Amy (13:48)

Yeah, yeah. So let’s say that, you know, because a lot of people at this point, full retirement age is age 67. So your full retirement age is age 67. Your benefit at full retirement age is expected to be about $3 ,000 a month. If you were to claim at 62, so claim early instead of waiting until full retirement age, your benefits going to be reduced by 30%. So that’s a monthly benefit of $2 ,100. So $900 less.

If you claim at 65, your benefits reduced 13 and a third percent or monthly benefit of 2 ,600, so about $400 a month. If you wait to claim until 70, then your benefit is increased by 24 % for a monthly benefit of $3 ,720, so an extra $720.

So there’s a big difference between the 2100, the lowest end, if you claim at 62 and the highest end if you wait until 70. So 3720. It’s huge. you know, people often just decide how they’re going to claim because a family member claimed that way or they heard or read general advice when really, you know, paying attention to what everyone else on the internet is doing or what everyone else around you is doing is not the best way to to make your claim decision. What do think about that, Mike?

Mike Hunsberger (15:15)

on the internet like us.

Amy (15:17)

Yeah, exactly. No, but what I mean is, you people out there get kind of giving blanket advice, and it’s not based on an individual’s or a couple’s situation.

Mike Hunsberger (15:29)

Yeah, I don’t think we said it, but we showed that $1 ,620 difference between $62 and $70 is a significant amount, especially if you live into your 90s. But whatever you decide should be based on your situation. So as you approach your 60s, you should either be doing your own homework There are calculators out there. Social Security has a calculator. There’s some other sites on the internet that, you know, a lot of them you pay, I don’t know, a hundred bucks and get access and then they can really walk through your situation. Or it’s smart to talk to a planner, again, understand because…

That is a big difference. Sixteen hundred twenty dollars over an extended lifetime, especially because it is indexed to inflation. that will continue to increase as we go on. So again, do your homework. Don’t just blindly claim because it could be hazardous to your wealth.

Amy (16:36)

The other thing I’ll mention too is that what a lot of people tend to do and sometimes what the calculators will do is tell you how to maximize your benefit based on life expectancy, things like that. And that is one way to approach your claim decision. It’s not the only way to approach your claim decision. there can be instances where it doesn’t really matter about how much you’re gonna get from social security if you’re not taking into account the other situate, the rest of your situation. So just be careful about the calculators that you’re using and your understanding what they’re telling you in terms of, you know, have you optimized your full situation or have you optimized your social security choice? So it’s important to understand context with those calculators. But Mike, you know, one of the things that I think confuses people about social security and, you know, this isn’t really part of the claims decision per se, but I think it’s important for people to understand how social security determines the full retirement age benefit. Can you just walk us through that?

Mike Hunsberger (17:47)

Sure. So Social Security calculates your benefit, your retirement benefit based on your average monthly or average annual inflation adjusted earnings. So while you need that 40 quarters or about 10 years of work history to qualify, they look at a much broader career time to actually figure out what your benefits going to one thing is they index it to inflation close to your retirement age to make these calculations because, you know, right out of college, maybe making $20 ,000 a year 40 years ago, they’ll adjust that up to what that, you know, is equivalent in today’s dollars when they do that calculation or it would really skew things.

So one other piece, it is 35 years. If you’ve only worked for 20 years, and a lot of spouses would see this, it may not have that full 35 years. Basically, zeros just get put in there, and that’s part of the overall calculation. So once they get that average of what you’ve made over that 35 -year career, they apply you know, the replacement percentages. And there’s a series of what they call bend points that determine, how much you’ll get and, say the first $20 ,000, you may get replaced at, you know, 40, 50%. And then the next $20 ,000 will be at a lower percentage. And at the very end, after that last endpoint is the replacement rate is actually pretty low. So you’ll hear people talk about, we need to mean stuff, whether folks get Social Security or not. But it’s already kind of baked into the formula so that if you were a lower earning person throughout your life, Social Security is going to replace more of that average annual income versus if you were, you know, super high earner who maxed out the Social Security benefit every year and paid taxes on that. You know, overall, that percentage is going to be significantly lower. And again, as Amy hit earlier, it’s really a safety net program. So that’s why it was designed like that. If you had lower income earlier, that’s why you’re going to get probably a higher percentage of your benefit for what you earned.

Amy (20:23)

So another part, another aspect of social security, which you talk about is taxation of social security. So depending on your total income, so all the income coming into your household, a portion of social security benefits might be subject to federal income tax.

And so understanding how this works can help you better understand how to plan for retirement income, but also your claiming decision. So income limits for benefit taxation are low. So if you have a military pension or another pension, there’s a good chance there’s at least some portion, if not, you know, up to 85 % of your social security benefits that will be taxed.

As an example, so for 2024 if you have total income of $44 ,000 or more for a married couple then 85 % of your social security benefit is taxable. It’s never more than 85 % but in this case, you know, just the total income of $44 ,000 results in 85 % of your benefit being taxed not to be confused with an 85 % tax rate. So people do get confused by that. It just means that of your social security benefit, 85 % will be taxed. So for most military retirees, you should probably plan on up to 85 % of your benefit being taxed. Mike, what else should we throw at them today?

Mike Hunsberger (21:50)

So I think the big thing, and we hit it just briefly, is the looming social security shortfall and what that actually means. So thoughts on that.

Amy (22:06)

Yeah, and I have a lot of clients who have, you know, are worried about this. We see the headlines all the time. Right now, as of right now, the Social Security Trust Fund, that’s sort of the nickname, is projected to run out of money in 2033. Okay. So that doesn’t mean that Social Security is over in 2033. It means that there’s no additional benefits. So the only benefits that can be paid out to current beneficiaries will be what’s coming in and at that point in time we expect that there will be enough income from today’s workers to pay out 77 % of the projected benefits to two beneficiaries.

So, you know, there’s Congress is working on it. We’ve heard that they’re working on it. So far, there hasn’t appeared to be any sort of resolution or breakthroughs. I do expect that something will get done. Unfortunately, the longer Congress waits, the less the you know, less the fewer options they have and the you know, the more pain it could kind of bring. So we’ll have to see. But Mike, any other thoughts on on that?

Mike Hunsberger (23:24)

No, my crystal ball is still broken on what that eventually will look like. Will it look like an increase in the retirement age again? Will it be a higher tax rate? Or will they somehow scope benefits? Typically, when they do any of these things, current retirees, they really try to make sure they’re not changing anything for somebody who’s close to retirement age. maybe younger workers could see something change. But again, you’ll have a long time to adjust for that over your kind of working career if it’s kind of a reduction or something else. So yeah, I think we kind of hit the main things, anything else beyond the looming shortfall that we should talk about.

Amy (24:24)

I can’t think of anything else. mean, really, I just, you know, wanna foot stomp the thing that we’ve reiterated throughout. This is a complex decision and it shouldn’t be made in isolation. This isn’t a decision that you make because somebody else made the same decision and they have what appears to be a similar situation. You really need to consider your own factors like, you your pension income that you already have, available resources to fund any sort of funding shortfall if you delay claiming your life expectancy, your financial needs, other sources of income, so on and so forth. So a lot to digest there. And it is a good idea to get some help or some insight from other resources, whether you’re reading good articles from ssa .gov, counting on good calculators or working with a financial planner.

Mike Hunsberger (25:22)

Yeah, I think that’s great. we’ve got a couple more episodes planned on this. Next time, we’re going to dive into couples claiming and how that can be different than just a single benefits. I encourage you to listen to that if you’re married or may get married in the future.

Otherwise, I think that’s a wrap on this one. So thanks, Amy, and look forward to talking with you soon.

Amy (25:48)

Sounds good, go to talk with you Mike.