Social Security ... What I Like About It (and What I Don’t)

To say Social Security is complex is an understatement. There are 9,409 different age-claiming combinations and 5,917 spousal benefit combinations, according to Social Security’s Office of Retirement and Disability Policy. There are rules for family benefits, disability benefits, divorced spouses and widows. Yet, Social Security is extremely important for retirees, as “nearly nine out of ten people age 65 and older receive benefits,” representing about 33% of the income of the elderly.

If you are on the cusp of retiring or wanting to know more, below are a few rules and tips to keep in mind. (For a deeper dive, join me for a free webinar on Aug. 19.)

What I Like about Social Security

There is a lot to like about Social Security retirement benefits. Foremost, the benefits last a lifetime — or two lifetimes if you are married. According to the World Economic Forum, the number of people making it to 100 and older is expected to grow to nearly 3.7 million by 2050, from just 95,000 in 1990. That means an 80-year-old may live another 20 years, or a 65-year-old could have a 35-year retirement. Income for life, not capped at any age, and payable for two lives instead of one, is a huge benefit for retirees.

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One of the nice things about Social Security benefits is that if you can wait until after your full retirement age to take them, they grow about 8% per year until age 70. How many investments do you know of that offer a guaranteed rate of return in the neighborhood of 8%? The planning implication here is that married couples or those with a long life expectancy should consider waiting till age 70 to collect the maximum retirement benefit.

Inflation or the loss of purchasing power is a real concern for retirees. At 3% inflation, the rule of 72 says prices will double in 24 years. That’s a scary proposition for those on a fixed income, like most annuity and pension income recipients, because those benefits don’t typically increase. Social Security retirement benefits, on the other hand, can increase each year due to what’s known as a cost-of-living adjustment, or COLA. An increase is not automatic, nor guaranteed, but has been consistent: Since 1975 there have only been three years benefits did not increase.

The spousal benefit is a nice perk too. Even if a spouse has never worked, he or she can still collect a benefit on the primary wage earner. Spousal benefits can be half as much as the spouse’s primary insurance amount (PIA). The PIA is the full, unreduced benefit one can collect at full retirement age, usually age 66 or 67. Spousal benefits can certainly help over time. (Note: The primary earner of a married couple must start his or her benefit to trigger the spousal benefit.) Some other things I like about Social Security include:

• You might be able to qualify for benefits based on your ex-spouse. If you were married at least 10 years, you can collect on your ex-spouse’s account (as long as you’re at least 62 and are currently single). And your ex doesn’t even have to be taking their benefits for you to claim your own, as long as they qualify and you’ve been divorced at least two years.
• Social Security benefits are not subject to the whims of the stock and bond market. In retirement, it’s nice to have some reliable income.
• Your benefits are backed by Uncle Sam. True, Social Security has financial troubles, but I am confident that the problems will get fixed. Social Security is too important for too many retirees. While many financial and insurance companies have gone belly up over the years, Social Security has stood the test of time.

What I Dislike about Social Security

Despite the many benefits, Social Security has a few drawbacks. We’ve already mentioned how complex Social Security is. That can be a huge drawback for people, because maximizing your benefit can make a big difference — potentially tens of thousands of dollars or more over your lifetime. Yet, getting the information to do that isn’t easy. You can’t just call or drop into your local Social Security office and get the advice you need to make one of the most important retirement decisions of your life. In fact, while the people who work at Social Security can help you file for benefits, technically they aren’t allowed to help you decide which claiming strategy is best for you or when you should file. I really dislike that about Social Security!

Here are a few other things I don’t like about Social Security:

• Your benefit can be reduced by as much as 30% if you collect early, prior to your full retirement age. And what’s worse, a spousal benefit can be reduced by as much as 35%.
• If you collect early at 62 and continue to work, some of your benefit is withheld. This is known as the Retirement Earnings Test (RET). The good news is your benefit will increase after you reach your full retirement age to make up for what was withheld. The bad news you are locked in for life – and if married then for two lives – to a lower benefit than if you waited until your full retirement age on up until age 70.
• Another potential drawback is that your benefits may be taxable. Up to 85% of your benefit may be taxable if you have “provisional income” — which includes half of your Social Security benefit plus tax-exempt interest, pensions and annuity income — greater than certain thresholds. There may be no free lunch as they say.
• Social Security may not be enough. The average retirement benefit is $1,544 according to Social Security’s fact sheet. Unfortunately, that most likely isn’t enough income to live on in retirement. Instead, retirees should consider Social Security as one piece of the overall retirement income puzzle. Other income could come from pensions, annuities, home equity, dividend-paying stocks or part-time work. Since low interest rates are a big challenge for retirees today, there may be other ways to boost your retirement income.

The Bottom Line

Social Security is unique in many ways. Retirement benefits are insured for two lives, can increase with inflation and potentially are available for non-working spouses. Taxes can be problem, however. Retirees should be aware of the “provisional income” calculation.

There are several planning techniques that may reduce the taxes on Social Security benefits. It’s best to work with a tax or financial professional who can help.

For more information on Social Security retirement benefits, including planning strategies and other tips, join our free “5 Things to Know about Social Security” webinar on Aug. 19 at 4pm EST. Register here: https://attendee.gotowebinar.com/rt/4188064395630955787