A common retirement planning myth is that Social Security benefits won’t be around for much longer. Generation X, Millennials, and Gen Z are jokingly told not to worry about Social Security because they’re not going to get any. However, the fact is that the funds that we currently have earmarked for Social Security should last us through 2035—even if Social Security were to go away for future generations.
Most people don’t treat Social Security benefits as their own money, but that’s exactly what it is. The average American will collect about $1 million in Social Security benefits in their lifetime. Social Security tax revenue alone will cover our retirement obligations until at least 2033, and then it will cover up to 77% of costs after that year, again assuming no changes to the current plans in place. Therefore, tax planners can factor in Social Security for at least the next 15 years as a source of retirement income.
Many taxpayers assume they will just take Social Security at age 62 because they have a need for the money. Another approach is to wait until their full retirement age, which depends on when they were born, and then use those funds as a replacement for income upon retirement. Others delay filing until age 70 with the goal of accruing the highest monthly payout. However, delaying beyond that age will not result in any additional payouts.
The common mistakes people make with Social Security are:
- Not seeing Social Security as the asset that it really is
- Being in a hurry to secure cashflow to sustain their lifestyle without contemplating the cost of reducing those benefits—because they will be reduced for life!
- Not leveraging the strategies available if they are married to team up for maximum benefits
- Not realizing the possible tax consequences when they don’t have a plan for a timing structure
For example, take a 66-year-old who makes $80,000 in their last year of working as a teacher. They can expect to get roughly $34,000 in initial Social Security income each year. If this person starts taking those benefits before they reach full retirement age, and they continue to work and earn income above a certain threshold, they will be subject to the retirement earnings test.
If the taxpayer exceeds the annual threshold, the amount of Social Security benefits they can receive will be reduced by $1 for every $3 earned above the limit for that year ($14,640 in 2021) until they reach full retirement age. Then the test disappears and their benefit will continue to grow as long as they’re working. On the other hand, continuing to earn a sizable income will also increase the benefits that person will receive for the remainder of their life, so both of these elements should be evaluated.
Also, remember that Social Security benefits are essentially a pension, which can really help a surviving spouse. If a taxpayer who is married starts taking benefits before retirement age, this impacts how much their spouse can receive from Social Security after their death. By strategizing when each spouse begins claiming Social Security, the surviving spouse can often receive a higher benefit when the first passes away.
Taxpayers can see positive outcomes from delaying when they begin taking Social Security benefits, but waiting is also a gamble that they will live to receive those planned benefits. Since the earliest someone can begin receiving benefits is age 62 and the full retirement age for many people (depending on the year they were born) is age 66 to 67, if someone dies at age 65, they may never have received Social Security benefits at all.
The goal here is to look at the opportunity for increased benefit amounts, as well as better tax treatment on those benefits. Taxpayers can receive thousands of dollars in additional Social Security payments by strategizing the timing of when to take those benefits. Increase your ability to evaluate each taxpayer’s circumstances and make insightful recommendations by becoming a Certified Tax Planner.
