Today I wanted to touch base on social security and how your employees can maximize their benefits.
Late in 2015, Congress made major changes in social security claiming strategies. The Social Security trust fund actually has no money in it—in its purest form, it’s essentially a legal Ponzi scheme. People pay in each year and more benefits are paid out than received. Many have discussed changing the plan for the future, but no one’s had the right plan (or the guts) to make any changes. Congress actually eliminated some of the benefits that would have allowed you or your spouse to maximize social security income. The good news is that it’s now easier for your employees to calculate their benefits. So what do you and your employees need to know?
Congress actually eliminated some of the benefits that would have allowed you or your spouse to maximize social security income. The good news is that it’s not easier for your employees to calculate their benefits. So what do you and your employees need to know?
First, everyone should go to www.ssa.gov, log in, enter your personal info and create an ID, then generate your social security report. It will tell you what you’ll receive for income at age 62, what you’ll receive if you wait for full social security age at 66 (or 67 if you were born after 1960), and what you’ll receive if you wait until age 70. Age 70 is the largest benefit you can receive, but you must forgo payments until that time.
So when should you take social security? It depends on many factors, primarily the state of your health, whether you can work, and whether you have other savings/investments to draw on during the early years of retirement. Another big factor is whether distributions from investment accounts are taxable or not.
Say, for example, Jim, a hypothetical client, retired two years ago and had money in cash, a Roth IRA, and his 401(k) plan, and his retired wife receives a monthly pension and is already taking her social security. Jim needs to determine when to take social security benefits in connection with the spend-down plan for his investments.
After calculating the total family income projection, we analyzed the expected spending needed for each year. This created a gap that needed to be filled with Jim’s social security income, other income, or distributions from other investments. We went to work on an appropriate social security timing and maximization plan, which included an analysis of the taxation elements of each strategy.
One of Jim’s goals was to minimize taxes from now until age 70, so we decided he should spend down the cash first, which he pays no taxes on. We plan to start social security when he turns 66 and also use his Roth IRA as necessary. Until he’s 70, he’ll pay virtually nothing in taxes. At 70, he’s required to take his minimum distribution, which will be taxable, and may increase the tax rates some from there on.
You may have known someone who retired and died the next month without collecting a dime of the social security owed to them. It’s definitely an important consideration you must make. Remember that if you start taking social security at 62 and are still working, your benefits might be reduced and your overall tax rate on your total income will probably increase as well. Don’t just blindly file for benefits
However, every year that you wait between 62 and full retirement age, your benefits increase by approximately 7% per year. Between full retirement age and 70, they increase by about 8% per year. So it may be worth it to wait.
So what happens if they take social security away? If you’re 55 or older, I’m confident that you can count on social security to be there for you in its present form. If you’re 50 or younger, depending on how much money you have at retirement some day, my guess is that the government may “means test” your benefits at the very least. That means your social security benefits are likely to be reduced.
Something like this must happen to fix the system, and this is the most logical solution in my mind. There are simply too few people paying into the system and too many taking out of it. There hasn’t been a president or Congress yet with enough political clout (or guts) to take on the social security problem.
If you’d like to schedule a meeting with your employees, we can explain these situations and help them analyze their social security benefits and options. Just send me a quick email, I’d love to help you out!