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October 2018

Client Conversations: Getting the Most Out of Social Security

Learn the options and implications for taking Social Security benefits and how to maximize them.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.



Social Security was never really intended to be the sole source of income for older Americans. Originally developed in the 1930s to supplement employer-sponsored plans and other personal savings, it’s now become the major stream of income for many retirees.

Ninety percent of those 65 and older receive benefits today. More than 62 million Americans will receive approximately $955 billion in Social Security benefits this year.1 However, the gap between what we receive from Social Security and the income many of us will need in the years to come may be wide.

That’s why it’s crucial to consider how timing, income, and taxes impact your Social Security benefits. Understanding more about these factors can help you plan accordingly, avoid surprises, and prepare for what you may need to find other sources of income to fill any gaps.

 

When Should I Begin Taking Social Security?

Let’s start with your biggest priority—knowing the amount of your Social Security benefits. The age you start taking benefits may affect that amount more than you realize. To have a successful retirement, it’s important to think about how much income you’ll actually need versus when you should file. When you figure that out, choosing when to file becomes a whole lot easier.

Today, 66 is full retirement age for anyone born before 1960 and 67 for those born after. Your benefits grow by 8% every year that you delay claiming them. The longer you hold off, the greater your benefits will be.
 

Amount of Full Social Security

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Age 66 is full retirement age in this example, but the longer retirement age is deferred, the greater the benefit.
Source: Social Security Administration, 2016

 

There are certainly pros and cons to taking them early or waiting. You can actually delay taking them all the way to age 70 before you stop seeing incremental increases in the benefit amount. If you can delay taking benefits until at least 70, you’ll have increased your annual Social Security income by 76% relative to someone who began taking benefits early at 62.

 

What Happens If I Continue To Work?

If you’re thinking about working while receiving Social Security benefits, your benefits may be reduced depending on when you file.

  • Before full retirement age, benefits are reduced $1 for every $2 above $16,920 in earned income.
  • At full retirement age, benefits are reduced $1 for every $3 above $44,880 in earned income.
  • After full retirement age, there’s no limit on earnings. Withheld earnings are returned.

Suppose you’re 63 and have work earnings of $30,000. You’ve exceeded your limit by $13,080 ($30,000 in earnings minus $16,920). Because of that, $6,540 (which is 50% of the overage) is going to be subtracted from your Social Security benefit.

If your Social Security benefit is supposed to be $800 a month, or $9,600 a year, your benefit is going to be reduced dramatically. Instead, the benefit amount you’ll receive is only about $3,060, or $255 a month. In other words, your benefit is going to be reduced by $545 a month because you’ve chosen to continue working. 

For those winding down work or working part-time, taking benefits may make sense. For those who are remaining at the same compensation level, you should consider delaying receiving benefits. The good news is you’d get that $545 a month back, but not until full retirement age. It would gradually be paid back even if you continue to work.

 

Will My Benefits Be Taxed?

Your benefits may be taxed. The question is if they are, at what percentage? That depends on what tax bracket you’re in. If your combined income is equal to or less than $25,000 if you file as an individual ($32,000 if married, filing jointly), then none of your Social Security benefit is taxable.

If it’s more than $25,000 and equal to or less than $34,000 ($32,000 and $44,000 if married, filing jointly), up to 50% is taxable. If your combined income is more than $34,000 ($44,000 if married, filing jointly), it goes up to 85% being subject to taxation.

Speak with your tax advisor for guidance concerning the calculation of taxes.

 

Who Can Help Me?

It would be easy if there was a simple manual for collecting Social Security benefits, a magic age, or exact income amount that worked for everyone. But, that’s not the case. Your situation and needs are unique. So, too, is the amount you’ll need to generate in order to live the way you want to in retirement. Social Security alone most likely won’t get you there. With potential funding issues down the road, it might get even tougher.

So, work with your financial advisor and tax adviser to put together your own personal plan for yourself and your loved ones. Visit the Social Security Administration website (ssa.gov) to access your Social Security statement or call 800-772-1213. Educating yourself today on the ins and outs of Social Security and its place in your retirement can help you make the most of your tomorrow. 





1Social Security Basic Facts, ssa.gov, 2017

 

All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting or legal advice. As with all matters of an investment, tax, or legal nature, you and your clients should consult with a qualified tax or legal professional regarding your or your client’s specific legal or tax situation, as applicable.

The preceding is not intended to be a recommendation or advice.

This information does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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