No matter whether they have $1 or $1,000,000 saved for retirement, most people in the United States qualify for (and rely on) Social Security benefits. That’s why we are going to begin our discussion of money by focusing on what is admittedly a boring topic, chock-full of numbers and complex rules. You can’t talk retirement without talking Social Security. It is a critical subject for retirees in America.

For most retirees, Social Security provides the bulk of their income. For many, it is the only thing separating them from a life of poverty.1 For others, it is a reliable foundation for meeting necessary expenses so that other money can be spent on lifestyle choices. Either way, for almost everyone, it is a key element of the lifetime income plan.

In your epic quest for retirement happiness, one of the biggest decisions you will face is when to “turn on” (start collecting) your Social Security income. This is called your claiming strategy. Here is the simplified version: barring some exceptions, you will turn on your Social Security benefits sometime between ages 62 and 70, and the longer you wait the higher your monthly income will be.

From there it gets complicated. There are many variables involved and some guesswork. Ultimately the decision boils down to a bet on Winning at Retirement 28 life expectancy. If you knew exactly how long you—and your spouse if you are married—were going to live, it would be fairly easy to figure out when to turn on your income (as we’ll explain later in this chapter).

But since no one has that information, deciding when to activate Social Security income becomes an educated guess. We will provide the “educated” part by describing the variables involved and how they change the odds. After that, the guess is up to you.

The Basics

In 1937 Ernest Ackerman received a lump sum payment of 17 cents from the U.S. government, and the Social Security system was born. A few years later, Ida May Fuller received her first monthly check of $22.54 and the program of monthly income as we know it today began.

The Social Security system provides a variety of benefits:

• Monthly retirement income

• Spousal benefits

• Survivor benefits

• Disability income

• Dependent benefits

• Child benefits

• A $255 death benefit

The right to receive retirement benefits is based on credits, which you get by working (and paying Social Security taxes).  The level of income you need to earn a credit varies from year to year. For 2022 it’s 2: A Game Plan for Social Security 29 one credit for each $1,510 of income. The max you can accumulate is four credits per year. So if you earn at least $6,040 in a year, you get four credits. Once you have accumulated 40 credits, you are eligible to receive Social Security benefits. To put it simply: you need to work for 10 years, at a fairly low level of income, to become eligible for Social Security. Certain limitations apply in the case of railroad workers and those who receive government pensions.

Maximum benefits

There is a limit to the total amount of income that a family—worker, spouse, children, and dependent parents— can receive based on one worker’s income. Typically the cap is 150%–180% of the amount the worker receives (the limit does not apply to divorced spouses). Higher amounts can be earned if both spouses worked and qualify for Social Security.

Full Retirement Age (FRA) is a key date for Social Security income calculations, and ranges between 65 and 67 years old, depending on your birth year. People born prior to 1938 had an FRA of 65. That number adjusts higher with later birth dates, and maxes out at 67 for those born after 1959. FRA is not scheduled to rise any higher than 67 at the moment, but as we will discuss later changes to the system are likely at some point.

You receive your full income benefit at FRA. Your monthly retirement income is reduced if you turn it on prior to then, and is increased if you wait until later (it maxes out at age 70). A number of other aspects of the Social Security benefits we will discuss are calculated in relation to FRA. For purposes of simplicity, in this book we will generally assume (unless otherwise noted) a full retirement age of 66.

The impact of collecting benefits before FRA while still working

If you have not yet reached FRA and continue to work while receiving Social Security, a portion—either half or a third of it, depending on your age—will be deferred until you reach FRA. Because of the deferral, and the fact that your monthly benefits will be permanently reduced due to turning on early, you should think twice about taking benefits while working prior to FRA. Beyond FRA you can work and none of your benefits will be withheld.

The more you earn during your working years, the more income you will receive in retirement. The Social Security Administration calculates the payments by taking an average of your 35 highest-earning years. If you work less than 35 years, your average will include zeros for the years you did not work. In 2021 the maximum level of earned income included in the calculation is $147,000. Visit www.ssa.gov/planners/maxtax.html for a chart of maximum income levels for various years. If you can put together 35 years of earnings at or above the maximum annual level, you will receive the maximum amount of monthly income. In 2022, the maximum income for an individual was $3,345 at FRA or $4,194 for those who wait until age 70.2 However, the average benefit in 2022 is $1,657/ month. As you approach age 62, you need to decide when to turn on your income for yourself if you are single, and if you are married, in coordination with the income of your spouse. Married couples need 2: A Game Plan for Social Security 31 to consider what will happen upon the death of a spouse. Divorce has certain implications as well. (These topics are addressed later in this chapter.) Given our focus on retirement, we will not cover income for dependent children or disability income (although these can certainly be relevant for some retirees). For a comprehensive overview of the Social Security system including those subjects, we refer you to ssa.gov, the official site of the Social Security Administration. It is fairly easy to navigate, and provides a wealth of information on the topic. In the rest of this chapter, we’ll talk about how to turn on your benefits, discuss when to turn them on (for singles and for couples), and address some other common questions about Social Security. What Have You Qualified For and How Can You Collect? How much can you expect to receive from Social Security? After age 60 you will receive a printed copy of your Social Security statement in the mail each year, which provides estimates of the income you will receive. Prior to age 60 you can obtain a statement online at www.ssa.gov/ mystatement. If you do not have a recent Social Security statement, visit ssa.gov and click the “My Social Security” button to either create or access your account. o To create an account you will be asked to provide personal information and answer questions based on your credit file, then you can download a statement which will provide a summary that should look something like Figure 2.1 (we’ve highlighted in bold the figures most will want to focus on): Winning at Retirement 32 Figure 2.1: Your Estimated Benefits Sample Statement Your Estimated Benefits *Retirement You have earned enough credits to qualify for benefi ts. At your current earnings rate, if you continue working until... your full retirement age (67 years), your payment would be about. .$ 2,908 a month age 70, your payment would be about. .........................$ 3,610 a month age 62, your pay1nent would be about ........................$ 2,000 a month *Disability You have earned enough credits to qualify for benefi ts. If you became disabled right now your payment would be about............$ 2,80l a month *Family If you get retirement or disability benefi ts, your spouse and children also may qualify for benefits. *Survivors You have earned enough credits for your family to receive survivors benefits. If you die this year, certain members of your family may qualify for the following benefits: Your child ...................................................................$ 2,131 a month Your spouse who is caring for your child ........................$ 2,131 a month Your spouse, if benefits start at full retirement age ...........$ 2,842 a month Total family benefits cannot be more than .......................$ 4,974 a month Your spouse or minor child may be eligible for a special one-time death benefit of $255. Medicare You have enough credits to qualify for Medicare at age 65. Even if you do not retire at age 65, be sure to contact Social Security three months before your 65th birthday to enroll in Medicare. * Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits. The earliest you can turn on your income (in most cases) is 62, and each year you wait beyond that—up to age 70—you receive a raise in your monthly benefit. At age 62 the individual whose statement is in Figure 2.1 would begin a lifetime income of $2,000 per month (with some caveats and adjustments we’ll discuss later). We say “estimated” because the report is not exact. It makes assumptions about future 2: A Game Plan for Social Security 33 income based on current income. If this person waited until 67 (full retirement age in this case), they would receive about $2,908 every month. If they were patient enough to wait until age 70, they would max out at a monthly income of around $3,610. Collecting Social Security To start collecting benefits, you need to apply online, by phone, or in person. Don’t expect to receive a check in the mail, though: all SSI payments are now made via direct deposit. If you activate your income, and then change your mind within one year, you can revoke your claim. You will need to pay the money back, and then it’s like you never made the claim in the first place. Note that you can only undo your claim once; you can’t claim and revoke multiple times. If you’ve been collecting benefits for more than a year and then change your mind, you can still suspend your claim, which means turning your income back off. That will allow your monthly income amount to increase for a while until you turn it back on. Medicare Part B premiums deducted from SSI Once you sign up for Medicare coverage—a subject we will cover in detail in Chapter 5—if you are receiving SSI, your Part B premiums will be deducted from your monthly check. Winning at Retirement 34 “When” for Singles If you are single, the decision about when to activate your income is pretty straightforward. Each year that you delay from age 62 to age 66, your monthly income increases by about 7.4% (it varies from year to year but that’s the average). Waiting from 66 to 70 gets you an increase of 8% per year. To put that in perspective, that is essentially a 7%–8% government- guaranteed rate of return that you earn by delaying the start of your Social Security income benefit. In this day and age of low interest rates, you likely won’t find a comparable (safe) return like that in the investment markets. Consider the person represented by Figure 2.1 again. He or she has three options: $2,000 a month at age 62, $2,908 a month at age 67, or $3,610 a month at age 70. Of course, waiting for the higher amount means forgoing years’ worth of income that one could otherwise receive. So does it make sense to wait, or not? Let’s crunch the numbers. Using the data in Figure 2.1, we know that this person would get $24,000/year (= 12 times $2,000) if they start collecting at age 62, about $12K more per year if they waited until age 67 (a total of $34,896), and nearly twice as much ($43,320/year) if they waited until age 70. Table 2.A shows the cumulative income for this person at key ages. 2: A Game Plan for Social Security 35 Table 2.A: Cumulative SS Benefits for an Individual Total Benefits Collected Age Start at 62 Start at 67 (FRA) Start at age 70 62 $24,000 $0 $0 67 $144,000 $34,896 $0 70 $216,000 $139,584 $43,320 75 $336,000 $314,064 $259,920 80 $456,000 $488,544 $476.520 85 $576,000 $663,024 $693,120 90 $696,000 $837,504 $909,720 You can see from this table why Social Security activation boils down to a bet on life expectancy. The various payment rates are designed so that if you live to your actuarial life expectancy you end up with about the same amount of money no matter when you turn the income on. At age 80 in the table, the three figures are in the same ballpark (ranging from about $450K to $490K). So if this person happened to die at age 80, it wouldn’t have made much difference when he or she started to collect their benefits. (Remember that we are focused on single life calculations at the moment—an added layer of complexity is involved when you consider spousal and survivor income.) Winning at Retirement 36 But now suppose this person died at age 70, well before the average life expectancy. He or she would have gotten over $200,000 in benefits if they started collecting at age 62 and much less or nothing if they waited until age 67 or 70, respectively, to start collecting. On the other hand, if they live to 90 or beyond, they are clearly best off if they wait until age 70 to start collecting benefits. So if you think you’re going to live for a very long time, it might be a good idea to wait until age 66 or 70 to get a higher monthly income. A word about life expectancy Since life expectancy is so integral to the subject of when to activate Social Security, it might be worth looking at the concept in more detail. According to government actuarial tables,3 the average life expectancy for men at birth is 76, while for women the number is nearly 81. Given the table above, which suggests a break-even point around 80 years old, that suggests turning on SSI early is a bad bet for a man and an OK bet for a woman. However, what really matters is your life expectancy at the claiming age of 62, which is when most people make the decision about when to turn on their income. At age 62, a man has a life expectancy of 82, and a woman nearly 85. Given those numbers, the odds favor waiting. Moreover, as we’ll discuss next, there are aspects of planning for couples that make waiting an even more compelling option. Often, when to take Social Security income goes hand in hand with a decision about whether or not to keep working. In that case, it’s a quality-of-life question on top of a bet about life expectancy. And, like so many other issues involving money, it means trade-offs between now and the future. If you work longer and delay taking Social Security, you 2: A Game Plan for Social Security 37 can end up with much more money as you get deeper into retirement. Plus, as we discussed in Chapter 1, working longer—in the right job— can provide a sense of purpose in addition to cash flow. The ideal scenario might be to find a way to keep working into your late 60s in a job you enjoy, while delaying when you need to tap into your investments and your Social Security income. Waiting means your income will increase 7%–8% each year, which is a pretty compelling risk-free rate of return. Social Security Planning for Couples For married couples, decisions about when to start collecting Social Security are much more complex. You have to consider the relative ages and life expectancy of both people, different earning levels, and (with heterosexual couples) the fact that women tend to outlive men. In our experience, many people do not understand how Social Security works for couples, especially the fact that when one spouse dies, the other has the option to keep the higher of their two incomes (more on that in a bit). This lack of understanding can lead to lousy outcomes (especially for widows who often end up with lower income than they could have received with better planning). Because of the complexity involved, we recommend using software that helps show break-even points based on your specific situation. Financial planners can provide a Social Security analysis (for a separate fee or as part of their broader suite of services), and there are free and paid programs you can access online such as: Winning at Retirement 38 • Open Social Security—A free, open-source Social Security calculator. https://opensocialsecurity.com/ • AARP Social Security Benefits Calculator—provided free by AARP, http://www.aarp.org/work/social-security/social-security-benefits- calculator.html • Maximize My Social Security—$40 for an annual license, https://maximizemysocialsecurity.com/ The quality of output from Social Security software varies, with some providing detailed analysis and some providing rough estimates. Google “Social Security calculator reviews” and you will find a number of articles on the subject. The most in-depth level of analysis will require you to enter your actual earnings history. Alternately, most programs utilize the estimates provided on your Social Security statement. Of course, make sure that you are dealing with a trusted source before providing personal details of any kind. No analysis should require you to provide your Social Security number. In a little while we will take a look at the output from a Social Security analyzer to see how these software programs can guide your decision making. When figuring out when to activate income, married couples should consider what happens if one of them passes away sooner than the other. And gentlemen, by “one of them,” we mean you: 97% of Social Security survivor benefits are paid to women.4 On average, heterosexual men marry women who are younger than they are,5 and, as reflected in the Social Security actuarial tables, women live longer than men. The 2: A Game Plan for Social Security 39 husband is also more likely to be the higher earner. These gender factors are very meaningful when it comes to Social Security planning. Times are changing. The term “married couple” no longer assumes a man and a women (Social Security rules are now the same for gay and straight couples). And the pay gap between men and women is narrowing, particularly among millennials. So the scenarios that are most common now might not be as common in the future. That doesn’t really matter, though ... all you need to know when making your decision is what the numbers look like for your particular situation. Spousal Benefits A key concept for couples is the spousal benefit. Married people can choose between two types of income: one based on their own earnings, or one based on a percentage of their spouse’s benefit. In some cases the best approach involves switching between the two at some point. The spousal benefit is important because it allows a spouse who either did not work or did not have high earnings to earn an income that is based upon the income of the higher earner. We once helped a client couple discover that the wife was entitled to a higher benefit than she had been receiving. In fact, she received a check totaling tens of thousands of dollars to make up for the mistake. This was an unusual case because the Social Security Administration found that the wife had never been notified of the option to take a spousal benefit. Normally if you fail to claim the optimal amount of income, you will not be compensated for the difference. (Note that so-called “deemed filing” rules, which will be explained in the next section, make failing to claim your maximum income less likely.) Winning at Retirement 40 With the spousal benefit, as with the regular benefit, if you wait until full retirement age, you get a higher income. However, there is no increase if you wait beyond full retirement age to take the spousal option. The maximum spousal benefit is 50% of what the other spouse would receive at FRA. So let’s say your benefit is $800 a month, but your spouse (at FRA) is to get $2,000. Instead of taking your $800, you could opt to take the spousal benefit of $1,000 (= 50% of $2,000). Some key points on this topic: 1) You can’t elect the spousal benefit until the other person has activated their own income. That is, if your spouse is still working and not claiming Social Security, you cannot claim a spousal benefit. 2) If you elect to receive either your own benefit or the spousal benefit prior to reaching FRA, your monthly benefit is permanently reduced (as discussed earlier). 3) The monthly amount is determined based on whether the person electing the spousal benefit has reached FRA, not whether the other one has gotten there or not. Let’s say for example a woman is electing a spousal benefit. The husband’s benefit sets the level of available income. The max spousal benefit is 50% of the husband’s benefit (at his FRA) . . . but the amount is reduced if the wife elects it prior to her FRA. Is all of this information giving you a headache yet? Writing it gave us headaches. The good news is that you don’t really need to understand every single aspect of this complicated subject to achieve a 2: A Game Plan for Social Security 41 successful plan. So bear with us while we continue to outline the basics, then we will talk about ways to figure it all out. Survivor Benefits In addition to the spousal benefit, the surviving spouse benefit is a critical element when it comes to Social Security planning for couples. In short, if the higher-earning spouse passes away, the survivor’s income steps up to the level that the deceased had been receiving. This has huge implications for women in heterosexual relationships, especially if they are from the Baby Boom generation and earlier. Not only do they usually live longer than their husbands, but they also tend to have earned less during life. In many cases they were homemakers without any earned income. If the husband turns on his income early and reduces his benefit, the woman can be stuck with a lower level of income for a very long time when she inherits his income. Because of this, the optimal Social Security strategy for married heterosexual couples tends to be for the wife to turn her income (or spousal benefit) on at 62 so that the couple begins receiving some income early, while the husband waits either until full retirement age or until 70, in order to optimize his income and thus optimize the wife’s survivor income. (This same rule applies for any couple where the higher-earning spouse has a lower life expectancy based on age, health status, etc.) It is important to understand that survivor income is based on two factors: 1. When the deceased spouse turned on their Social Security income Winning at Retirement 42 2. When the surviving spouse turns on the survivor benefit A surviving spouse can take the benefit as early as age 60, but the monthly income is permanently reduced if taken any time prior to their FRA. So, if possible, it might be best for the survivor to keep on his or her own income until FRA, before switching to the survivor benefit. As with spousal benefits, there is no advantage for a survivor to wait beyond FRA. What about divorced couples? The rules concerning divorce are complex and are beyond the scope of our willingness to explain endless details. The short version is that if someone is married for at least 10 years, they can be eligible for spousal and survivor benefits based on the earnings of their ex. In fact, the rules for divorced couples are somewhat more flexible than those for married couples. We refer you to ssa.gov/ planners/retire/divspouse.html for more information. Lapsed or Lapsing SS Spousal Rules Due to rule changes adopted in 2015, some planning options for married couples are no longer available, or are being phased out: • The so-called file and suspend strategy that allowed one person to claim their spousal benefit while both delayed their personal benefits has been done away with. • A similar strategy, called filing a restricted application, is still available but only if you were born on or before 1/1/1954. This involves spouse 1 activating their income while spouse 2: A Game Plan for Social Security 43 2 takes spousal income, even though the latter’s own benefit would be higher. This allows spouse 2’s own benefit to continue to increase for a number of years (max of age 70), at which point they switch from spousal benefit to their own benefit. If you don’t make the 1954 birthday cutoff, once you elect to turn on income, you are deemed to have elected the highest level of benefit available to you (the so-called deemed filing rule). Social Security Scenarios for Couples Enough chitchat, let’s look at some examples. Our firm uses a couple of different software packages to analyze Social Security claiming strategies. One program is called Savvy Social Security Planning, and we will check out some of its output now. We’ll look at three scenarios with varying ages and income levels for the spouses. The software calculates three possible approaches for each scenario: • Maximum Benefit: the approach that provides maximum combined benefits over time if the husband and wife both live to life expectancy • Earliest Benefit: the amount of income if both activate at 62 years of age (the most common age of activation), and then both live to life expectancy • Hybrid Strategy: one of them turns on early at age 62, while the other waits until a later date (at which point the one who turned on early can switch to a spousal benefit) Winning at Retirement 44 Spoiler alert: the hybrid strategy typically provides the best overall projected outcomes. Scenario 1: Heterosexual spouses are of similar age and the husband earns more This is one of the two most common situations (we will look at the other one next). The chart and graph in Figure 2.2 depict results under the three different claiming strategies outlined above. In this case, we assume both parts of the couple live to their life expectancies (her 85, him 82). In light gray box (upper graph) and solid light gray line (lower graph) we see the strategy that maximizes long-term results. In this case, the wife activates her income at age 66, the husband at 70 (at which point the wife switches to the spousal benefit of 50% of his benefit). In medium gray box (upper chart) and thick-dashed gray (lower graph) we see what happens if the couple activate as early as possible, both at age 62. In the black box (upper graph) and black dotted line (lower graph) we see the hybrid strategy, where the wife turns on her Social Security at 62, and the husband waits until the max age of 70 (at which point she switches to the spousal benefit). 2: A Game Plan for Social Security 45 Figure 2.2: Cumulative Benefit For Similar-Age Couple with Higher-Earning Husband 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1,260,306 Cumulative Benefit ($) 1,041,998 1,232,422 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Cumulative Benefit ($) Year 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 Maximum Benefit Earliest Benefit Hybrid Strategy The Earliest Benefit scenario—both turning on at 62—is the most popular approach, and by looking at the graph you can see some appeal to it. For many years, the maximum outcome for the couple comes from activating early (we saw this illustrated by the data in Table 2.A for a single person). It’s a tempting proposition: you can have a bunch of money coming in RIGHT NOW vs. you need to wait eight years (from ages 62 to 70), even though by waiting you might get more total benefit in the long run. And as you can see from the lower graph (dashed line), it does seem to work out well for a long time. For the equal-age couple Winning at Retirement 46 it maximizes total payments until they are 78 years old, at which point the more patient strategies begin to pull ahead. So far, this sounds very similar to the single-person scenario we discussed earlier. But here’s the key difference: remember, when one spouse dies, the income of the survivor may increase if the deceased spouse was receiving a higher income. And most of the time that means a higher-earning husband passing away and leaving a lower-earning widow. Figure 2.3 shows the benefit received by a surviving wife (at the husband’s life expectancy age of 82), and in that case the Earliest Benefit (“both turn on at 62”) strategy has the worst results by far. In fact, if the husband waits till age 70 to activate his income, the surviving wife will receive nearly twice as much income after his passing. Figure 2.3 Surviving Spouse Benefit for Equal-Age Heterosexual Couple 80,000 60,000 40,000 20,000 0 64,510 Survivor Benefit ($) 36,653 64,510 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy Hence the appeal of the hybrid strategy. If you take another look at the income graph in Figure 2.2, you’ll note that the Hybrid Strategy line begins at the same time as the Earliest Benefit line (because the wife turns her income on right away in both cases), while the theoretical maximum long-term income approach—the light gray, Maximum Benefit, line—doesn’t start until the wife is 66. 2: A Game Plan for Social Security 47 Couples should look at the Social Security claiming strategy with two goals in mind: maximize total income and maximize the outcome for the survivor. The hybrid strategy is a sensible approach that effectively straddles both goals. Scenario 2: An older spouse has a higher income Let’s change the inputs a bit and see how the results differ. In this case, one spouse is significantly older than the other (gender is irrelevant). Figure 2.4 illustrates this common scenario where an older spouse has a higher income history. In this case it appears there are only two lines showing on the graph because the maximum long-term income strategy is the hybrid strategy, where the younger spouse turns on at 62 and the older spouse waits until 70—so the Maximum Benefit and Hybrid Strategy lines are identical. Don’t worry if you just got confused, the concept is what counts, not the details. And we will summarize this all in a way that will hopefully provide clarity. In this example the crossover point (see next page)—where the overall benefits favor waiting—is about age 78 for the older spouse and age 71 for the younger spouse. Figure 2.4 Cumulative Benefit When Older Spouse Has Higher Income 2,000,000 1,500,000 1,000,000 500,000 0 1,566,941 Cumulative Benefit ($) 1,184,246 1,566,941 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy Winning at Retirement 48 Figure 2.4 Cumulative Benefit When Older Spouse Has Higher Income (cont.) 2,000,000 1,500,000 1,000,000 500,000 0 Cumulative Benefit ($) 2017 2019 2021 2023 2025 2026 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 Maximum Benefit Earliest Benefit Hybrid Strategy Year However, again the crossover point of total benefits is not the only variable to consider. The survivor income for the younger spouse is dramatically different if the older spouse holds off on activating their benefit until age 70 (Figure 2.5) Figure 2.5: Survivor Benefits for Younger Spouse 80,000 60,000 40,000 20,000 0 64,510 Survivor Benefit ($) 36,653 64,510 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy Scenario 3: Spouses are of similar age and earn similar money A look at one more scenario reveals similar results. Figures 2.6 and 2.7 show that the hybrid approach has the husband activating at 62 while the wife waits until 70. No matter what ages or relative income 2: A Game Plan for Social Security 49 levels we use, we get back variations on the same theme in terms of the outcome. Figure 2.6: Cumulative Benefit when Spouses Are of Similar Age and Income 2,000,000 1,500,000 1,000,000 500,000 0 1,663,219 Cumulative Benefit ($) 1,359,128 1,553,096 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy Cumulative Benefit ($) Year 2,000,000 1,500,000 1,000,000 500,000 0 Maximum Benefit Earliest Benefit Hybrid Strategy 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 Figure 2.7: Survivor Benefit for Spouses of Similar Age/Income 80,000 60,000 40,000 20,000 0 64,515 Survivor Benefit ($) 36,649 64,515 1 Maximum benefit 2 Earliest benefit 3 Hybrid strategy Winning at Retirement 50 Bottom Line for Married Couples • Starting Social Security benefits at 62 for both spouses maximizes income for a period of time but results in a low income from a survivor perspective. • Starting both incomes later (between full retirement age and age 70) maximizes results later in life, but it does take a long time for the crossover point to occur. • The hybrid approach, where one person takes income early and the other waits until later, is typically the happy medium. The couple gets the benefit of money coming in early on, but the survivor still receives a high survivor benefit. Taxation of Social Security Benefits It might not surprise you to learn that the government, while giving you money, wants to take some of it back from you. Thankfully, most people receive their Social Security benefits tax-free. But depending on your overall level of income, some amount of your Social Security payments might be taxable. It’s determined by a number called Modified Adjusted Gross Income. Adjusted Gross Income (AGI) is calculated on your tax return, and includes investment income, capital gains, earned income, and so forth. For purposes of Social Security taxation calculation, you make the leap from AGI to Modified AGI by: 1) Adding back adjustments to gross income 2: A Game Plan for Social Security 51 2) Adding in any tax-exempt interest received 3) Adding 1⁄2 of the Social Security income received Figure 2.8 shows various levels of Modified AGI—for single or married people—and what each means in terms of taxation of Social Security income (2018 data). For example, if you are a married couple earning more than $44,000 in Modified AGI, 85% of your Social Security income will be taxable. Figure 2.8: Modified AGI Taxation Married Single Amount Taxable Less than $32,000 Less than $25,000 0% $32,000-$44,000 $25,000-$34,000 50% Over $44,000 Over $34,000 85% On top of federal income taxes, some states take a piece as well. You can visit this site for a map showing which states tax SSI: http:// www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index. php?map=tax-social-security#anchor Is Social Security Going Broke? Well, not quite yet. But trouble looms. Each year the government publishes an overview of the Social Security system’s finances called the OASI Trustees Report. It runs almost 300 pages and is chock-full of Winning at Retirement 52 data, so if you have trouble sleeping at night, we recommend you check it out: https://www.ssa.gov/oact/TR/2021/index.html. Actually, the summaries provided in the first 30 pages or so provide a pretty good sense of the problem we face. The Social Security system has reached a tipping point in terms of paying out more each year than it takes in. The government socked away reserves during the many years that it was taking in more than enough taxes to cover benefits, but those reserves are projected to run out in 2034. At that point, the system will be “broke.” At least, from an accounting standpoint. There is no actual bank account holding a bunch of money earmarked for Social Security benefits. Rather, what we are talking about are various entries on government accounting ledgers. Moreover, there will always be payroll taxes coming in, just not enough to fully cover benefits, so the system wouldn’t be completely insolvent. Nonetheless, from an accounting perspective the Social Security system is projected to be short of funding about 12 years from the time of this writing. The OASI Trustees Report makes projections looking 75 years out. According to the report, there are some fixes that could make the Social Security system stay solvent for that long. Either the Social Security tax rate will need to increase by 3.54% (to 15.94%) on all workers, or benefits will have to be cut by 24% for current and future beneficiaries, or some combination of both.6 Cutting benefits is a politically unpopular approach, to say the least. And Americans in or near retirement are a politically influential group (it’s a large and growing population, and one that tends to vote more than younger people7 ). Plus, not many people like the idea of cutting the income of seniors. Given those factors—and the general 2: A Game Plan for Social Security 53 tendency for nothing to get done in Washington these days—we think it is unlikely that benefits will be cut for those currently receiving them, or those approaching the initial eligibility age of 62. On the other hand, it’s fair to assume that a 3.36% payroll tax increase on all workers—the adjustment that would be necessary to balance the books—wouldn’t be terribly popular either. So there is no easy way out of the problem. But eventually, something is going to need to be done. The longer it takes to start fixing the financial imbalance, the greater the pain will be in terms of higher taxes and/or lower benefits. Some likely outcomes, in our opinion, are: • delayed eligibility ages (particularly for those who have not yet reached 50 years old) • increased taxation of benefits (particularly for high earners) • removal of income caps for payroll taxes Another possibility is a change in the way cost of living increases are calculated so that annual “raises” are not as high. The bottom line is: something has to give. The problem highlights the need for people to have income plans for retirement—whether via working longer or from investments—that are beyond what is provided by Social Security. Social Security Summary More than two-thirds of Americans turn on Social Security prior to full retirement age, and the most common age is 62.8 As we saw in the Winning at Retirement 54 examples we reviewed, this early claiming approach has one glaring weakness: it can negatively impact the income of the surviving spouse. It also hinders long-term results if both spouses live to a ripe old age. We call this problem “early onset Social Security.” Given that a hybrid approach seems so broadly beneficial, why is early claiming so common? There is a mixture of factors at play. According to a study by Voya, 60% of Americans end up retiring sooner than planned.9 Some of those likely resulted from involuntary layoffs, some for health reasons. In any case, a lot of people experience retirement sooner than expected, and it makes sense that many of them are unprepared financially. A study by Experian says 71% of Americans feel they do not have enough saved for retirement.10 Given the dearth of savings in America, even those who retire when they expect to aren’t necessarily ready. In other words, the primary reason why so many Americans turn on their income early is likely “desperation.” People simply feel they have no other choice but to take as much as they can right away. Another factor may be lack of knowledge or planning. A study by Northwestern Mutual suggests 35% of Americans have not spoken with anyone about retirement, and that includes their spouses!11 Only 27% have spoken with a financial advisor. This may be partly a “head in the sand” phenomenon. People who know they are in deep trouble in terms of their retirement savings may be choosing to ignore the issue altogether. In any case, it is fair to assume that many Social Security recipients have never seen the kind of software analysis we looked at earlier, nor have they consulted with anyone knowledgeable about the pros and 2: A Game Plan for Social Security 55 cons of various claiming strategies. Many may simply be unaware of the potential advantages of a hybrid claiming strategy. Another problem is that while there is a wealth of information available on the internet about Social Security, it tends to come in the form of lots of rules and data, but not much actual advice. And the subject, as you have experienced while wading through this chapter, is complex and often confusing. With that in mind, here are some practical steps to take to educate yourself and make smart decisions for you and your family: • Visit ssa.gov and download your statement. Married couples should download statements for both spouses. Review them for accuracy. • Analyze different claiming strategies based on your particular circumstances. A financial advisor can help, or you can do it yourself with the aid of software. • Consider the results of your Social Security analysis in light of a full financial plan, which you can pursue via do-it- yourself services or with the help of a financial planner. We will revisit this in the last chapter when we talk about your overall action plan. We recommend that you schedule a visit to your local SSA office for a consultation. You can find you local office by checking https:// secure.ssa.gov/ICON/main.jsp. Local help is available by phone or in person. For in-person meetings, an appointment is not required but is highly recommended to avoid long wait times. The experience of our clients has been mixed when it comes to assistance in local SSA offices. The Winning at Retirement 56 quality of help you will receive can vary from location to location. Some people rave about the helpful service they received, some rant about the lack of it. Almost anything that can be accomplished in person can also be done online, so if you are having a bad experience with the local people, try getting help online or via the main number: (800) 772-1213. In short, as with the broader subjects of investing and financial planning, do not come at the subject uninformed. And do not be short- sighted about it. Future you will thank current you for giving serious consideration to what your needs might be many years down the road. Endnotes 1 Social Security Keeps 22 Million Americans Out of Poverty: A State-By-State Analysis. https://www.cbpp.org/research/social-security/social-security- keeps-22-million-americans-out-of-poverty-a-state-by-state 2 Go to SSA.gov to find our more about maximum benefits. 3 Social Security Actuarial Life Table. https://www.ssa.gov/oact/STATS/ table4c6.html 4 Policy Basics: Top Ten Facts About Social Security. https://www.cbpp.org/ research/social-security/policy-basics-top-ten-facts-about-social-security 5 What’s the Average Age Difference in a Couple? https://fivethirtyeight.com/ features/whats-the-average-age-difference-in-a-couple/ 6 https://www.ssa.gov/oact/TRSUM/ 7 Voter Turnout Demographics. http://www.electproject.org/home/voter-turn- out/demographics 8 When Should You Take Social Security? https://www.schwab.com/ resource-center/insights/content/when-should-you-take-social-security 9 How to Plan for an Unexpected Early Retirement. http://corporate.voya.com/ newsroom/media-highlights/how-plan-unexpected-early-retirement 10 Survey Results: Personal Finance. http://www.experian.com/blogs/ask-expe- rian/survey-results-personal-finance/ 11 2016 Planning & Progress Study. http://news.northwesternmutual.com/down- load/2016-planning-progress-financial-anxiety.pdf