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  • Writer's pictureJeran Van Alfen, CFP®

Planning on Social Security?

We all want some level of security. Especially at the end of a long working career, it is important to have the peace of mind that comes from knowing that money is there when we need it. For most people who are retiring soon, the Social Security program is a key component of their plan for financial independence. With this in mind, this post will address several important points to consider about the Social Security program and how to plan for your benefits.

Common Misunderstandings

Will Social Security run out of money? This is a major concern that I constantly discuss with people during the retirement planning process. There is a lot of fear-based reporting on the status of Social Security and the future of Social Security has been a constant debate in political conversations. However, it is important to understand the real risks to the program in order to plan for options in the future.

The Social Security program is funded through payroll taxes. As employees and employers, we all pay our share of FICA and this tax revenue funds the benefits for current recipients. The program operates with a surplus right now. However, with more people retiring than entering the workforce, that surplus is at risk of being depleted. The current projection is that the Social Security trust fund will run out of money in 2034. This does not mean that Social Security will be bankrupt. The important point to remember on this is that the program will still have revenue. So, while the surplus will be depleted, if no changes are made, the estimate is that the program would be able to pay 79% of the promised benefits until 2090.

What does this mean for your benefit? We don’t know for sure right now. However, if history is a guide, there will most likely be changes made to keep the program in the black. In the 1980’s when the reserves were in danger, Congress took actions including raising the retirement age and taxing the benefits. Many speculate that the retirement age will be moved back again. Last year, congress changed the age for required minimum distributions from retirement plans from 70 ½ to 72 for everyone who was not already taking a distribution. While the two situations are not related, Social Security may experience similar changes to fund current benefits. Another move could be to raise the FICA Wage Base Limit. Currently, gross income above $137,700 is exempt from the Social Security tax. If congress needs to raise revenue, it seems that raising this limit would be a natural fix.

Of course, any changes to the Social Security program are a touchy subject, so it seems that the can keeps getting kicked down the road. Just this last week, there was a debate about payroll taxes in the news. One side floated the idea of waiving payroll taxes due to the Covid-19 pandemic. Since these taxes are the lifeline of Social Security, this action was viewed by the other side as an attack on people’s benefits. We will have to wait and see what solutions are finally agreed upon. For now, it seems that those who are receiving benefits or are close to eligibility will be ok. For the future generations, it seems that the retirement age may be increasingly distant. Whatever changes are made, it seems that Social Security is an American institution at this point and the idea of taking care of our elderly population through a social program like this has majority support across the board.

The President sets the cost-of-living adjustment. This is a common misunderstanding that comes up when retirees get their annual statement. The President and congress actually don’t decide on what COLA will be added each year. Social Security benefits are automatically adjusted for inflation. The change is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, since inflation has been so low over the past few years, COLA adjustments have been low or non-existent.

Undocumented immigrants collect Social Security. This is another misconception. The idea is often tied to the fear that the program is being drained by funding benefits for illegal immigrants. In fact, undocumented immigrants can’t collect benefits. However, these workers and their employers do pay FICA taxes. Social Security nets approximately $13 billion per year from undocumented immigrants.[1] (Side note: There is a program called the Supplemental Security Income which provides benefits for people with limited means, disabled, blind, or 65 and older. Refugees, asylum seekers, and permanent residents are eligible for this benefit. However, this benefit is not funded by payroll taxes. It is funded by the Government’s general fund.)

How to plan for your benefit:

Eligibility. First it is important to understand when you are eligible for Social Security. You have to have 40 quarters (10 years) of wages that were subject to Social Security payroll taxes. These quarters do not have to be consecutive, so you can have interruptions in work and still accumulate eligibility.

The program also allows for non-working spouses in a household to qualify under their working spouse’s wage history. This is called the spousal benefit. Essentially, a non-working spouse will be eligible to receive their own benefit or 50% of the value of the working spouse’s benefit, whichever is greater.

It is also important to understand that benefits are calculated based on the average of the highest 35 years of earnings. This means that the longer that you work in a high-paying salary, the larger your benefit will be.

Important terms to know:

Primary Insurance Amount (PIA): This is your monthly benefit. When you receive your Social Security statement, it shows your estimated PIA at Full Retirement Age, at age 70, and at age 62.

Full Retirement Age: This is an extremely important term to know. This is the age that you are entitled to receive your full PIA. Essentially, this is your retirement age. If you decide to take benefits before or after this age, there are consequences that you need to understand.

Reduced benefits. You can choose to take your PIA starting at age 62. However, receiving benefits before your Full Retirement Age will result in reduced benefits. This decision is permanent. This means that once you begin receiving a reduced benefit, your PIA will always be penalized. It will not increase to your full PIA at your Full Retirement Age.

Retirement Earnings Limit. If you choose to take Social Security before your Full Retirement Age, the Retirement Earnings Limit will apply to you. This is the maximum amount that you can earn in the year before your monthly benefit is penalized. Basically, the government wants to make sure you are really retired if you take an early benefit. If you are receiving Social Security before your FRA and you earn income above the earnings limit, the government will withhold $1 of benefit for every $2 of earnings above the limit. You don’t get this money back. This means that it is important to determine how much you will receive in wages from work before you take an early Social Security benefit. (Keep in mind, that this only applies to earned income. Withdrawals from IRAs, etc. are not included in the earnings limit.)

2020 Earnings Limit

Under FRA: $18,240

At FRA or older: No Limit

Increased Benefits. While the decision to take Social Security results in a penalty to your PIA, delaying your benefit will result in a bonus. You receive increased benefits for each month that you delay taking your PIA up until age 70. The benefit increases 8% each year until you take it and lock in your PIA.

When should you take your benefit?

This decision is different for every individual. I often say that your Social Security decision is a bet on longevity because there is a “Break-even” age depending on when you take your benefit. If you begin receiving benefits earlier, it is a lower amount but that is money in your pocket. If you delay benefits, you will receive a higher monthly income, but it will take time for your total amount received to make up for the years that you could have been receiving an income. There is a certain age that you break-even and begin to come out ahead.

Source: Social Security, Options to help you maximize your benefits. Fidelity Investments.

This hypothetical example assumes that the person is not working in retirement. Sample benefit amounts are not exact due to rounding. They do not reflect annual COLA or taxes. Benefit at FRA is assumed to be $2,000 per month.

Since delaying benefits only results in more total money if you continue to live past the break-even age, many retirees decide to take an earlier benefit simply to “live it up” while they are younger. I refer to this as a bet on longevity because you may want to consider your family longevity history and your own personal health and lifestyle before you make a decision.

The fact is many people tell me they think they won’t last that long, however the numbers tell a different story. We are living longer and a couple at age 65 has a 50% chance of at least one person living to 93 years old.

Source: Blackrock: Helping to Secure Your Client's Retirement

What factors affect your decision?

There are many other factors besides longevity that you need to consider when planning for your benefit. The major retirement planning goal is to relieve pressure on your investment portfolio and savings. If you have guaranteed income sources like Social Security, then you do not need to withdraw as much money out of your savings to live on and your portfolio should last longer. You should consider the following factors and continue to monitor them as you get closer to retirement.

How long will you continue to work? The length of your career is an important factor. As we discussed previously, you should wait to file for benefits until your FRA if you plan on considerable wages. Also, you may be trying to maximize benefits by gaining more working years under a high paying salary. If you don’t need the income, you may want to let your benefit grow. However, you also may want to take the extra income and invest it.

How much guaranteed income do you have? Consider what other income sources you will rely on in retirement. Real estate or business income, pensions, annuities. All of these types of income may allow you to cover your expenses without taking portfolio withdrawals. If you have other income sources, you may want to delay your Social Security benefit to let it increase and provide a higher paycheck for your later years.

How is the market performing when you retire? If you have experienced considerable losses in the markets (both stock and real estate), around your retirement years, then it may make sense to leave your money invested as long as you can before you begin taking withdrawals and rely more on Social Security. It is important to plan and coordinate your Social Security benefits and your portfolio withdrawals in order to optimize the longevity of your portfolio.


Once you receive your Social Security benefit, it is helpful to know how the money is taxed. As we discussed previously, taxation of Social Security benefits was part of the changes in the 1980’s that the government enacted to keep the program solvent. The important thing to know is that a portion of your Social Security benefit will be subject to tax depending on how much other income you receive. To determine this, we use your provisional income. Your provisional income includes all of the income sources shown here:

Source: Social Security: Options to help you maximize your investments. Fidelity Investments.

Once your provisional income is established, the percentage of your Social Security benefits that are taxed is based on these thresholds:

Source: Social Security: Options to help you maximize your benefits. Fidelity Investments.

Other important details

Spousal Benefits. As I mentioned above, a non-working spouse is eligible under the working spouse’s record. The maximum spousal benefit is 50% of the working spouse’s PIA. See the image below. In this example, Jordan and Alex are married. Jordan worked and is eligible a PIA of $2,200. Alex did not work for the required 40 quarters and therefore has a PIA of $0.

Source: Blackrock: Helping to secure your client's retirement.

Survivor Benefits. When a spouse dies, the surviving spouse is eligible for survivor benefits. The surviving spouse will be able to receive or continue receiving the highest benefit between the two spouse’s benefits. Keep in mind, only one PIA will continue, not both. This is an important concept to plan for because you don’t want to get caught off guard by losing income. The expectation is that a loss of benefit will be offset by less expenses.

Example: Mike and Maureen both receive Social Security benefits. Mike receives $2,725 per month and Maureen receives a spousal benefit of $1,362.50. Mike passes away. Maureen will continue to receive Mike’s $2,725 and her spousal benefit will stop. Her monthly income is now reduced. If her monthly expenditures are not reduced without Mike, she may have to make adjustments.

Divorced Spousal Benefits. If you were married for at least 10 years and have not re-married, you may be eligible for divorced spousal benefits. Many people ask if they have to coordinate this with their ex-spouse, and the answer is no. Divorced spousal benefits do not affect the ex-spouse’s benefit and you can inquire through the SSA to determine your eligibility without contacting your ex-spouse.

Source: Social Security: Options to help your maximize your benefits. Fidelity Investments.

Make a plan

According to Fidelity, a majority of people receive reduced benefits, and many did not have a reason for taking the loss.

Fidelity Advisor 2013 Survey of Investors at Retirement, July 2013.

As you approach your Social Security decision, I recommend consulting your financial plan and deciding on a strategy. Don’t go it alone. A good analysis will help you consider all the factors involved and provide guidance to help you make an educated decision.

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