Social Security

Social security is constantly being scrutinized as one of the areas in need of reform as the federal government attempts to find ways to decrease our deficit. Until any major changes are made—and we will keep our clients posted of such—the following remains true:

Eligibility for social security benefits is determined by your work history. To qualify for benefits, you must have earned a minimum number of “credits” throughout the course of your working life.

Changes to your status in any of these areas can have a positive or negative effect on your benefit amount. Your benefit amount will be determined on the basis of your work experience, your average earnings, the age at which you begin taking benefits, and any additional earned income you receive from working after you begin receiving benefits.

The year of your birth and your age when you start taking social security benefits directly affect the amount you receive. If you choose to receive benefits before your full retirement age, your benefits will be reduced permanently. For example, if you were born between 1943 and 1954, your full retirement age is 66. If you were to start receiving benefits at age:

  • 62, you would receive 75 percent of your benefit
  • 66, you would receive 100 percent of your benefit
  • 70, you would receive 132 percent of your benefit

Working while you take social security may reduce your benefits. If you are younger than your full retirement age when you begin receiving benefits, then there are limits on how much you can earn without affecting your benefit amount. When you reach full retirement age, the earnings limits no longer apply.

Your social security benefits are taxable in most circumstances. Up to 85 percent of your social security benefits may be taxable on the basis of your “modified adjusted gross income” (MAGI). With careful planning, however, you can reduce the taxability of your social security benefits. For example, there are some “preferred asset classes,” which are exempt from the MAGI calculation.

Certain kinds of income will not increase the taxability of your social security benefits. Preferred asset classes such as qualified Roth IRAs or Roth 401(k) distributions are exempt from the MAGI calculation. Also, for assets that have a cost basis, the cost basis is exempt from the calculation. These assets include the security purchase price (in the case of a taxable investment account), nondeductible IRA contributions, and the principal investment portion of an annuity distribution.

Once you start taking social security, it is very difficult to “turn off”—the program is not built for flexibility. Deciding when to start receiving your social security benefits is a key retirement decision. Although it is possible to withdraw a claim and then return paid benefits, it is best to have a plan in place so that you start receiving and keep receiving benefits as a part of your overall retirement strategy.

Your social security estimate is not a direct representation of what you will receive. The benefit estimate you run on is made on the basis of your most recent earnings and the assumption that you will continue to work and earn about the same amount as you currently earn. The estimate does not account for uncertainties such as changes in your earnings or work status, future law changes, and when you start receiving benefits.

If something happens to you, then your spouse and children may be eligible for benefits. When you die, your spouse (if he or she is age 60 or older, or any age if he or she is caring for your children younger than age 16) may be eligible for survivor benefits to continue receiving your benefits. This is an important consideration when preparing a retirement plan for you and your spouse.

Below are two documents that may be of use to you:

  1. A decision tree for a married couple that is contemplating taking social security benefits early
  2. A social security claiming guide

Please contact our advisors to answer your questions regarding social security benefits.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situations.