All Things Financial Planning Blog


Social Security

Coming ‘Of Age’ – ‘Retirement Age’ That Is…As more and more of our ‘baby boomers’ come of age and near the time for applying for social security benefits, I thought it might be appropriate to review a little bit about our social security benefit program as it applies to everyone.

It is extremely important to understand what our social security options are before we make a potentially irrevocable decision about taking and receiving our benefits as the dollar amounts received over our lifetimes could be meaningfully more!

Taxes – Funding Benefit and Receiving Benefit
Social security benefits are funded by contributions made through payroll taxes that are half paid by the employer and half paid by the employee with self-employeds effectively paying both halves. When we receive social security benefits they are income tax free unless you ‘make too much money’.

So managing income recognition and managing the character or type of income (cash flow) received when we are drawing social security benefits can be extremely important in maximizing what we keep of this otherwise income tax free benefit!

Social Security Benefits Started Before Full Retirement Age (FRA)
If you start your social security benefits before FRA you will receive a reduced benefit of about 75% at age 62, about 80% at age 63, about 87% at age 64 and age 65 about 93%. Another complication of drawing social security before the year in which you turn FRA is that if you keep working you will have to give back some of your social security earnings.

In 2013 that $1 of ‘giveback’ for every $2 of earned income starts when you make more than $15,120. In the year you reach FRA the ‘giveback’ becomes $1 for every $3 of earnings above $40,080 (2013 amount).

Social Security Benefits Started At Full Retirement Age (FRA)
Social security benefits are calculated based on a minimum of 40 credits (quarters of covered work) to be eligible for benefits. Depending on your birth date, your age of retirement, FRA, will vary between 65 and 67 years of age (if you were born after 1960).

The Social Security Benefits Administration has a calculator for you to run some what-ifs about choosing a retirement date. They also have other calculators that can run estimated benefits, offset effects (see discussion below), etc., etc. Besides the when to take retirement question, there are other strategies to consider in maximizing the social security benefits to be received.

One such strategy is called ‘file-and-suspend’ which may allow a qualifying recipient to suspend payments while the spouse files for spousal benefits.

Another strategy comes available to us when we have been married to another for at least 10 years. In those cases, you may qualify for benefits based upon the former spouses earnings. If you wait until your FRA, you can file on your former spouses earnings for a spousal benefit and delay taking your retirement until age 70. This strategy will not work if you apply for the spousal benefit before FRA!

Social Security Benefits Started At Age 70 (Post-FRA)
By waiting until age 70 to draw upon our social security benefits a person born after 1943 would have their FRA benefit increase 8% per year by waiting until age 70! Very compelling, indeed!

Social Security Benefits Post the Windsor Supreme Court Decision
As a result of the US Supreme Court decision on same sex marriages the Social Security administration is no longer prohibited from recognizing same-sex marriages for purposes of determining benefit claims filed after June 26, 2013. The decision and its social security benefits impact are being discussed by the Administration and exact details on same-sex marriage benefits will be forthcoming.

Medicare Starts At Age 65
Social security is one matter, Medicare is another! If you do not sign up for Medicare at age 65, your Medicare coverage may be delayed and cost more!

‘Other Pension’ Offsets to Social Security Benefits Received
Two issues that could impact your benefit received are the following.

  • Government Pension Offset. If you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s or widow’s or widower’s benefits may be reduced.
  • Windfall Elimination Provision. The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive.

Survivors Benefits and Benefits for Children
Benefits can be made available to others based on our benefit should we die or become disabled. Two of those are survivor benefits (spouse) and benefits for children.

  • Survivor Benefits. Your widow or widower may be able to receive full benefits at full retirement age. Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled.
  • Benefits for Children. Children of disabled, retired or deceased parents may be entitled to a benefit. Your child can get benefits if he or she is your biological child, adopted child or dependent stepchild. (In some cases, your child also could be eligible for benefits on his or her grandparents’ earnings.)

To get benefits, a child must have:

  • A parent(s) who is disabled or retired and entitled to Social Security benefits; or
  • A parent who died after having worked long enough in a job where he or she paid Social Security taxes.
  • The child also must be:
    • Unmarried;
    • Younger than age 18;
    • 18-19 years old and a full-time student (no higher than grade 12); or
    • 18 or older and disabled. (The disability must have started before age 22.)

Concluding Thoughts.
Social security benefits have been providing a ‘safety net’ to our citizens since the program came into existence.

Pre-retirement benefit programs like ‘Benefits for Children’ and ‘Surviving Spouses’ provide support to those qualifying families who have lost a breadwinner.

Retirement benefit program options are diverse and not readily understood by many. For some households social security retirement benefits comprise as much as 85% of household income so ensuring that one receives as much as is legally possible of the benefits that they have earned the right to, is so important! Consult with your advisor before you make any decisions. You may well be bound to them for your lifetime!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


How Will a Reduced Social Security Benefit Affect Me?

In an earlier blog, I wrote about the impact of the higher age at which social security benefits start (Full Retirement Age or FRA) based on the changes in the law enacted in 1983. The premise of that article was that the benefit was 19% lower because current retirees have an FRA of 67 versus the 65 FRA of their parents.

Subsequently, I wrote another blog that referenced the current challenge the country has in raising the debt ceiling and how to reduce the budget deficit that is currently adding over $1 trillion to the national debt each year. In that blog, I identified several ways in which the annual deficit could be reduced by changing the way in which certain benefits are calculated so that less would be paid out each year to the beneficiaries of these benefits. One of the changes that I suggested could be done was to reduce the annual increase in the social security benefits that is tied to the Consumer Price Index (CPI).

Lo and behold, a few weeks later several articles appeared that suggest one change would reduce the annual increase in the CPI amount by .3% annually by changing what is included in the CPI index. The changes are technical in nature and beyond the scope of what I want to discuss with you, so I will leave that research to you to find those differences. In this blog I want to identify for you what this suggested .3% reduction in benefits will mean to you and to the benefits you will receive. Let’s start slowly so as to keep all of us on the same page.

Your benefits will be based on the high 35 years of your actual earnings each year you work up to the maximum wage base each year. For those of us who started working in 1963 the wage base maximum was $5,200. Today the maximum is $106,800 of earnings that goes into this calculation. Since each of us earns a different amount every year, each of us will have a different benefit when we retire. What is true, however, is if we earn more each year than we did the previous year, our retirement benefit will be higher than if we earned the same amount every year. So work harder, make more money and the reward will be a higher annual benefit from social security when you eventually retire.

The next thing to appreciate is that if we start receiving our social security benefits at age 62 rather than at our FRA, the annual benefit will be much lower (as much as 32% lower) than what the benefit will be if we wait to the FRA age to start it. This will be significant over our lifetime, especially if we have good genes and live to a ripe age of 90 to 100 or more. So think long and hard about when you start your benefits if you want to get the maximum out of this great benefit.

Now we are ready for that annual CPI increase. Let’s say you start with a benefit of $1,200 per month. If the annual CPI increase was 3% (this is the long term average annual increase including the zero % increase in the past two years), next year your monthly benefit would  be increased by $36 to $1,236, the next year another $37 increase will put it at $1,273, and so on.

So if they change the method to a lower CPI that averages 2.7% annually (.3% less than the CPI used today), the increase is only $32 to $1,232, then a $34 increase the next year to $1,266, and so on. After two years, you are receiving $12 per month less which is $144 per year of income you will not have. Like the snow ball going downhill, this difference gets larger over time. After 10 years, the difference is $41 per month which equates to $492 per year. That will be pretty big money to some retirees. So let’s talk about how to offset this through saving more each year when we are working and having options on how we save or spend what we earn.

While none of us knows the exact time of our demise, we do know that people are living longer today than our ancestors lived. The largest segment of growth by age group is people over age 80 and many more of them are women than men. So when we retire at age 62, many of us can be looking at receiving this benefit for more years than we actually worked and earned money. So we need to look at the long term impact of what these small changes in the formula have on our financial well being.

To do this, I had to crank up my magic worksheet and do some serious number crunching to get a real answer for you. For this I took a client (John or Nancy) who is receiving a monthly benefit of $1,659 today and compared his annual social security at various stages down the road at an average increase of 3% per year (the long-term average) with a 2.7% annual increase (what the rate of increase would be under the new CPI). In 10 years, the monthly benefit would go to $2,165 per month under the 3% annual increase compared to $2,109 at the 2.7% increase. In 20 years, the monthly benefits go to $2,909 and $2,752 respectively, a difference of $157 per month and $1,884 annually. Should they live another 30 years and the program had no further changes in the next 30 years, the monthly amounts are $3,909 and $3,592 which is a difference of $317 per month and $3,804 per year.

Let’s assume that John/Nancy need these amounts to meet their monthly expense needs, what amount would John/Nancy need to save prior to starting their social security benefits to cover this shortfall over their lifetime?  For this I did several calculations to use. First, I assumed that the money would be invested and earn a long term rate of 6% until needed to meet the annual shortfall. If they had $10,000 more available at the beginning of retirement, this money would last 25 years. At $15,000, it would last 33 years, and at $20,000, this would cover 40 years of shortfall in the social security benefit.

Now comes the big challenge, how do we accumulate the desired amount between today and when we retire and start our social security benefits. One thing we could do is delay the start of our benefits by one or more years. This would increase our monthly benefit by about 8% for each year of deferral. For John/Nancy, that would be about $133 per month for every year they delay the start of their benefits. 

But if you have already started your benefits, that option is not available to you. So you need to be saving some additional amounts each month prior to retirement in order to accumulate the amount needed. So if you need to have $15,000 available when you retire to make up this shortfall in monthly benefits, here are some guidelines: If you have 10 years to go (age 52-55 today), you need to save an additional $1,000 per year. If you have 20 years (age 42-45 today) you need to save about $400 per year). Finally, if you have 25 years (age 37-40 today), you need to save $250 more per year. As you can see, the longer you have to save, the easier it is to save per year. But you need to get going – NOW.

In future blogs I will tackle some of the other major issues we as individuals need to address now to avoid the challenges I believe each of us will have to face in the future. This would include items like being responsible for more of our medical expenses in the form of higher premiums, more co-pays and deductibles, paying higher income tax rates, higher FRA ages for social security, or other things that are unforeseen today.


Francis St. Onge, CFP®
Total Financial Planning, LLC
Brighton, MI