Understanding Social Security

Jake Cross, CFP?, a financial planner here at?Falcon Wealth Advisors, recently joined me on?Upticks?to discuss an important topic for so many Americans – Social Security. We discussed some fun facts people may not know, strategies for when to begin taking Social Security, and much more. A summary of my conversation with Jake is below.

Falcon:?The Social Security Act?was signed into law by President Franklin Delano Roosevelt in 1935. Can you guess how much the first monthly Social Security check was for?

Cross:?I will guess $40-50.

Falcon:?The first Social Security check was for even less than that—$22.54. Today, Social Security checks are often between $1,000-$3,000, depending on much you contributed while working. Social Security is one of the largest government programs in the world and pays out hundreds of billions of dollars each year to more than 70 million Americans.

Let’s discuss some of the nuances of Social Security. Would you talk about the minimum criteria to qualify for Social Security?

Cross:?Sure. One key thing to know is that generally speaking a person has to be at least 62 years of age to begin collecting Social Security, though you can wait until you’re older to begin collecting.

Falcon:?Yes, and you have to pay into Social Security for at least 10 years, or in parts of 40 different quarters, to be eligible to collect. To calculate how much of a benefit you will receive, the Social Security Administration averages how much you contributed over a span of up to 35 years.

It is possible to receive Social Security benefits even if you did not contribute. If you stayed at home while your spouse worked,?you are eligible for a portion of their benefits.

As you alluded to, you don’t have to begin collecting Social Security as soon as you turn 62. The longer you wait, the larger your monthly check becomes. To receive the largest possible benefit, you have to wait until age 70 to begin collecting.

It’s worth noting that if you’re experiencing a disability, you may be able to collect benefits before age 62. But broadly speaking, most people aren’t able to collect benefits until they’re 62.

Deciding when to begin collecting Social Security can be complicated, but it’s a decision we help clients with here at?Falcon Wealth Advisors. We can show you how Social Security impacts your larger financial plan.

A big misconception workers have about Social Security is they assume the money they’re contributing today is going into a pool for them to access when they’re older. That’s not the case. Can you explain where the money they’re contributing today is going?

Cross:?It’s simple – money contributed today pays for Americans who are drawing benefits today.

Falcon:?I have found this interesting, because it’s somewhat of a Ponzi Scheme by definition. The government is taking new money to pay original investors. I don’t understand how the government gets away with this, but I guess they had to use this model to launch Social Security many years ago.

Cross:?Indeed. I wish there was a little more transparency about how the Social Security Administration manages its investments.

Also, a lot of people are surprised to learn a portion of the Social Security benefits they will receive are taxable.

Falcon:?Yes, and these taxes are based on income. If you have a low income in retirement, your Social Security benefits will not be taxed as much as if you have a higher income. Up to 85% of a recipient’s Social Security benefits can be taxed, and this is a detail we build into the financial plans of clients at?Falcon Wealth Advisors.

Would you share the threshold at which Social Security benefits are taxed? I know it’s pretty low.

Cross:?Yes, for a married couple filing jointly, if you have an annual?provisional income?of $44,000, your benefits can be taxed up to 85%.

Falcon:?This is an important element of the tax planning we do for clients at?Falcon Wealth Advisors. We analyze our clients’ tax returns each year and explore strategies to optimize their tax situation and lower their short- and long-term tax liability, all within the broader context of their overall financial plan.

One of the most common questions we receive is “When should I begin collecting Social Security benefits?” Please walk through some of the conversations we have with clients when they ask this question.

Cross:?It’s hard to give a perfect answer because it doesn’t exist. There are two main factors you need to consider. The first is the rate of return you’re expecting on your investments. The higher your assumed rate of return is, the longer it will take for you to “break even” with your Social Security benefits. Breaking even refers to the point at which the amount of money you’ve received evens out regardless of when you began collecting.

And the second factor is how long you think you will live. Of course, you can’t be sure of the answers to either of these questions, especially the second. If you have a family history that you feel makes it unlikely you will live into your 80s, perhaps it makes sense to begin collecting Social Security benefits at 62. But if you think there’s a chance you could live to 100, you may want to wait so that you can ensure a higher payment for that long period you hope to collect.

Falcon:?Let’s talk more about that first factor. If you delay Social Security until age 70, you typically have to live about another 10 years to break even and ensure if you made the right decision. You’re taking a little bit of a risk by waiting to collect Social Security, simply from a math and longevity perspective. But with people living longer, it’s easier to win this gamble. Social Security grows about 8% each year that it’s delayed—although that growth is?simple interest, not compound interest.

Of course, if you turn on Social Security benefits at age 62, there is no “break even” number, as you’re collecting a reduced benefit while not pulling as much from your nest egg.

The people who should and often do turn on Social Security benefits early are the people who need Social Security the least. The idea is that rather than trying to maximize the Social Security income stream, they’re trying to protect their nest egg and continue to grow their assets.

Also, if you’re planning to work in retirement, even in an?encore career, you’re not going to want to turn on Social Security. Why’s that?

Cross:?If you earn more than $19,500, the Social Security benefit gets reduced by 50% for every dollar you earn above that. However, you can redo Social Security once—meaning you can essentially turn it off after turning it on, and let it grow and get that 8% increase each year.

Falcon:?Still, if you don’t know what the future holds regarding you working, it’s better and easier to just to wait and not collect until you’re sure that you’re not going back to work.

If you’re married, it often makes sense to turn on Social Security for the spouse earning less of a benefit, and then wait to collect benefits for the spouse who will earn more. This obviously allows a couple to get some income from Social Security while also holding out for the biggest possible benefit for one spouse. And if something were to happen to either spouse, the spouse still living will be able to collect the higher amount.

Cross:?I think this is a good strategy for many couples. It allows you to draw less from your nest egg and let it grow while also getting that 8% increase on one of the spouse’s eventual benefits.

Falcon:?These are strategies we help our clients with everyday. It’s why it’s so important for you to work with your fiduciary wealth advisor to understand what your financial plan means to you.

At Falcon Wealth Advisors, we’ve found many people want to go ahead and?collect Social Security as soon as possible. No one knows how long they will live, but after paying into Social Security for decades, it’s understandable that you want to start seeing a return. As we’ve mentioned, collecting Social Security allows you to leave more of your portfolio invested in the stock market, and that’s welcome in years like this one when stocks are down. Social Security is helping some?Falcon Wealth Advisors?clients leave more of their portfolio untouched and avoid selling stocks when they’re down.

Our financial planning process is especially useful because we’re able to use our software to show you exactly what your financial plan will look like if you begin collecting at, say, 62 or 65 or 70. And by the way, you can see your projected benefits if you create an account on?SSA.gov. After you see those dollar amounts, you can share that information and we can plug it into your financial plan to project Social Security’s potential impact.

Anything else we should note, Jake?

Cross:?We should discuss the spousal benefit, which allows you to collect half of your spouse’s Social Security benefit—you would want to do this if half of their benefit is bigger than the full benefit you’re eligible for. And if you’re divorced, but were married for at least 10 years, you can still get the spousal benefit from your ex-spouse if you have not remarried.

Falcon:?Those are indeed two important details readers should know. If you have a unique situation, or even if you’re simply trying to decide when you should collect Social Security, our team at?Falcon Wealth Advisors?can help you navigate these important decisions. Please reach out to me directly to learn more. You can contact me at?[email protected].

Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.