By Matthew Gaude & Shawn McGuire
When payday arrives, you probably don’t analyze every single deduction on your paycheck. You know that taxes come out, as well as your healthcare premium, and of course, Social Security. But have you ever thought about just how much of your hard-earned money is going to Social Security?
Between you and your employers, you’ve doled out 12.4% of your annual income, all the way back to your first job as a teenager. By now, that’s added up to a substantial amount, and one that could make your 401(k) look like chump change. Don’t you want to maximize your benefits so you get every penny that’s rightfully yours?
Unfortunately, with a system as complicated as Social Security, people make all sorts of incorrect assumptions about how it works. Some are minor while others are way off base and can even be financially devastating. Let’s look at some common Social Security myths and set the record straight so you don’t leave money on the table.
Myth #1: Social Security Won’t Exist In The Future
Many of us, especially those who won’t be retiring in the near future, are worried that Social Security won’t be around by the time we reach this milestone. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2019 and the system will rely on incoming interest payments to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink to 75% of what Americans were expecting.1
Since you can’t control the success or failure of the Social Security program, educate yourself and plan ahead. Create an account on the Social Security website so you understand your current benefits and know where you stand. There is plenty that could happen between now and 2034 that could impact the program, so don’t believe the assumption that there will be no money left for you by the time you retire.
Myth #2: What You Give Is What You Get
Social Security is not a savings account per se. The taxes that everyone is paying from their paychecks are pooled and then paid out. Your contributions are supporting others and when you retire, the money others pay into the system will support you.
In 1960, the amount of contributing workers-to-beneficiaries was 5:1. In 2013, it was 2.8:1.2 So while the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. As time goes on and the life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than you what you think they will be.
Myth #3: Everyone Contributes Equally To Social Security
Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), with an earnings cap of $127,500. So if you earn that amount, and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,886.40.3 If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out.
Myth #4: You Should Claim Social Security At Age 65
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount of benefit you receive.
Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later.
If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned.
Myth #5: Your Benefit Amount Is Fixed
For every year beyond your FRA that you delay taking benefits, the value increases by 8% until you reach age 70. There is nowhere else you can get an 8% return guaranteed by the U.S. government! If you retire early, benefits may be about 30% less, which means you could be leaving a significant amount of money on the table.
Myth #6: Social Security Benefits Are Tax-Free
While Social Security benefits are not normally taxed, they could be taxed by up to 85% if you are working or have other sources of income while you are collecting benefits. Any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2017, the limit is $16,920. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn.
The income restrictions change in the year in which you reach FRA. That year there is a higher limit: $44,880 for 2017. Once your income supersedes that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. As soon as you have your birthday and reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
Myth #7: You Can Switch Claiming Strategies At Any Time
A shocking 38% of people incorrectly believe they can switch their claiming strategy after they’ve made their official choice.4 This just isn’t true.
According to the Social Security website, you can withdraw your claim once within 12 months after applying, but you must repay all the benefits you received during that time.5
Myth #8: Your Claiming Strategy Affects Your Ex-Spouse
Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. If you are married for 10 consecutive years and haven’t remarried, you are entitled to either your full benefit or half of your former spouse’s benefit, whichever is greater.
Myth #9: You Can Apply for Benefits At Any Time
If you want your first Social Security check next week but haven’t yet applied for benefits, you are out of luck. You must file for benefits 3 to 4 months before you get your hands on your money.
Myth #10: Social Security Is A Headache
Social Security is a major piece of your retirement puzzle. It was designed to replace 40% of an average worker’s wages,6 and that’s money you don’t want to walk away from. Since there is no one-size-fits-all claiming strategy, it’s critical to work with an experienced professional who can help you feel more confident and less overwhelmed.
At Live Oak Wealth Management, we offer comprehensive retirement and income distribution planning with the goal of helping you create a steady stream of income to provide for you and your family in your retirement years. If you want to maximize your Social Security benefits and plan for financial security, call us at 770-552-5968 or email firstname.lastname@example.org to schedule a phone appointment or face-to-face meeting.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.