Social Security: It's not just about getting the biggest monthly check
It’s absolutely important to understand your Social Security benefits but it is also true that understanding those benefits requires some effort on your part.
In addition to the complexity of the program, another problem is that so often you can’t just contact your nearest Social Security office and ask them a question. You could if we all worked the same number of hours, married our spouses at the same time, earned the same amount of money etc. But the human condition being what it is, every one of us presents a different set of variables. In addition, we aren’t all looking for the same thing. It’s true for instance that you can earn the largest monthly benefit if you wait until 70, but it’s also true that the final earning amount will differ based on a vast number of criteria including the ones listed above and of course little things like how long you live, whether or not you have young children still at home etc.
Here’s an interesting conundrum. Julie Price had a husband and wife come into her office and ask her how to maximize their benefits. They were self-employed. All in all, there are not many couples that work for the same business and that same business is their own. The man, we’ll call him Joe, earns a couple hundred thousand each year. Joe, who is older than his wife, we’ll call her Alice, by about 15 years is in his 70s. People who are self-employed pay both the employer tax and the employee tax. So if you look at the updated Social Security form, you’ll notice that people who work for a business other than their own pay 6.2 percent taxes on their earnings each year. Joe, because he’s self-employed pays 12.4 percent on his earnings each year. Regardless of whether you are Joe or Joe’s neighbor who works for Boeing, there is a maximum earning amount that Social Security taxes. This year, that amount is $117,000. After that, you no longer pay Social Security taxes (you do however, continue to pay Medicare taxes). Therefore, each year at some point Joe quits paying Social Security taxes whenever he’s maxed out on his earnings. This is great for Joe. He’s maximized his Social Security benefits for years and when Social Security looks back at the 40 (or more) credits he’s earned over his life time, they’ll look at his highest paying 35 years. If Joe had retired at his full retirement age he would earn a maximum benefit of $2,642 per month. Instead Joe has continued working and now is working past age 70, which is when Social Security no longer increases your benefits by as much as 8 percent a year for waiting to claim benefits. However his benefits will continue to increase if he’s knocking lower earning years out of his best 35 years.
Alice’s earning however are a completely different animal. She works with Joe and as with Joe also pays 12.4 percent on her earnings. But, Alice has only been claiming to earn a small amount each year. At this point Alice has several years until she’ll reach full retirement age but her benefit is a great deal smaller than Joe’s.
When Julie ran their numbers, she realized something important. Joe can continue to receive pay and continue to pay out to Social Security his maximum taxable income, however doing so will only incrementally change his benefits with Social Security. But, there’s another option. Alice could maximize her earnings over the next few years and make major changes to the amount of her Social Security benefit without impacting their combined employment earnings while Joe collects a much smaller amount.
Here’s at least one of the reasons Joe and Alice might want to do that. Considering the age difference between Joe and Alice, Joe is far more likely to die before Alice. When that happens, Alice will continue to earn survivor benefits from Joe’s earnings but at best those benefits will amount to half of Joe’s current Social Security benefits. By maximizing Alice’s earnings, they can potentially increase her own earnings enough that her eventual Social Security benefit will be larger than the current maximum possibility of half of his benefit.
When doing Social Security planning, it’s important to recognize the impact on the surviving spouse. That’s not to belittle the death of a spouse but to recognize that paying attention to what happens after a death can potentially protect the surviving spouse from poverty. “More than 70% of all elderly persons with incomes below the poverty level are women. But what is perhaps even more significant is that more than half of elderly widows now living in poverty were not poor before the death of their husbands,” according to the Administration on Aging (AOA).
That’s why it’s so important to find a financial professional that understands Social Security benefits. Because, it isn’t simply about maximizing your benefits, it’s about being able to use those benefits to protect the lives of the people you love even if you’ll no longer be around.
- You can talk to Julie Price about how to get the best value for you from your retirement by calling 1-877-76-AGING.
- If you would like to see a chart on the maximum earnings that Social Security taxed for the last 70 or so years, go here.
- Are you throwing away thousands of dollars worth of Social Security benefits?
- How your Social Security benefits are impacted if you return to work
- Last week, I posted an updated form on Social Security benefits under the Resources tab. You can find the form here.