We hear of concerns about individuals getting near retirement and not being prepared and we also hear of concerns about Social Security. Just how does Social Security work? David Bethel, partner, with the Financial Planners of Missouri, stopped by the set of Good Morning Heartland to discuss this topic.
Question: What is the long term forecast for Social Security?
Answer: In spite of a lot of negative conversation, it is actually very good. Social Security is not in the same category as Medicare when it comes to long-term government debt. However, there may be ways to improve Social Security to ensure its long-term viability. The wage base could be increased, the payroll tax could be increased, or the benefits could be reduced. Full retirement age has been increased from 65 for my parents to 66 for me 67 for you. Maybe it will be raised again for your children as we live longer.
Question: How does Social Security work?
Answer: First of all you have to become eligible for a Social Security benefit. You must work and pay in enough to earn 40 credits. It used to be 40 quarters or 10 years of working all year. But now you could earn enough in one quarter to get 4 credits.
Your benefit is based on your earnings. The more you earn the higher your benefit. However Social Security is designed to replace a much larger percentage of the income of a lower wage earner than the income of a higher wage earner.
As I mentioned, full retirement age for me is 66. However, I could start taking my benefit as early as age 62. But, my benefit is discounted 25 percent. Or if I delay starting my Social Security past full retirement age my benefit is increased by 8 percent a year until I reach age 70.
Question: When is the best time to start taking your Social Security benefit?
Answer: Well, that depends on a couple of important factors. First, if you delay starting your Social Security income past the day you retire you must have other resources to live on. Because your Social Security benefit is increasing by delaying your start date all the way to age 70 you??re deciding whether to spend your money and grow your Social Security benefit or spend your Social Security benefit and grow your money. With delayed retirement credits of 8 percent a year many would be better off if they spend their own money and grow their Social Security benefit.
Unfortunately, that is not true for everyone. And that is why the second factor is so important. One??s expected mortality is very important in deciding when to start your Social Security benefit. Imagine someone who retires at age 62, in poor health, whose parents passed at an early age. That person probably would not benefit by delaying their Social Security benefit.
For a single individual, the break-even timeframe is about 9-10 years. That means, if you wait to get a bigger check you will get fewer of them. For example, someone whose life expectancy is less than age 80 might not want to wait until age 70 to get the biggest benefit possible.
Question: Are there other things to consider for a married couple?
Answer: Yes, for a married couple the decision is more complicated and the opportunities are more abundant. The survivor of the couple is eligible to keep the higher of their benefit or their deceased spouse??s benefit. When the couple??s earnings have not been similar there is value for the higher wage earner to wait to start their benefit in order to increase the potential benefit should the lower wage earner be the survivor
In addition, there are switch strategies that can greatly enhance the total Social Security benefit for a couple. A switch strategy allows one to claim a temporary benefit from another while allowing their Social Security benefit to grow. This benefit for couples makes it easier to delay and grow your Social Security benefit without having to use as many of your own investments. For example, if my wife and I were the same age and had similar wages she could file a restricted application and draw 50 percent of my benefit while growing her benefit until age 70.
Question: Where does one go for help?
Answer: Obviously, you can make an appointment to speak with someone at your local Social Security office. They can run a breakeven analysis and they can explain the switch strategies in greater detail. Some of us in the financial services industry can also be a resource. At Financial Planners of Missouri we offer complimentary workshops for couples to learn more about these topics.Financial Planners of Missouri
110 S. Franklin St.Kirksville, MO 63501Phone (660) 956-9416Toll free (888) 418-4790Fax (877) 357-0787