Maximizing Your Social Security Benefits with Natalie Berning

CHAPTER 1

Topics

In today’s session, we’re going to be discussing the various retirement income sources that people have available to them, Social Security solvency, early versus delayed filing of benefits, working and receiving benefits, the taxation of Social Security, as well as answer some frequently asked questions.

CHAPTER 2

When to start collecting benefits?

Deciding when to collect Social Security benefits will be one of the most important financial decisions you make. The decision you make will have lifetime consequences for you and your spouse. So it’s essential to understand all of your options and make a prudent decision.

Social Security is a very complex program with over 2,700 rules that are subject to change. And many people miss out on thousands of dollars in benefits because they’re not aware of various claiming strategies that they can use to their advantage.

Unfortunately, the Social Security Administration doesn’t give personalized guidance on each person’s situation.

And so I would recommend working with a financial professional like myself to ensure that you make a decision that is best for you and your family. Although I don’t have all 2,700 rules memorized, I do have a team of experts and sophisticated resources that can help you or your family members evaluate all of the options available to you for your unique situation.

CHAPTER 3

Retirement Income Sources

Now when thinking about claiming your Social Security benefits, it’s important to think about how these benefits play into your overall retirement income sources.

For the majority of retired Americans, though, Social Security is the primary source of retired income.

That said, ideally, you should have a variety of income sources available to rely on during retirement and Social Security, such as, you know, pensions, Social Security benefits, 401(k) withdrawals, IRA withdrawals, and continuing to work part-time. These different retirement income sources are gonna give you the three legs of a stool to provide for a comfortable retirement.

The more you can understand about your Social Security benefits, the more you’ll realize it is a great retirement income source. This slide highlights some of the main advantages of Social Security, and we’ll discuss these in more detail throughout this presentation.

But you can see here that Social Security provides lifetime income. It’s government-backed. It has annual inflation adjustments. You do get preferential income tax treatment on your Social Security benefits. There are survivor benefits for spouses or young children, and it also provides a steady stream of monthly income that you can rely on.

CHAPTER 4

Social Security Solvency

One topic that comes up so frequently when I’m meeting with clients one-on-one is Social Security solvency.

You know, many people are concerned that Social Security isn’t gonna be there for them when they retire. And this might be a concern for many of you as well. It’s currently estimated that if no reforms are made, Social Security has adequate funding to meet a hundred percent of payable benefits through the year 2034. And then an additional eighty percent of benefits through 2089. There are so many Americans that are reliant on Social Security benefits, so it’s likely that there will be future reforms so that benefits can be fully paid. Changes were made back in 2015 that did eliminate certain strategies for spouses in an effort to keep the funding available. We’ll discuss some of those changes later in this presentation.

My main point here is just that I want you to make sure that you’re feeling confident and you’re not basing your decisions on your retirement income on the belief that Social Security will not be around for you.

CHAPTER 5

Online Social Security Account

Now, if you have not done so already, I strongly encourage everyone to go online and establish a Social Security account so that you can become familiar with your personalized benefits statement. Now this is a statement that used to get mailed out to us every year, and it’s no longer mailed on a regular basis. So if you want to see what your current Social Security benefits would be, you’ll need to log in to ssa.gov and establish a profile.

It’s important to establish that online account also to prevent fraudsters from establishing one under your own identity which can be a major headache to deal with. Throughout today’s presentation, we will highlight and explain different items you will find on your benefits statement.

CHAPTER 6

Terms to Know

Now, let’s get started with some Social Security basics and discuss some terms we’re gonna mention throughout this presentation and the next. The first term to get familiar with is your Primary Insurance Amount, or PIA.

This is the monthly amount you are eligible to start collecting at your Full Retirement Age, or FRA.

The Social Security Administration, the SSA, is great at acronyms.

So your PIA, Primary Insurance Amount, is calculated based on your 35 highest earning years.

The higher your 35 highest earning years, the higher your Primary Insurance Amount. If you have less than 35 years of earnings, the years that are missing will have zeros filled in, which will lower your Primary Insurance Amount.

If you do less than 35 years of work, or you have some years in the 35 with very low earnings, like when you are a student compared to what you currently make, you can increase your Primary Insurance Amount by continuing to work at a higher income level.

Your Full Retirement Age, or FRA is a key milestone when it comes to Social Security. As you can see on this chart, it based on the year you were born and should be somewhere between the ages of 66 and 67.

Your Full Retirement Age is when you can collect your full PIA, or Primary Insurance Amount, but it also has other implications that we will talk about.

Do not take the term Full Retirement Age too literally, because it does not determine when you could or should retire.

There are many factors aside from Social Security that influence when you truly should retire.

CHAPTER 7

Early vs. Delayed Filing

As I was just mentioning, the Full Retirement Age, or FRA, is when you would collect your full Primary Insurance Amount. But you do not have to wait until your Full Retirement Age to start collecting benefits.

Some people choose to claim benefits as early as age 62 or as late as age 70. You can see here on this chart that there’s a difference in the amount that you will get based on when you draw your benefits.

If you claim benefits prior to your Full Retirement Age, you will have a permanent reduction in your lifetime benefit amount. So for someone whose Full Retirement Age is 66, for example, and they start collecting benefits at age 62, they will only receive 75 percent of their Primary Insurance Amount.

However, if your Full Retirement Age were 67, you would only receive 70 percent of your Primary Insurance Amount by drawing at age 62.

On the flip side of that, if you decide to delay collecting benefits past your Full Retirement Age, you will receive an eight percent annual increase from your Primary Insurance Amount up until the age of 70, which could result in a benefit as high as 132 percent of your primary insurance if your Full Retirement Age is 66, or up to 124 percent of your Primary Insurance Amount if your Full Retirement Age is 67. So you can see here that there’s big differences in the amount of money that you’ll receive depending on when you claim

CHAPTER 8

Your Benefits Information

Your benefits statement that you can view online at ssa.gov will show your Full Retirement Age as well as an estimate of how much you’re eligible to collect at age 62, your Full Retirement Age, and your age 70. Those amounts will change over time if you continue to add years of working at a higher income level.

CHAPTER 9

Early vs. Delayed Claiming Example

Now it’s all well and good to hear the differences in percentage of your Primary Insurance Amount, collecting at age 62, Full Retirement Age, or 70.

But to see how big of an impact your claiming age can make in dollar terms, let’s look at a simple example.

An individual with a Primary Insurance Amount of $2000 per month or $24,000 dollars per year at their Full Retirement Age of 66 would receive $6,000 less per year if they claimed at age 62. And just a reminder, that reduction in benefits is permanent.

If this individual were to wait until age 70, they would receive $7,680 more per year over their full retirement amount, and $13,680 more per year versus claiming at age 62. So you can see the age you decide to claim benefits can have a significant impact on your annual retirement income.

CHAPTER 10

Cost of Living Adjustments

One of the nice advantages of Social Security retirement benefits are a cost of living adjustment, or a COLA.

A COLA is an annual inflation adjustment to your benefit amount which is based on the increase in the consumer price index.

These annual adjustments help you maintain the purchasing power of your benefits and keep up with the price inflation of goods and services.

While all recipients of Social Security receive the same annual COLA percentage, those with a larger benefit amount will receive a larger dollar increase. As you can see here, a COLA of two percent is much more if you start collecting at age 70 versus age 62. And these COLA’s can really add up over time. To clarify, you do not have to claim benefits to receive a COLA. They are factored into your benefits, even if you have not claimed yet.

CHAPTER 11

Working & Receiving Benefits

Now I often receive questions about collecting your Social Security benefits and continuing to work. There are some various rules around this that I’d love to discuss.

So if you claim your benefits prior to your Full Retirement Age and you’re still working, Social Security could withhold a portion or even all of your benefits.

It depends on if your earnings exceed certain thresholds.

So for years prior to your Full Retirement Age, if you earn more than the earnings limit, you will have one dollar of benefits withheld for every two dollars earned over that threshold.

For the year in which you reach Full Retirement Age or your FRA, a higher earnings limit applies. And you will have one dollar in benefits withheld for every three dollars in earnings over the threshold.

If you continue to work past Full Retirement Age, there are no earnings limits after that point. You will receive your full benefit.

If you have benefits withheld, Social Security does adjust your benefit amount at Full Retirement Age to start paying you back for the amount that was withheld. It is a common misconception that I hear that the benefits are permanently lost when withheld due to this earnings rule, but they aren’t. It’s basically a forced suspension of benefits.

Now if you retire and collect Social Security benefits at your Full Retirement Age or later, there are no rules around working and receiving benefits. And there are no income limits.

So as you can see, claiming early if you’re still working is not always a good decision, especially if you will have some of your Social Security benefits withheld.

CHAPTER 12

Taxation of Social Security Benefits

Another big concern for people as they approach Social Security is the taxation of their Social Security benefits.

So the taxation of Social Security benefits depends on what the Social Security Administration calls your provisional income. And you can see this calculation here.

For the most part, your provisional income includes all sources of income you have, such as withdrawals from IRAs or 401(k)s, withdrawals from cash balance life insurance, certain types of deferred annuity income, as well as half of your Social Security benefits.

This is why Social Security is a more favorable source of income from a tax perspective.

If your provisional income falls below the first threshold on this chart, your benefits are tax-free, which is a great deal.

If your income exceeds the first threshold, up to the second threshold, 50 percent of your benefits are taxable income. And if your income exceeds the second threshold, up to 85 percent of your benefits are taxed.

Now this doesn’t mean that your benefits are taxed 50 or 85 percent. It just means that 50 percent or 85 percent of your benefits are included in your taxable income and you’re charged your regular taxable income rate.

Social Security is income tax efficient in a couple of ways.

Only half of the benefits are counted in your provisional income and again at most, only 85 percent of the benefits are taxed as income.

CHAPTER 13

If you have a government pension

The final topic I’d like to discuss in this session regards government pensions.

So if you or your spouse are a federal, state or local government employee, it’s possible that there will be certain downward adjustments to your Social Security benefits.

If the government entity you or your spouse worked for did not participate in the Social Security system, these adjustments will most likely apply to you. We’re not gonna spend a lot of time talking about those today because they’re fairly rare, but just know that if these adjustments may apply to you, you may want to seek guidance from your financial professional. And I will share that in working with many Oregon PERS members, I have not found one Oregon PERS member yet that is subject to this provision.

CHAPTER 14

Frequently Asked Questions

I’ve addressed many of the frequently asked questions that I get throughout this presentation, but there’s a couple others I’d like to bring up.

So, one of them involves the taxation of Social Security Benefits. So I’m often asked if these benefits are taxed both federally and by the state. So there are twelve states that do tax Social Security benefits but Oregon and Washington are not, either of those states. So your benefits are only gonna be taxed as federal income, not on your state income taxes.

CHAPTER 15

Tax Torpedo

Additionally, I also often get questions about a tax torpedo as it relates to Social Security. So if you’ve heard that term and don’t know what it relates to, let me give you a brief overview.

So when you’re taking your Social Security benefits, and you also have to withdraw money from an IRA or a 401(k), you want to be aware of the tax torpedo.

It occurs when IRA withdrawals in combination with Social Security benefits, push your taxpayers into a higher tax rate than they would be otherwise.

That is why by holding off on Social Security benefits and living off of distributions from your IRA or 401(k) income in the early years of retirement, you could potentially receive a larger Social Security benefit later while also reducing the required withdrawals from your IRA or 401(k), which could keep you in a lower overall tax rate. So this is some of the more complex planning that we do with clients when we work one-on-one.

CHAPTER 16

Topics covered in Session 2

In the second session in the two-part series, we’re going to be discussing spousal benefits, survivor benefits, and questions to consider as you’re approaching Social Security age, general claiming guidelines, as well as some next steps. I’ll also again answer some frequently asked questions.

CHAPTER 17

Investment Services Contact Information

Thank you so much for joining me today to learn more about maximizing your Social Security benefits.

I know we covered a lot of information. So if you have any follow-up questions on Social Security, or any other financial planning or investment topics, please reach out to our team at Investment Services. One of our many Financial Advisors would be happy to meet with you one-on-one. Thank you so much, and have a great day.