We have all wondered whether Social Security will be there when we retire. Well, the government has done their latest assessment regarding the state of Social Security (see The 2017 Annual Report of the Federal Old-Age and Survivors Insurance and Federal Disability Trusts Funds. You can Google it.). Some of the relevant facts are that:
- Current reserves are sufficient to pay full benefits to all retirees through 2035; and
- Taxes collected from income will cover at least 75% of the promised benefits through 2091;
- The amount of your benefit is calculated based on your 35 highest earning years of work
So, if all of the government’s assumptions are correct (I don’t make any assertions regarding that subject), there is some expectation of coverage continuing in some form for a while. That’s a relief!
However, we also see that Social Security will not typically cover more than about 33% of total retirement income for the average American over 65. That means we need to have savings, pensions, annuities, or some other sources of income to supplement our Social Security benefit. We know that pensions are nearly extinct for private company employees, and someone may or may not have annuities. So one way to supplement income for today’s retirees is to have a job in retirement.
Many clients ask if they are allowed to work and still receive benefits, and the answer is that you can. However, the benefit may be reduced if you have not reached full retirement age (FRA). FRA means the age when you are eligible to receive full benefits. FRA is based on your date of birth. You can find your own benefit statement, including your FRA, by setting up your account at http://ssa.gov/myaccount.
If you choose to receive benefits before your FRA, you will encounter some earned income limits; and exceeding these limits will result in a reduction of benefits. Basically, if you are paid for doing something, that is earned income. In 2018 the earned income limits that may affect Social Security payments are as follows:
- If you have not reached FRA then the limit is $17,040 per year. That means that for every $2 in earnings above that limit, $1 of benefits will be withheld;
- If you reach your FRA during 2018 but are collecting during 2018 prior to your FRA date, then $1 of benefits will be withheld for every $3 earned above the limit of $45,360 per year for the months prior to FRA;
- Once you reach FRA there is no re-duction applied no matter what your earned income is.
Of course, when to collect your Social Security payment depends on each individual situation. Ignoring disability (which could allow you to collect benefits earlier), you may begin to collect as early as 62 years of age; but you will have anywhere from a 24-30% decrease in benefits (depending on your FRA) by collecting early. Conversely, if you delay benefits until age 70, you will increase your benefit by up to 8% per year. Again, exactly when to collect and the relevant tax consequences depends on your personal financial plan.
Please let us know if we may be of assistance.
by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services