In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the best way to maximize social security, and why it’s best to wait to claim it if you can.
Hey everyone, and welcome to another episode of Adam Talks. I’m Adam Bergman, tax attorney, founder of IRA Financial. In today’s episode, the key to maximizing Social Security benefits.
Well, this is kind of a new topic for me. It’s a topic that I’ve spent some time researching over the last several months, but not a topic that I’ve done a lot of writing or speaking about.
Yes, Social Security is somewhat connected to retirement account savings. I mean, in both cases, the funds are for later in years when you’re 60 plus. So there are some similarities. Social Security is taxable up to, potentially, 85%, unlike Roth IRA, Roth 401(k)s, which generally are not taxable so long as you’re 59 1/2 and account’s open at least five years. Although pretax IRAs are taxable.
So there are similarities. The taxation of it’s different. I wanted to spend some time going through the rules because I’ve got a bunch of questions over the last several weeks and months from people starting to look at Social Security. People in their late 50s and then 60s asking, hey, Adam, “what do you think? You’re a tax lawyer? Should I hold off taking Social Security? Should I apply for it early? What should I do?”
So I thought this would be a really interesting topic for a podcast, and that’s what I wanted to do. So I spent a bunch of time researching it, and I tried to break it down into several categories to make this subject a little bit easier to digest.
So let me start. Obviously, the question on whether someone should claim Social Security is a very big decision, right? It potentially could cost you hundreds of dollars a month, if not more. Okay. So if you claim it too early, you potentially lock in lower payments, which could be ultimately a mistake down the road, especially if you live a long time. And that’s hopefully something we’re all going to do.
On the other hand, if you delay it in order to secure higher payments, then if you have a financial situation early on, it could require you to tap into other savings or retirement accounts and maybe isn’t the best solution. So, I’ll preface what I’m about to say, there’s no right or wrong. Everyone is in a different situation. It’s facts and circumstances. It certainly depends on your age, of course, your financial situation, your health, your spouse, your family, things like that. So not one answer applies to everyone. It’s really individual.
But essentially, why do you start collecting Social Security? Simple, right? You need the money. That’s in the most obvious and straightforward case, people that start early need the money. And that’s okay. That’s what it’s there for, right? That’s the whole idea of a Social Security system. It’s an umbrella. It’s a safety net that you can tap into when you’re older a little bit. Maybe you’re not in your highest income years and it will help you get by.
So, clearly the first thing’s first is if you need the money, you should take it earlier. If you don’t need the money, then, you probably want to listen up. Or if you’re watching, watch, because I’ll give you some tips in terms of pros and cons for tapping into your Social Security too early.
So how does it work? Okay, so as of 2021, workers pay approximately 6.2% of their wages into Social Security and up to $142,800 of their income, and it’s $147,000 in 2022. And then the employers contribute another 6.2%, and self-employed people have to pay both portions of 12.4%. So how much is Social Security? Basically, the amount you are able to claim as a Social Security benefit is based on your lifetime earnings in which you pay the Social Security taxes. So higher income translates obviously to bigger benefits. And it’s up to a point, right? You’re going to be capped at a point. So if you make $40 million a year or $2 million a year, you’re going to be capped at the same amount for someone who makes a lot less.
The amount you’re entitled to obviously modified by other factors like your age and when you claim the benefits. Okay, so eligibility for Social Security is based on credits that you earn during your working years. So as of 2021, for every $1,470 you make, you earn one credit and it’s up to a maximum of four per year. In 2022 it rises to $1,500 and ten. When you make and you’ll get a credit for 15/10 versus the 14/70. If you’re born in 1929 or later, then you need 40 credits, essentially ten years of full work to receive Social Security benefits at retirement.
So basically, ya gotta work for like ten years – full time work to get some benefits. Okay, so it’s something to remember. Again, even if you’re self employed, you still pay into the system. If you don’t ever work, for whatever reason, then you may not have Social Security benefits when you get older, although you may through a spouse.
So, it’s kind of a fair trade off. If you put nothing in the system, why should you reap the benefits? It’s kind of the idea behind Social Security system. It’s like pay as you go system.
You can begin getting Social Security retirement benefits at early as age 62, and we’ll talk about does it make sense to tap into that age, or should you be patient and wait? But your benefit will be reduced by as much as 30% below what you can get if you waited to begin getting payments until your full retirement age. And if you wait until your full retirement age, which is 67, if you’re born in 1960 or later, you will get your full benefit. So what is the full benefit?
The full benefit retirement age, as I mentioned, is 67 years old for people obtaining age 62 in 2022. The age for Medicare eligibility is 65, though. Okay. Social Security is a little bit different. So in 2022, the full retirement benefit age is 67. So current full retirement age is 67 years old for people that are attaining age 62 in 2022. Okay. So if you’re turning 62 and 2022, your full retirement age is 67. So you got some years to wait if you want to tap in and get full benefits.
So let’s do a couple of examples. The estimated average Social Security retirement benefit in 2022 is $1,657 a month and the maximum benefit, the most an individual can get, is $3,345 a month. And that’s for someone who files in 2022 for the full retirement age. And that’s the age when you qualify for the 100% benefit.
You’ll only know the amount you get when you apply. But there are essentially good ways to know kind of what you can get. And there’s some easy ways on like AARP, they have a really good Social Security benefit calculator. But you can check out my Social Security account, too. These are some easy free tools that you can kind of guesstimate what you will have whether you’re 62 or 67 at that point, what you can expect.
So, for example, if you look at the AARP calculator, if you’re born on January 1 1960 and you average $50,000 in income, you get a benefit of $1,338 if you file Social Security at 62 and you’d get $1,911 if you waited to 67, which is your full retirement age. So you can see the difference, by waiting five years, you’re getting an extra $500-$600 a month. Adds up, right? It’s like six grand a year.
So can you still get Social Security if you work? Yes, of course, you can receive Social Security benefit even if you’re working. If you reach your full retirement age, you can work and earn as much as you’d like and receive the full benefits. Good stuff. If you’re under full retirement age, your benefits will be reduced temporarily.
Okay, what about spousal benefits? So your spouse can benefit as well from you working. So when a worker files for retirement benefits, the worker’s spouse may be eligible for benefits based on the worker’s earnings. Another requirement is that the spouse must be at least the age of 62 or have a qualifying child in his or her care. In other words, spouses who still claim benefits regardless of whether they ever had paying jobs based on their partner’s record. Okay.
To qualify, again, you must be 62. The spousal benefit can be as much as half of the worker’s primary insurance amount, depending on the spouse’s age at retirement. The spouse will begin receiving retirement benefits before normal retirement age, the spouse will receive a reduced benefit. Okay, and if the spouse is eligible for his or her own benefits and the spousal benefit is higher than what you would receive from the spouse, then obviously the spouse will get the higher amount.
Spouses who are widowed become eligible for 100% of their partner’s full benefit unless they have a job and the benefit they’ve earned through their income is higher. Okay. And there’s also rules for divorce or surviving spouses who are remarried before 60 will forfeit.
So, let’s get to the heart of the matter. What day should I start taking Social Security benefits? So, the increases from delaying come large as you delay. For example, a worker with $1,000 benefit at her full retirement age at 66; would receive $750 a month if she started at age 62, or $1,320 if she delayed until 70. Okay, so, $750 if she starts at 62, $1,000 at 66, and $1,320 at 70. Right, so the longer you wait, the more you get. The problem is you need the money earlier and what happens if you die before you hit 70? You just lost your Social Security benefit. Your surviving spouse might be able to tap into it, but you lost it, right? So it’s a game of, “Am I going to live? Do I need the money? And can I wait for the bigger amount?” So it’s a game of chicken, cat or mouse. We’ll see who wins. You don’t really know. You hope you live and you hope you can wait. But if you can’t, take it.
Is Social Security taxable? It is, potentially. So, couples who file a joint tax return and have a combined income from $32,000 to $44,000 will pay tax on 50%. And if you’re above that, you’re going to pay tax on 85% of the benefits.
So let’s talk about pros and cons of delay until 70. Okay. The answer is; what are the pros and cons? If I wait til 70 to tap into Social Security? Not 62, not 67, but 70. The pros: obviously larger income stream, right? The most obvious reason is that the delay leads to a substantial higher amount benefit in your 80s and 90s. Right? So the longer you can wait, so long as you’re living at that point, you’re going to get higher benefits as the examples I previously mentioned suggest.
Your benefit also increases each of the years you delay. It’s up to an 8% benefit, right? So, you’re probably better off spending down your retirement accounts or other savings that maybe will not be growing at an 8% clip versus tapping into your Social Security too early. 8% is a pretty good return. If your other investments aren’t getting 8%, you may want to tap into those investments and then let your Social Security roll. Keep it rolling. Keep it rolling until 70. And then bang, you are going to get a higher payout at 70. Assuming you live a long and healthy life or just a long life, you’ll have a higher income stream going forward.
Cost of living adjustments: they go up every year. So, the longer you wait, the more money you’re going to get each year because there’s a cost of living adjustments for Social Security. So, if you use the 2022 increase to 5.9%, a person receiving $1,500 per month will see a bump of $88.50 per month, while someone who benefits is $2,000 will see $118 increase, right? So those increases compound over the years. So obviously, if you delay Social Security benefits, not only does it allow you to lock in higher amounts, but you’ll get increases over those longer periods. So it’s all about cost of living adjustment. If you can survive and handle not tapping in earlier, there are huge potential. Not huge, but there are financial benefits.
So, you can change your mind at any time. Social Security is not a one time decision. While you claim the benefit, you’re stuck. But you can always delay now and go back a year later, right? If, let’s say you’re 62 and you’re like, I’ll wait it out a few years, you can always claim it. But once you elect to participate, you’re participating. So once you exceed your full retirement age, you can elect to receive up to six months retroactive. So you have some flexibility.
Tax planning – this is pretty important. While Social Security becomes taxable once your total income exceeds the annual limit, even at the highest inclusion in the taxable income, only 85% is taxed. Right? So that means if you can delay Social Security, only 85% of that number will be taxed, whereas if you tap into other retirement accounts, 100% of that could be taxed, like RMDs. So, maybe it makes sense to tap into those earlier; pay the tax at an earlier stage. Now you can benefit from Social Security and only pay 85% tax on a higher amount. So again, it’s all about can you wait? If you have flexibility, then honestly, if you can wait, wait; that’s the bottom line.
And I’ll go to some of the cons for waiting. The break even point’s about 12 to 14 years, right? So if you start at 62 and if you start early and you die before 84, 85, you may kind of be at the same point versus holding up to 70. If you live longer than probably 85, 86, you’re going to win if you save. Okay? So something to keep in mind. In my estimation, just doing tons of research and as a tax attorney, waiting makes sense. Obviously, you’re going to play the game of are you going to be alive. But if you are healthy and you feel like you’re going to be around, you don’t need the money. I’d wait.
Some other cons for waiting. Health, right? If you need the money, take it. Don’t try to get cute if you need to take it. Fear of sudden death, right? If it’s stressing you out waiting, take the money.
What else? The future of Social Security. Some people said, hey, Social Security may not be around; there’s projection shortfalls in 2034, I might as well take it now because who knows what’s going to happen in 10, 15, 20 years. I wouldn’t worry about it. The government wants to get elected, whoever is in office. And if they cut Social Security or let Social Security fail, they won’t get elected. Okay. So they’re going to make sure Social Security is funded. So I would not worry about that.
Could they change the taxation of it from 85% to 100%? Yes, they could. Right, before ’82, Social Security was not even taxable. They went to 50%, 85%. That’s real. They potentially could tax 100% of it over a certain income threshold. There’s also a chance that, hey, if you make above a certain amount, you may not be eligible for Social Security even if you paid into the system.
There are countries, Canada has a variation of that, which some people think it’s fair. Let’s say you have a million dollars of income and you’re over 70, maybe for that year. You don’t tap into Social Security; fair, right? You need that extra $30 grand. Probably not. But, you did pay into the system. So there are things that can play around with Social Security, but I do not think it’s just going to go away. Okay?
Bottom line, you have to sum up everything. If you can wait, wait. If you need the money, take it. Again,it’s about a 12 to 14 year break even point. So, you may be okay and if you take it early, God forbid you pass before the 12 or 14 years, you’re probably ahead of the game for taking it early. Obviously, if you’re super wealthy and don’t need the money, the extra $30-40 grand. Okay, then just wait it out and get a bigger payment down the road. Your surviving spouse will benefit as well.
Those are the key factors to consider: your health, the financial position, you’re in, your family’s position, whether you’re still working. Those are the keys. No right or wrong answer, but I thought it was an important topic to discuss. Social Security doesn’t get a lot of chatter just because it’s really something that impacts older people. There’s just a couple of options. Some people don’t have options. Some people just got to grab the money right away at 62. Others can wait a couple of years and some can just wait til 70 and just take the maximum amount.
So there are; although people in the middle that have some flexibility and I wanted to do a podcast to give people keys to kind of figure out should they wait to 70, should they not? I tried to go through the pros and cons; also went through how Social Security works. What are the numbers that you can expect? And there are some good tools that you can plug in what your average salary has been for a period, and then you can kind of guesstimate what you’ll have. Again, no one knows for sure because there’s cost of living adjustments that go in to determine how much you would get each year.
We’re living in a period of high inflation, so you can expect Social Security payments probably go up in the next few years, which is needed for many people that are kind of living paycheck to paycheck. Many retirees just can’t keep up with the 7-8% inflation. Their investments aren’t keeping up. Their cash isn’t keeping up. So, hopefully Social Security will and we’ll give them those extra monthly payments so they can cover the increased costs of food and gas and rent and everything that we’re all experiencing.
So, there you go. That is, in a nutshell, how the Social Security system works. Some of the pros and cons of waiting versus tapping in early. Hope you enjoy some of the examples. Try to keep it kind of simple. It is kind of a delicate, somewhat complex topic, but there’s some pretty good information available on government websites; go through FAQs and calculations. There’s hotlines too. If you wait, you wait; if you’re in, you’re in. So, just probably start thinking about this when you’re hitting 60. I would start maybe talking to a financial adviser and accountant, someone that can kind of run some numbers with you or just go on a calculator and figure it out for yourself, whether it makes sense to start right away or just kind of wait it out for three or maybe even seven or eight years.
So, there you go. I appreciate you guys watching if you’re doing it on YouTube; if you’re listening on Apple, Spotify, SoundCloud, amazing! I hope you guys enjoyed it. This is a weekly podcast that drops every Wednesday. If you’re interested in learning more about various tax, retirement and alternative takes on retirement, check me out every Wednesday. I have a lot of fun with this podcast so hope you guys enjoyed it. Otherwise have a great week, and I’ll talk to everyone again next week.
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