SOCIAL SECURITY
Retirement.news 2 202109RNNSSBMCPensions When you retire, your income may come from more than just one source. Depending on where you (and your spouse, if applicable) worked throughout your lifetime, some of these retirement income generators could include a defined-benefit pension and Social Security. Even with one or more reliable and ongoing “paychecks” in retirement, though, it is still possible that you could have an income “gap.” This means that your expenses are more than the amount of net spendable income you are bringing in. If this is the case, you must plan to fill in this income gap so that you don’t have an unpleasant financial surprise in the future and have to either cut your expenses or continue working for a more extended time. Pensions & Social Security
Retirement.news 3 202109RNNSSBMCPensions Retirement income and security is different now than it was even just a few decades ago. One reason for this is because many companies have done away with the defined benefit pension plan – which typically pays out an ongoing stream of income for the remainder of the worker/retiree’s life. In some cases, income from these types of pensions may continue for the rest of a surviving spouse’s life, too. The employer usually funds these plans in a “pooled” trust account, and the benefits to participants are also paid out from this account. The employer’s contributions may be tax-deductible to the company. Further, gains on the underlying investments are also not taxable. But if the investments in the account perform poorly, it is still up to the employer to make good on the income payments. The amount of income that covered employees/retirees receive is based on a pre-determined formula. Often, retiring employees can choose how pension funds are received, such as via a lump sum cash out or an ongoing monthly payment. The benefits paid to the retirees and that reflect employer contributions and investment earnings will be taxable to the recipient as ordinary income at their thencurrent income tax rate. Unfortunately, while defined benefit pension plans can provide income security for retirees, they are expensive for companies to keep up, especially with people living longer (on average) today and, in turn, receiving income for a more extended time. So, many companies have essentially “replaced” these defined benefit plans with defined contribution plans – with the most popular of these being the 401(k). With a traditional 401(k), participants can enjoy several tax-related benefits, such as pre-tax contributions and tax-deferred growth of the funds inside of the account. But even so, with defined contribution plans, it is up to the individual – not the employer – to choose how the money is invested (typically by picking from a list of available investments and fixed-rate financial vehicles). Defined contribution plan participants must also ensure that there is enough income generated from the account in retirement. It is coordinated with other sources of future income like Social Security. Defining Pensions
Retirement.news 4 202109RNNSSBMCPensions For many people, Social Security can make up a significant portion of retirement income. According to the Social Security Administration, an individual with average earnings may replace approximately 42% of their pre-retirement earnings. However, higher-wage earners will typically replace less than that with their Social Security retirement benefits. Both employers and employees typically pay into the Social Security system. These funds are then used for funding retirement income benefits to recipients and for paying out Social Security disability and survivor’s benefits. Social Security taxes are collected in a payroll deduction, which is mandated by FICA (the Federal Insurance Contributions Act) or SECA (the Self-Employed Contributions Act). As Social Security is a “pay-as-you-go” system, the taxes collected from today’s workers go towards funding the benefits of the current recipients. Therefore, the benefits collected by future retirees will be funded by tax-paying workers in the future. Unfortunately, the number of workers that pay into the Social Security program has gone down. In contrast, the number of benefit recipients continues to rise – due in large part to the massive number of Baby Boomers who are entering into retirement. It is estimated that roughly 10,000 people in the U.S. turn age 65 every day – and this massive influx of benefit recipients is putting pressure on both Social Security and Medicare. The amount of your Social Security retirement benefits can depend on several different factors, including: • Your age when you file for benefits (and your full retirement age, according to Social Security) • How much income you earned during your working years (35 years of earnings are factored into the benefit computation equation) • Whether or not you (and your spouse) have earned enough work credits to qualify for Social Security retirement income benefits There are many options available when it comes to filing for Social Security retirement benefits. For instance, your total benefit amount – which is based in large part on your top 35 earning years – will be paid if you file at your full retirement age (FRA). For many years, the Social Security full retirement age was 65 for all retirees. However, to help with reducing some of the pressure on the system, the FRA can be as high as age 67 now, based on the year you were born. Understanding Social Security
Retirement.news 5 202109RNNSSBMCPensions To be eligible for Social Security retirement benefits, you (or your spouse, if applicable) must have worked at a job where taxes are paid into the system. You must also have earned 40 “work credits.” These credits are based on the amount of earnings you have over time. For instance, (in 2021), one work credit towards Social Security retirement benefits is earned for each $1,470 in income you generate. You can accumulate a maximum of four Social Security work credits per year. If you (or your spouse) have earned at least 40 work credits and are eligible for Social Security, you can file for benefits as early as age 62. If you file before your full retirement age, though, the dollar amount of the benefit you receive will be permanently reduced. It is also possible that your Social Security benefit may be taxable. Source: Social Security Administration Social Security Full Retirement Age (FRA) Year of Birth Minimum Retirement Age for Full Social Security Retirement Income Benefits 1937 or before 65 1938 65 + 2 months 1939 65 + 4 months 1940 65 + 6 months 1941 65 + 8 months 1942 65 + 10 months 1943 to 1954 66 1955 66 + 2 months 1956 66 + 4 months 1957 66 + 6 months 1958 66 + 8 months 1959 66 + 10 months 1960 or later 67
Retirement.news 6 202109RNNSSBMCPensions Another way of determining the difference in the dollar amount of your Social Security benefits is to consider the “cost” of taking this income before your full retirement age. Even so, based on your specific situation and financial needs, there can be some instances where taking Social Security retirement benefits early – between age 62 and your full retirement age – could make sense. Source: Social Security Administration Social Security Benefit Reduction for Early Filers Year of Birth Full Retirement Age (FRA) Months Between age 62 and FRA Retirement Benefit is Reduced By A $1,000 Benefit Would Be Reduced By 1943-1954 66 48 25.00% $750 1955 66 and 2 months 50 25.83% $741 1956 66 and 4 months 52 26.67% $733 1957 66 and 6 months 54 27.50% $725 1958 66 and 8 months 56 28.33% $716 1959 66 and 10 months 58 29.17% $708 1960 and later 67 60 30.00% $700
Retirement.news 7 202109RNNSSBMCPensions On the other hand, if you wait until after you have reached your FRA for Social Security, the dollar amount of your benefit can go up. This is referred to as getting a “delayed retirement credit.” In this case, for every year that you wait to file after your full retirement age (up until age 70), your benefit will increase by 8%. You could give yourself a “raise” of up to 32% of your original benefit amount with that in mind. For example, suppose your full retirement age is 66, and your total amount of Social Security retirement income is $2,000 per month. In that case, you could end up with a 32% increase in the dollar figure by simply waiting until age 70 to start collecting. And this figure doesn’t even include any cost-of-living adjustment(s) (COLA) that you may also receive going forward. Source: Social Security Administration Cost of Taking Social Security Income Before Your Full Retirement Age (FRA) Age Full Retirement Age 66 Full Retirement Age 67 62 25% reduction 30% reduction 63 20% reduction 25% reduction 64 13.3% reduction 20% reduction 65 6.7% reduction 13.3% reduction 66 Full Benefits 6.7% reduction 67 Full Benefits
Retirement.news 8 202109RNNSSBMCPensions Suppose you are married, and either you or your spouse is eligible for Social Security retirement benefits. However, the other has not worked and earned any wages that count towards these benefits. In that case, the non-working spouse could still be eligible to receive Social Security spousal income – provided that this spouse is at least age 62 or older and that the worker spouse is either currently receiving Social Security retirement benefits or is eligible but has not yet filed for them. The same holds concerning an eligible spouse filing for Social Security benefits before or after reaching full retirement age. In this instance, though, if the spousal retirement benefits are claimed at the spouse’s FRA, the dollar amount will be half of the worker spouse’s full retirement benefit. Suppose you and your spouse are eligible to receive income from a defined benefit pension plan and Social Security. In that case, it is important that you properly coordinate when these income sources start and how much you will bring in. That’s because there could be various taxes or penalties incurred, which in turn, could end up reducing the amount of net spendable income you have to spend on goods and services in retirement. You can obtain an estimate of your Social Security benefit amount by going to the Social Security Administration’s website at: https:// ssa.gov/benefits/retirement/estimator.html. This benefit estimate will be based on your Social Security earnings record. Social Security Delayed Retirement Credit Example If you take your Social Security retirement benefits at age: Monthly benefit amount: 66 (FRA) $2,000 67 $2,160 68 $2,320 69 $2,480 70 $2,640 It is important to note, though, that this figure is only an estimated amount, and it could change based on one or more of the following criteria: • Any increases or decreases in your future earnings • Cost-of-living adjustments (COLAs) from Social Security • Military service and pensions that you earned but did not pay Social Security taxes on
Retirement.news 9 202109RNNSSBMCPensions Before you commit to any type of withdrawal plan from a defined benefit pension plan, Social Security, and other retirement income generation source, there are several factors to consider. For example, coming up with an approximate amount of your expenses in retirement will give you an idea of your monthly or annual “outgo.” While some financial advisors state that expenses will decrease after you retire, this is not necessarily the case – and in some instances, expenses may even increase. For instance, as people age, the cost of healthcare will often rise. Based on a recent study, an average 65-yearold couple who retired in 2020 can expect to pay roughly $300,000 in out-of-pocket healthcare costs – and this figure does not include potential long-term care needs. Depending on where you live in the United States, the monthly cost of a semi-private room in a skilled nursing home can be $7,700 or more, with a private room adding $1,100 per month. Another critical factor to consider is taxes because they don’t typically stop when you retire. Millions of retirees must pay tax every year on the withdrawals they take from traditional retirement accounts like the 401(k) and traditional IRAs and personal savings and investment accounts. Federal (and state, where applicable) income tax rates have varied widely for more than a century in the U.S., with the top federal rate being 94% in 1944 and 1945, and forty-nine years where it was 70% or more. So, the current (in 2021) top federal income tax rate of 37% is relatively low in comparison. But there is no guarantee that rates won’t go back up. It is much more likely that income tax rates will rise in the future – but no one knows just how high they could go. Factors to Consider When Collecting Social Security and a Pension
Retirement.news 10 202109RNNSSBMCPensions Year Rate (%) Year Rate (%) 2018-2021 37 1950 84.36 2013-2017 39.6 1948-1949 82.13 2003-2012 35 1946-1947 86.45 2002 38.6 1944-1945 94 2001 39.1 1942-1943 88 1993-2000 39.6 1941 81 1991-1992 31 1940 81.1 1988-1990 28 1936-1939 79 1987 38.5 1932-1935 63 1982-1986 50 1930-1931 25 1981 69.125 1929 24 1971-1980 70 1925-1928 25 1970 71.75 1924 46 1969 77 1923 43.5 1968 75.25 1922 58 1965-1967 70 1919-1921 73 1964 77 1918 77 1954-1963 91 1917 67 1952-1953 92 1916 15 1951 91 1913-1915 7 Source: Inside Gov Top Federal Income Tax Rates 1913 – 2021
Retirement.news 11 202109RNNSSBMCPensions Many people are not aware that Social Security retirement benefits could be taxable. In this case, several factors could make Social Security income subject to income tax. These can include the following situations: • Whether or not you have reached your full retirement age (FRA) when you file for benefits • The amount of income you receive from other sources (if any) Therefore, depending on your specific situation, you may have to pay tax on a percent of your Social Security benefits (in 2021) if you meet the following criteria: The amount of your combined income is equal to your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security benefits. In addition to the possibility of your Social Security retirement benefits being taxable, there is also the chance that this income could be reduced – at least temporarily. For example, suppose you have not yet reached your full retirement age and earn more than a certain amount of money. In that case, you may experience a reduction in your Social Security retirement income benefits. For instance, if you continue to work after you have filed for, and started receiving, your Social Security retirement benefits, some of your benefits may temporarily be withheld, based on the amount of your income. In this particular case (in 2021), your Social Security benefits would be reduced by $1 for every $2 that you earn over $18,960. In the year that you reach your full retirement age (FRA), your benefits will be reduced by $1 for every $3 you earn above $50,520 (in 2021). After that, starting with the month that you attain your full retirement age, your Social Security benefits will no longer be reduced. You file your annual federal income tax return as an individual, and your combined income is: • Between $25,000 and $34,000 (up to 50% of your benefits may be taxable) • More than $34,000 (up to 85% of your benefits may be taxable) You file a joint income tax return with your spouse, and you have a combined income that is: • Between $32,000 and $44,000 (up to 50% of your benefits may be taxable) • More than $44,000 (up to 85% of your benefits may be taxable) 02 03 01 You are married, and you file a separate tax return.
Retirement.news 12 202109RNNSSBMCPensions However, it is important to note that these “lost” Social Security benefits are not gone forever. Instead, the amount of your Social Security benefit will be increased to account for them after you have reached your full retirement age. You may also receive annual cost-of-living adjustments (COLAs) that can help your Social Security benefits to keep better pace with rising inflation over time. Although COLA increases are not guaranteed, Social Security retirement income benefits have gone up in most years since COLAs were initiated in 1975. Reduction of Social Security Benefits Based on Your Income (in 2021) Under Full Retirement Age (FRA) In the year you reach Full Retirement Age (FRA) Give up $1 in Social Security benefits for every $2 you earn above the $18,960 limit Give up $1 in Social Security benefits for every $3 you earn above the $50,520 limit Source: Social Security Administration
Retirement.news 13 202109RNNSSBMCPensions Year COLA % Year COLA % Year COLA % 1975 8.0 1991 3.7 2007 2.3 1976 6.4 1992 3.0 2008 5.8 1977 5.9 1993 2.6 2009 0.0 1978 6.5 1994 2.8 2010 0.0 1979 9.9 1995 2.6 2011 3.6 1980 14.3 1996 2.9 2012 1.7 1981 11.2 1997 2.1 2013 1.5 1982 7.4 1998 1.3 2014 1.7 1983 3.5 1999 2.5 2015 0.0 1984 3.5 2000 3.5 2016 0.3 1985 3.1 2001 2.6 2017 2.0 1986 1.3 2002 1.4 2018 2.8 1987 4.2 2003 2.1 2019 1.6 1988 4.0 2004 2.7 2020 1.3 1989 4.7 2005 4.1 1990 5.4 2006 3.3 Another critical factor to consider when receiving retirement income is whether or not you have reached age 59 ½. This is because certain types of withdrawals – such as those coming out of traditional IRA and 401(k) plans – could incur a 10% “early withdrawal penalty” from the IRS. This is in addition to any taxes that you may owe. Social Security Cost-of-Living Adjustments (COLAs) Income (in 2021) Source: https://www.ssa.gov/oact/cola/colaseries.html
Retirement.news 14 202109RNNSSBMCPensions Likewise, many retirement savings plan participants are required to start withdrawing at least a “required minimum distribution,” or RMD, at age 72. If these distributions are not taken, the IRS will charge a penalty in the amount of 50% of what should have been withdrawn. With that in mind, it is essential to have a plan in place for reducing – or even for eliminating – income taxes and penalties in retirement so that you can net the most money possible for your essential (and non-essential) expenses in the future. The good news is that there are some ways that you can do that. Making sure that you generate enough income in retirement could mean the difference between enjoying all that life offers or constantly worrying about running out of money while it is still needed. Suppose you are eligible for a defined benefit pension, Social Security, and/or any other type of income plan. In that case, you must maximize what you will bring in and coordinate all of your incoming cash flow sources so that you don’t unknowingly cause additional taxes or other situations that could reduce what you have available to spend. Because not everyone’s short- and long-term financial objectives are the same, there isn’t just one strategy that benefits all retirees across the board. Working with a retirement income specialist can help you narrow down which strategy and financial tools are best for you. How to Coordinate and Maximize Your Spendable Income Sources in Retirement
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