Financial Tips about Social Security Young People Should Know

Given how complicated our government has made the rules and regulations around Social Security, there’s many misconceptions and myths about surrounds benefits. Here’s some actionable tips and strategies to help you cut through the noise and make progress on your path to financial independence.  

Social Security should be closely managed like other assets.

Many people will have large IRA and/or 401(k) balances heading into retirement, and they’ve implemented all sorts of financial planning and asset management strategies for decades, like maximizing returns and minimizing expenses. Few young people think of their future Social Security income as an asset that should managed and maximized, but they should. There are different strategies and techniques that young people should consider to help them maximize their retirement benefit.

Retiring early has its drawbacks.  

Since the Social Security formula considers your 35 highest earning years, retiring early will negatively impact the formula if you haven’t reached 35 years yet. Penalizing early retirees even more is that each of the 35 years used are adjusted to today’s dollars, but the inflation-adjusted maximum earnings numbers are higher for more recent years than years far in the past.  

To maximize your social Security benefit, you’d have to minimize the time period between retiring from work and collecting the benefit. Once you’ve put in 35 years though, the benefit of continuing to work gets smaller.

Social Security will likely be altered, but won’t go away completely.

According to the 2018 Trustees report, the Social Security trust, which had $2.9 trillion at 12/31/2017, is fully funded until 2034. After that, Social Security has enough money to continue to support only 77% of benefits, decreasing to 74% coverage by 2092.

To make up the difference, some of the proposals include increasing the maximum income that’s subject to Social Security tax ($128,000 in 2018), raising the full retirement age (67 for people born after 1960), reducing Cost of Living Adjustments (COLA for all retirees, or lowering benefits. The 2017 report estimates that it would take a 3% increase in payroll taxes to bring Social Security back to a fully funded level.

Social Security income is more valuable than you think.  

Many people are dismissive of Social Security given that their current earnings are far larger than their expected Social Security benefit. This is a mistake since every dollar you earn in Social Security is much more valuable than a dollar of regular income, because 1) Social Security is not subject to payroll taxes; 2) Social Security is tax-free income for many people; 3) your lifestyle expenses might be much lower when you receive Social Security; 4) you’ll no longer need to make retirement savings contributions when you receive Social Security; and 5) you’ll (ideally) have few debts to pay off when you receive benefits.

Social Security penalizes you for working in retirement.  

Since the Social Security calculation takes into account the highest earning 35 years, it’s possible to replace some of the lower earning years by working while taking Social Security benefits.  On the other hand, Social Security benefits are withheld over certain income ($1 of benefits are withheld for every $2 you earn over $17,040 in 2018), which deters some people from working. The good news is that these reductions stops when you hit Full Retirement Age (FRA).  

Divorced spouses can potentially get a divorced spouse benefit.

For marriages that lasted longer than 10 years, the lower earning spouse may be able to benefit from the income earnings of their former spouse. There are very specific rules that govern which divorced spouses are eligible, but many divorced couples are unaware of this benefit. The benefits paid to the lower income spouse don’t affect the higher earning spouse.

Your Social Security statement is probably inaccurate.

The statement you get from the Social Security Administration is just an estimate of your benefits if you continue to work. Your actual benefit could be much higher or lower, depending on if you continue to work or not. The benefit on your statement is the FRA benefit, calculated at 62, but you still continue to earn Cost of Living Adjustments (COLA) until FRA; and COLA credits if you wait until 70. As well, you’ll want to see if the historical earnings on your statement are accurate. If it’s missing some of your earnings, you could receive a benefit lower than what you’re entitled.

People should generally think of Social Security as longevity insurance.  

When it comes to deciding when to take Social Security, the worry I most often hear is “what if I delay taking Social Security and I die early?”  This is definitely a valid concern since most people don’t want to leave money on the table. A bigger concern is not having enough money in retirement if you live longer than expected, also known as “longevity risk.” Since Social Security greatly rewards those waiting until FRA or later with COLA and delayed credits of 8% per year, most people are actually losing out on money if they take it early. Basically, delaying taking the benefit guards against getting poor in old age.

Social Security also guards against two of retirement’s biggest’s risks: inflation and a stock market crash.

Two of the biggest risks in retirement are increasing prices, or inflation risk, and the risk that retirement assets invested in the stock market will decrease dramatically. Social Security helps address both of these risks. Social Security’s Cost of Living adjustments (COLA) help retirees keep pace with inflation. The COLA increase in 2019 was 2.8%, which is higher than the 2.6% average since increase since 1984. And while retirees won’t see their Social Security paychecks increase much during periods of very low inflation, as evidenced by the three 0% COLA increases since 2010, retirees will get protection from higher prices during times of hyper inflation. COLA increases averaged 8.7% during the high inflation years from 1975 to 1982. Also, while a dramatic stock market decline or an extended bear market can have a negative impact on many retirees with large stock market positions, Social Security benefits won’t be impacted by changes in the stock market.

Your decisions about Social Security affect your spouse.

Many people decide when to take their benefits without realizing that their decision can affect their spouse for decades. Spouses with a higher income partner can earn a spousal benefit, but that benefit is based on when the higher earning spouse started taking their benefit, with the benefit being much lower if it’s taken before FRA.

Also, widow benefits are determined based on the age the deceased takes Social Security and the age the widow takes Social Security. A widow of a higher income earning spouse is far more likely to not run out of money if the deceased waited to FRA or later to take social security benefits.

Small business owner Social Security strategies can backfire.

Some advisers advocate for business owners taking a salary to proactively pay themselves or a spouse wages to earn a Social Security benefit in the future. Given that business owners paying themselves would have to pay 12.4% up to the max earnings ($128,,400 in 2018) and 2.9% in Medicare taxes on all earnings, the break even age for these strategies to pay off could be at ages over 100. As an employee, you’re only liable for half of these taxes, so taking a job just for future benefits can make more sense than for a business owner.

David Flores Wilson, CFP®, CFA, is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.