Social Security: Myth Busters Edition
No matter how many times some myths are debunked, we may still believe them. For example, cracking your knuckles causes arthritis (still possibly annoying but not true), humans swallow eight spiders a year in their sleep (gross and thankfully not true) and twinkies have no expiration date and would survive a nuclear apocalypse (shelf life is a few weeks… wait, how is that myth not true?!). When it comes to social security, there are several myths that have been frequently debunked. Let’s review and debunk a few of the more persistent myths and look at the implications they may have for your financial plan:
If you work while taking social security, you will have to give back most of your benefits
- Debunked: once you reach full retirement age (FRA; FRA is age 66 for someone born in 1956), earned income does not reduce benefits regardless of how much you make. While true that benefits are reduced at certain earned income thresholds prior to FRA, you would also receive a credit for those deductions towards a recalculated benefit once you reach FRA.
- Planning implication: accurately factor your benefits (pre-FRA and post-FRA) when evaluating whether or not to take social security while you are still working.
Social security benefits are tax free
- Debunked: taxation of social security benefits is based upon your provisional income (formula = adjusted gross income – socialsecurity benefits + ½ social security benefits + nontaxable interest). Depending on your provisional income, up to 85% of social security benefits may be taxable federally. State taxation varies.
- Planning implication: factor the impact that taxation of social security benefits may have on your plan, which may add up over time.
It is always best to wait until age 70 to maximize your benefits
- Debunked: benefits grow 8% annually when delayed past FRA until a maximum benefit is reached at age 70, but the break-evenage for delaying benefits from FRA to age 70 is 82 – 83 years old.
- Planning implication: if you do not expect to live until the break-even point, it may not make sense to delay. Also, you simply maynot be able to afford to delay if you need the benefits to pay your bills.
It is always best to take social security as soon as you are eligible
- Debunked: if claiming at earliest possible age 62, you would receive a 25 – 30% reduction compared to your FRA benefit.
- Planning implication: if you can afford to wait and believe that you have an above average life expectancy, it may make sense todelay social security until age 70 to maximize lifetime benefits.
Social security is going broke and you will not receive benefits
- Debunked: most benefits are paid by a 6.2% payroll tax on a pay-as-you go system. In recent years benefits paid have exceeded payroll tax received. With no changes, current projections show that the social security trust fund (funded by payroll tax surplus) willbe depleted around 2034 and benefits could be reduced at that time by approximately 20%. Given the popularity of social security, it isunlikely that no changes will be implemented in the coming years. A similar issue was resolved back in 1983 with bipartisan support.
- Planning implication: it is not realistic to assume that social security will not exist. Factor in a reasonable social security estimate intoyour plan to illustrate an accurate picture of your retirement income and help determine if you are meeting your retirement goals.
As always, please reach out to your trusted advisor with any questions.
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