Chances are, like many of us, you probably don’t analyze each deduction on your paycheck every payday. You already know the basics that come out, such as taxes, your healthcare premium, and, of course, Social Security. And while it's not necessarily important that you nitpick every paycheck, when is the last time, if ever, you actually thought about just how much of your hard-earned money is going to Social Security?
The shocking reality is that between you and your employers, you’ve doled out 12.4% of your annual income, all the way back to your first job as a teenager! So by this point, after years upon years of paychecks, it’s added up to a substantial amount. Maybe even so substantial that it could start to make your 401(k) look like chump change. Realizing this, why wouldn’t you want to maximize your benefits so you don’t unknowingly forfeit money that’s rightfully yours?
As you probably already know, Social Security is a pretty complicated system. Therefore, unfortunately, many people mistakenly believe false information and make incorrect assumptions about how this system actually works. Some of these mistakes are minor. On the other hand, some can actually be severe and even bring about financially devastating results. It is just cause for alarm when you realize this, so today we want to uncover some common Social Security myths and expose the truth to help you avoid making detrimental mistakes with your money.
Myth #1: Social Security Won’t Exist In The Future
The word on the street these days is that Social Security won’t be around much longer. This myth leaves many of us, especially those nowhere close to retirement yet, quite concerned. However, here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2019, leaving the system to rely on incoming interest payments to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink. But even still, they would only shrink to about 75% of what Americans were expecting; they would not completely disappear. (1)
Unfortunately, you can’t control whether the Social Security program fails or succeeds. Therefore, your best plan of action is to educate yourself and plan ahead accordingly. One great way to do so is to create an account on the Social Security website in order to understand your current benefits and know where you stand. And keep in mind, a great deal of things can happen between now and 2034 that could impact the program. So don’t believe the agitated assumption that there will be no money left for you by the time you are ready to retire.
Myth #2: What You Give Is What You Get
Many believe that the amount of Social Security they pay is being stored up for them and that saved money is what they will get back once they retire. That is simply not true. What actually happens is the taxes that every income earner pays out are pooled together and then paid out. So your current contributions are supporting others now, and when you retire, the money others pay into the system will support you.
In 1960, the contributing workers-to-beneficiaries ratio was 5:1. In 2013, it was 2.8:1. (2) So even though the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. However, as time goes on and our life expectancy keeps increasing, there is a possibility that you may need to mentally prepare for your benefit amount to be less than you expect.
Myth #3: Everyone Contributes Equally To Social Security
Many believe that everyone pays an equal percentage relative to the amount they make. For example, everyone paying 5% of their net income implies that someone who makes $5 million per year is contributing much more than someone who makes $25,000. Unfortunately, that is just not true.
The reality is that every employee pays 6.2% out of their paychecks, with their employer paying another 6.2% as well, to fund Social Security. (The tax rate for self-employment income in 2019 is 12.4 percent.) This is subject to an earnings cap of $132,900 in 2019. So if you earn $133,000 per year and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,960.80. (3) Everyone pays the same total amount, with the exception of those making less than $132,900, who contribute less. If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out.
Myth #4: You Should Claim Social Security At Age 65
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount of benefit you receive.
Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later. (4)
If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned. If you decide to collect early, you receive only a percentage of that Primary Insurance Amount, which can vary from 30% to 6.7% depending on how early you decide to begin collecting. (5)
Myth #5: Your Benefit Amount Is Fixed
As we just learned above, collecting your Social Security benefit before you reach your Full Retirement Age will result in you forfeiting a percentage of what you have earned and accepting a lower payout. But did you know that for every year beyond your FRA that you delay taking benefits, the value increases by 8%, all the way up until you reach age 70? There is nowhere else you can get an 8% return guaranteed by the U.S. government! (6) This means that your benefit amount is not fixed, and depending on when you begin to collect, you will either leave money on the table, receive exactly what you’ve earned, or even make out with some extra.
Myth #6: Earning An Income Will Not Affect Your Benefits
This is one of those myths that is partly true. Once you reach full retirement age (FRA), it is true that your benefit amount will not be affected by your other income. However, that changes if you are collecting your benefit while below your FRA and have another source of income. There is a set limit that when surpassed your benefit is reduced.
For 2019, that limit is $17,640 if you are not yet in the year in which you will reach FRA. For every $2 you earn above $17,640, your Social Security benefit will be reduced by $1. During the year that you reach your FRA, the limit is $46,920. When you exceed that during your FRA year, your benefit will be reduced by $1 for every $3 you earn. (7) Then, as soon as you have your birthday and reach FRA, all limits are lifted. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
Myth #7: You Can Switch Claiming Strategies At Any Time
A shocking 38% of people incorrectly believe they can simply switch their claiming strategy with no repercussion after they’ve made their official choice. The truth is that you can withdraw your claim and re-apply at a future date, however, this is not done without consequence. (8)
The Social Security website states that you may withdraw your claim only once within your lifetime, and it must be done within 12 months of the original date you applied. Furthermore, you must repay all the benefits you and your family received, including all benefits your spouse or children received, whether they are living with you or not. (9) If you miss that 12-month window, you can suspend your benefits, but only if you have reached FRA but have not turned 70.
Myth #8: Your Claiming Strategy Affects Your Ex-Spouse
Many people believe that if they receive benefits based on their ex-spouse’s record, it will affect the benefit of their ex-spouse. The truth is actually just the opposite. The amount of benefits you would receive based on their record actually has no effect on the benefits of your ex-spouse or their current spouse.
With that being said, there are criteria that need to be met in order to be able to claim benefits based on an ex-spouse’s record. You must have been married for 10 consecutive years, have not remarried (unless your later marriage has already ended by annulment, divorce, or death), and have divorced at least two years before applying. If you meet these criteria, then you are entitled to either your full benefit or up to half of your former spouse’s benefit, whichever is greater. (10)
Myth #9: You Will Receive Your Benefits Promptly
Social Security, like most other programs similar in complexity, requires some time to process and begin. So, if you are in need of your first Social Security check in less than three months, chances are you are out of luck. It is generally recommended that you file for benefits around three months before you need your first payment. However, your application can only be processed a maximum of four months before benefits are scheduled to begin. This means that if you are planning on starting as soon as you are eligible at age 62 and one month, you cannot apply before you are 61 years and 10 months old. (11) Keep in mind that your first benefit payment will always be 1 month behind the start date. So if you apply in order to start your benefits at 65, you will get your first check in the first month after you started, at 65 years and one month.
Myth #10: Social Security Is A Headache
While it may seem like there is a lot of stress involved with making sure you optimize your Social Security benefit, the fact is Social Security remains a major piece of your retirement puzzle. It was designed to replace 40% of an average worker’s wages, (12) and that’s a significant amount of money you don’t want to just throw your hands up and walk away from. However, there is a lot to know to make sure you maximize your benefit. And since there is no one-size-fits-all claiming strategy, it is imperative that you work with an experienced professional who can provide you with confidence and make the whole process much less overwhelming.
You Don't Have To Be An Expert; You Just Have To Know Who To Ask
Here at ClearVista Financial, our goal is to help those who are planning for retirement develop a perfect personalized financial plan to address their unique needs and desires for their golden years. We believe that an integral part of this plan is your Social Security benefit. We work hard to educate you on your opportunities, answer your questions, and offer objective guidance. If you are preparing for retirement and want to partner with someone who is passionate about helping you maximize your Social Security benefit and pursue your ideal retirement, email me at email@example.com, call 800-491-4508, or click here to book your free introductory meeting.
About ClearVista Financial
ClearVista Financial is a faith-based independent financial services firm providing financial planning and retirement planning to pre-retirees and 401(k) plan participants. Founded by Mark Trice, ClearVista strives to help people find financial balance in their lives and spend their lives well. As a Certified Kingdom Advisor (CKA®) advisor, Mark provides professional guidance while also incorporating biblically-based financial management truths into ClearVista’s financial advisory practice. ClearVista Financial has offices in Austin, Brownwood, Temple, Houston, and Waco, Texas. Along with serving clients in Texas, the team also works with individuals in Arizona, California, Colorado, Missouri, West Virginia, and Virginia. To learn more, visit www.clearvistafinancial.com or connect with us on LinkedIn.