SECRETS OF SOCIAL SECURITY

Which would you rather?

1. Electrocution
2. Spontaneous human combustion, or
3. Reading the government’s guidelines to Social Security benefits?

If you answered choices one or two above, we most likely share a similar experience.

While I can’t say I’ve ever been electrocuted or have spontaneously combusted, I can say with great certainty that I’ve read some of the documentation the Social Security administration provides and let me tell you, next time around I think I just might give either of the first two items a try.

Bad jokes aside, a few years ago I’d ask someone about their Social Security benefits and they’d often give me a “Let’s move on and talk about investments” reaction.

Back then, Social Security didn’t seem to be a big priority. The markets were doing great, interest rates were attractive, everyone seemed to be making money and the financial world didn’t seem like it could be headed to economic Armageddon.

Since ’08 and some recent market turmoil, however, it seems many people are taking their Social Security planning and benefits far more seriously than ever before.

For the purposes of this article, I will assume Social Security will not go bankrupt. That subject unto itself would comprise a volume of data and boardwalk Madam Marie fortune teller predictions. As such, I’ll take the momentary optimistic belief that Social Security will survive the shortfall by yet another form of government bailout or one of the following proposals that are now actively being considered:

• Raising the retirement age
• Lowering benefits for future retirees
• Increasing the maximum earnings subject to Social Security tax
• Reducing cost of living adjustments

Leaving this important issue aside, there’s a couple of things I think are worth bringing to your attention. After all, knowing a few simple facts about Social Security can make a big difference in the amount of income one receives over a lifetime.

Perhaps some of these ideas are familiar to you, while others will hopefully come as a pleasant surprise.

So, in no order of priority or importance, let’s take a closer look.

FILE AND SUSPEND

This one tops my list because it is often the most lucrative.

When it comes to Social Security planning, many people question whether or not they should take their benefits early at age sixty-two or wait longer until receiving them. Unbeknownst to many married folks, the following example could be a great solution.

Let’s suppose:

• Hank and Susan are married and are sixty-six years old
• Hank, the historically higher earning spouse, applies for his benefits.
• Susan then files for her spousal benefit.
• After that’s done, Hank then suspends his benefits.
• Hank then waits until his full retirement age to re-apply for his benefits.

Why do this?

Is it because the Social Security office is an interesting place to visit? I can assure you, it’s not. The food is terrible.

It’s because in this case, Hank and Susan get the best of both worlds. Susan gets her spousal benefits while Hank’s benefits continue to accrue what’s known as “delayed credits” that increase his benefit base by eight percent per year until full retirement age, thereby allowing him to reclaim his benefits at full retirement and receive the higher income over his lifetime.

MULLIGANS

No thanks to a kid we used to call “Cranky Andy,” my childhood kickball games never allowed for do-overs but thankfully, the Social Security administration does. If the above or other strategies makes sense, one can pay back their benefits without any interest or penalties owed and essentially “reset” their benefit base so that they can receive the higher income at full retirement age.

So much for Cranky Andy… Moving on…

CLAIM NOW, CLAIM MORE LATER

In this twist on the first strategy, let’s suppose:

• Hank and Susan are still married
• Hank’s stated benefits are $2,000; Susan’s are $800.
• Susan files for her benefits as soon as possible, in their case at age sixty-six (or, ideally at age sixty-two)
• Hank then files for his spousal benefit at the same time and begins collecting $400, which represents half of Susan’s amount.
• When Hank turns seventy, he then applies for and switches to his higher benefit.
• The result is that Hank receives an additional $400 per month from age sixty-six through age seventy but does not mess up his credits (that increase eight percent per year) to his full retirement age.

It is important to note that this cannot be done before one is already at full retirement age.

FORGET WHAT FDR SAID

When Social Security was first enacted, popular lore states FDR promised the income would never be taxed. These days, however, up to eighty-five percent of Social Security benefits can be exposed to income taxation and that’s not a good thing.

Because of something called “The Provisional Income Formula,” sad but true, income from Social Security can be taxed and even things such as tax free interest from municipal bonds can really mess things up.

A few years ago, a CPA friend of mine shared with me a “before and after” situation where a little planning went a long way, and it’s a concept I’ve been occasionally sharing with people ever since. In this particular case, with some repositioning of various assets, the client’s before-and-after cash flow remained the same but they wound up paying roughly $7,000 less tax merely because of what turned out to be some minor repositioning.

If you’d like to see a before and after example, be sure to email me. I’d be happy to send you an example along with the formula that determines how much, if any, of Social Security benefits are exposed to taxes.

COLLEGE, ANYONE?

Many people are not aware that the child of an individual collecting Social Security can claim roughly half of their parent’s benefit for help pay the costs. It’s a benefit rarely known and one that can really help some people out.

LARRY KING AND THE BENEFITS OF DIVORCE

Unbeknownst to some, a divorcee can receive Social Security benefits based on their ex-spouses’s work record as long as the marriage lasted ten years or more and they haven’t remarried.

Furthermore, for the eight or nine women that Larry King divorced, it’s important to know more than one ex-spouse can receive benefits based on the same person’s working record. Therefore, in Larry King’s case, all of his ex-wives can basically claim divorced-spouse benefits as long as their marriage lasted at least those ten years, which is likely a long-shot for some.

Lastly, if you just so happen to be Larry King and are actually reading this, don’t despair: the benefits paid to one of your ex-spouse does not affect or lower those paid to you.

IN CONCLUSION

Please don’t take any of the above as gospel. Social Security is a complex subject very much deserving of a full analysis that will help determine one’s best course of action.

So, whether you are Larry King worried about your many future ex-wives or you are someone who is just trying to figure out the best way to get the most bang for your buck, hopefully some of the above has been of some help.

If you are interested in getting more information about your Social Security benefits, click here.

Tagged as: full retirement, full retirement age, income taxation, investments, Larry King, retirement age, Social Security, social security benefits, Social Security planning, Social Security tax