On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received $22.54 and was 65 years old at that time, according to the Social Security Administration. See https://www.ssa.gov/history/idapayroll.html.
Ida May Fuller worked for three years under the Social Security program, paid a total of $24.75 in payroll taxes, and collected $22,888.92 in Social Security benefits by the time she passed away at 100 years of age. See also https://www.ssa.gov/history/idapayroll.html.
Today, nearly 70 million people receive some form of assistance from Social Security. See https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/. You and I will never receive the return on our contributions that Ms. Fuller received, but Social Security can and does play a role in supplementing savings accumulated over a lifetime.
Recognizing that Social Security supplements other sources of income, we can take proactive measures that maximize benefits while avoiding the pitfalls that poor choices can create.
With that in mind, let’s review potential financial Social Security potholes that can cost you money.
1. Collecting benefits too soon. You may begin receiving your retirement benefit at age 62…at a reduced rate. You probably know this, but let’s talk turkey.
If you were born in 1960 or later, full retirement age is 67. At age 62, your monthly benefit amount is reduced by about 30% of what you would receive if you waited until you are 67. The reduction for starting benefits at 63 is about 25%; 64 is about 20%; 65 is about 13.3%; and 66 is about 6.7%.
In casual conversation, it’s common for folks to ask us, “When is the right time for me to begin receiving benefits?” I usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.
If you have questions, let’s talk. I believe it’s important to tailor my thoughts and recommendations to each specific set of circumstances.
2. You collect prior to your full retirement age while still working. If you are under full retirement age for the entire year, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640. Ouch! See https://www.ssa.gov/planners/retire/whileworking.html.
In the year you reach full retirement, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. Only earnings before the month you reach your full retirement age are counted. See also https://www.ssa.gov/planners/retire/whileworking.html.
In many cases, the price of collecting Social Security while working and under full retirement age can be costly.
3. You are unaware that your Social Security may be taxed. IRA and 401k contributions may be deducted from income. However, Social Security taxes paid by the employee are not deductible. But that doesn’t necessarily translate into tax-free Social Security income.
If you file a federal tax return as an “individual” and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Earn more than $34,000, and up to 85% of your benefits may be taxable.See https://www.ssa.gov/planners/taxes.html
If you file a joint return, the threshold rises to $32,000 and $44,000, respectively. See also https://www.ssa.gov/planners/taxes.html.
4. You decide to defer the spousal benefit. The longer you wait to take Social Security, the greater the monthly benefit, up to age 70. So, why not employ the same strategy for your spouse, if money isn’t the primary issue? Unfortunately, that may not be a wise choice. See https://www.aarp.org/retirement/social-security/questions-answers/maximizing-spousal-social-security-benefit/.
The most your spouse may receive is 50% of the monthly benefit of the primary account that you are entitled to at full retirement age. If your spouse waits past his or her full retirement age, he or she is leaving money with the government.
5. Remarriage and your benefit. It’s complicated. You may already be aware that divorced spouses are eligible for benefits tied to their former marriage. See https://www.elderlawanswers.com/how-do-divorce-and-remarriage-affect-social-security-benefits-14386.
Eligibility is determined by these criteria:
- You were married for at least 10 straight years.
- You are at least 62 years old.
- Your ex-spouse is eligible for retirement benefits.
- You are currently unmarried.
However, if you remarry, you lose the rights to your former spouse’s benefits unless your new marriage ends, whether by death or divorce.
I understand that the monthly Social Security check you receive may pale in comparison with the new journey you are about to begin, but it’s important that you are aware of the financial component.
6. How many years have you worked? Most of us understand one simple concept: the longer we wait to take Social Security (up to age 70) the higher the benefit (spousal benefit may be an exception–see #4).
We also understand that higher wage earners can expect to receive a higher benefit. But did you realize that your monthly benefit is also based on your highest 35 years of earnings? See https://www.ssa.gov/planners/retire/stopwork.html.
What if you haven’t worked 35 years? Social Security averages in zero for those years, which reduces your benefit. If you have at least 35 years but some of those years are low earning years, they will be averaged in, creating lower benefit versus continued employment at higher wages.
Are you still working in your 50s or 60s? Great! Those after-school jobs in high school or years when your income may have been low are removed from the benefit calculation if you’ve exceeded 35 years of income.
When I am factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but I believe it is something to be aware of.
For some folks, Social Security may seem simple. For others, it feels as if you’re entering a complicated financial maze. If you have questions about Social Security or are uncertain how to proceed, feel free to give my office a call.
Finally, feel free to run any tax scenarios by your tax advisor.
The bond market turns upside down
When I was younger–much younger–I learned the value of hard work (and a dollar) from my first job as a caddie at the local golf club. On most in-season early mornings when school was not in session, I was headed to the golf club, ready to carry those bags that were almost as big as me.
Besides offering a great lesson on savings for my earnings, my parents provided a simple explanation of bank savings accounts and monthly interest. If I remember correctly, my FDIC-insured savings earned 5%.
How times have changed! Rates are much lower today. But it’s a much more difficult situation for savers in many developed nations. It’s called “negative interest rates.”
You no longer earn any money by lending cash to the government, i.e., buying government bonds. Instead, you’ll pay the government to hold your cash.
Currently, all German government bonds offer yields below zero, while financial service providers UBS and Credit Suisse are planning to charge a small fee for clients that hold large cash balances (Bloomberg News).
We have not seen negative rates in the U.S., but in much of Europe and Japan, below-zero rates on government bonds are common, with over $15 trillion (yes, trillion, that’s not a misprint) in government debt sporting yields less than zero percent, according to Bloomberg News.
Table 1: Below Zero
10-Year Govt Bond
Source: MktWatch, Bloomberg 8/30/19
How can you buy a bond with a rate that’s below zero?
Well, let’s say Germany issues a 10-year bond with a par value of 1,000 euros (German currency is denominated in euros). You won’t pay Germany an annual coupon. Instead, you’ll buy that bond at a price that’s greater than 1,000 euros. At maturity, you’ll receive 1,000 euros.
It’s a great deal for Germany but it doesn’t seem to make much sense for an investor. But that’s today’s new global reality.
What’s going on?
Today, several factors are contributing to below-zero yields.
- Inflation in Europe is very low.
- Growth has been substandard in Europe for much of the decade. Global trade tensions are adding to the uncertainty, and Europe may be headed toward another recession.
- The European Central Bank has been much more accommodative than the Federal Reserve and appears set to ease again this month.
- There’s too much cash sloshing around the globe that can’t find a home in viable industrial projects. So, it finds a home in creditworthy government bonds.
The next question that usually surfaces: “Why should I care? I’m in the U.S.”
What happens around the globe can affect investors at home.
Below-zero yields in major countries can encourage foreign investors to seek out positive returns in other nations, including in U.S. Treasuries. Since yields and bond prices move in opposite directions, an influx of foreign cash pushes up U.S. bond prices and knocks down yields.
It’s one reason why the yield on the 30-year Treasury fell to a record low of 1.94% on August 28 (U.S. Treasury Dept.), and the benchmark 10-year Treasury sported a yield of less than 1.50% on the same day.
Clearly, it’s a far cry from the risk-free savings account I received on my bank savings account many years ago.
As I’ve recently emphasized, you must control what you can control.
You can’t control the stock market, you can’t control headlines, and timing the market isn’t a realistic tool. But, you can control the portfolio.
Your plan should consider your time horizon, risk tolerance, and financial goals. There is always risk when investing, but investors should have their strategy tailored with their financial goals in mind.
I hope you’ve found this article to be informative and helpful. If you have any questions, concerns about this article or would like to discuss any planning or investment matters, please feel free to email Eric@ElmTreeCapital.com or give my office a call at (781) 236-0802.
I'm happy to talk!