Social Security Myths

Last week, I attended the State Bar of Michigan Elder Law and Disability Rights Section 16th Annual Spring Conference in Plymouth, Michigan. One of the presenters at the conference was Daniel D. McHugh, a Certified Financial Planner® and Certified Public Accountant with Advance Capital Management, one of the largest money managers in Metro Detroit per Crain’s Detroit Business. Mr. McHugh gave an informative presentation on Social Security myths that he has encountered over the years as a financial advisor. This week’s column will summarize and discuss his top five Social Security myths.

Myth #1: Your benefit is calculated based on your last few years of work.

In order to qualify for Social Security retirement benefits, you generally must have at least 40 qualifying credits, four per year for 10 year’s working. If you work more than ten years, they are not ignored for Social Security purposes. Your 35 highest inflation adjusted income years are used in the calculation of your Social Security benefits.

Generally, you can claim early reduced Social Security benefits at age 62, full Social Security benefits at your Full Retirement Age (FRA) and delayed increased Social Security benefits after FRA until age 70. If you were born between 1943 and 1954, your FRA is 66. For those of you born after 1959, your FRA is 67. And if you were born between 1955 and 1959, your FRA is between 66 and 67.

When you claim your benefits early at age 62, your benefits are permanently reduced by 25% if your FRA is 66 and 30% if your FRA is 67. If you claim early benefits after age 62, your benefits reduction is calculated based upon the number of months before FRA you claimed your benefits.

For early claimants before your FRA, there is an annual earned income limitation of $17,040 (in 2018) in which your Social Security benefits are reduced $1 for every $2 earned over the limit. In the year you reach FRA, early claimants have an earned income limitation of $45,360 (in 2018), in which your Social Security benefits are reduced $1 for every $3 earned over the limit. After FRA, there is no earned income limitation.

You can delay your Social Security benefit claims until as late as age 70. If you delay your claim after your FRA, your benefits are permanently increased by 2/3% per month, or 8% per year, until age 70.

Myth #2: You can receive a full spousal benefit on top of your own benefit.

If you are married and your spouse is already receiving Social Security retirement or disability benefits, you are eligible for a spousal benefit at age 62, regardless of whether you have worked or not. Your spousal benefits are in addition to the Social Security benefits received by your spouse. When you file for spousal benefits, you will receive the higher of your own benefits or the spousal benefits.

Your maximum spousal benefits are 50% of your spouse’s Social Security benefits if you apply at FRA or later, and 35% if you apply at age 62. Between age 62 and FRA, your spousal benefit is prorated between 35% and 50%. The $16,920 and $45,360 annual earned income limitations applies until your FRA. There is no increase in your spousal benefits if you wait to apply for spousal benefits after your FRA.

Myth #3: Social Security is fully taxable.

In Michigan, there is no state income taxation of Social Security benefits. If you have no income other than your Social Security benefits, there is also no federal income taxation of those benefits. When your Social Security benefits, together with your other income, such as wages, retirement plan benefits, interest and dividends, are above a certain amount, up to 85% of your Social Security benefits may be subject to federal income taxation.

Myth #4: You keep both Social Security benefits after your spouse passes away.

You are generally eligible for survivor benefits after your spouse passes away if your spouse’s Social Security benefits are greater than yours. If you are both receiving Social Security benefits at the time of our spouse’s death, you would keep the higher of the two benefits, not both. If you are not receiving Social Security at the time of your spouse’s death, you can generally apply for reduced survivor benefits beginning at age 60 and full survivor benefits at FRA, so long as you have not remarried before age 60.

If you were married more than 10 years and then divorced, you may be eligible for survivor benefits after your ex-spouse passes based upon their earnings record, so long as you have not remarried before age 60. We had one case come through our office a number of years ago, in which the deceased was married at the time of his death, and had been previously married more than 10 years to two other women, who did not remarry before age 60. The widow and both exes received full survivor Social Security benefits based upon the deceased’s earnings record.

Myth #5: Everyone is better off waiting to claim Social Security.

If you are healthy and have sufficient sources of retirement income other than Social Security, it may make sense to delay your Social Security benefits and receive the higher benefit later. Many claimants and their financial advisors will only look at Social Security benefits alone in a break-even analysis to determine whether they should claim their Social Security benefits early or delayed.

But what is a break-even analysis? It is comparing both early and delayed Social Security claims and calculating the age at which the income of the two is the same. Too many people use it as the sole determining factor and conclude they can start collecting earlier than they should. Claiming Social Security too early can cost you thousands of dollars each year.

However, you should not look at Social Security in a vacuum. You should be focusing on “total income maximization,” not just on “Social Security income maximization.” What are your other sources of income? Look at your retirement and other cash and investment accounts, pensions, wages, rental income, inheritances, etc. When do you have to start taking required minimum distributions out of retirement accounts? What are you monthly expenses?

What should I do?                                              

There are many online resources available. Consult a knowledgeable financial professional who can review your situation and determine what is best for you. The more information you have, the more likely you will be making a decision that will be the most beneficial for you.

By Matthew M. Wallace, CPA, JD

Published edited March 25, 2018 in The Times Herald newspaper Port Huron, Michigan as: Debunking popular Social Security myths

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