5 Things People Get Wrong About Social Security When Planning for Retirement

Social Security is a really important part of an overall retirement plan but there are five things people get wrong when planning for retirement. The things we’ll talk about in this video are misunderstandings we often hear from clients and other people. In fact, advisors don’t always get these things right.

If you’re approaching retirement or already in retirement, you’ll want to make sure you get clarity on these five things before you make any Social Security decisions. Getting any of these things wrong could cost you money and impact your retirement income. If you have any questions or need personalized advice, please reach out and we’ll be happy to assist you further.

Here’s what we discuss in this episode:

0:00 – Intro

1:57 – Long-term solvency of Social Security

6:17 – Spousal benefits

8:51 – Maximizing survivor benefits

12:04 – Confusing taxes with the earnings test

14:51 – Taxes you’ll owe

Full Transcript:

Ben (00:00):

Coming up on this episode of Candid Conversations Retirement Talk with Ryan Cravitz. We have five things people get wrong about Social Security when they're planning for retirement. In fact, even some advisors get these things wrong at times. So today we want to make sure you're aware of these. Make sure you're getting it right when it comes to Social Security.

Announcer (00:16):

This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial & Insurance Solutions.

Ben (00:24):

Well, hello, welcome in. Glad to have you on Candid Conversations Retirement Talk with Ryan Cravitz. Make sure you subscribe to our YouTube channel if you haven't already. Ryan, I know Social Security a big part of the retirement puzzle and today we have five things we want to take people through, right?

Ryan (00:36):

It's certainly, it's a real important part, obviously, of an overall retirement income plan. And there's things that I see I read, I hear from clients and other people as well, just things that are often misunderstood. So hopefully we can clarify or clear up some of the misunderstanding on some of these things.

Ben (00:55):

And before we get started again, if you have any questions for Ryan, 714-462-9155 or CravitzFinancial.com, let's go ahead and set the stage. Ryan, let's just take people through, give them a little preview of what's to come with these five things today.

Ryan (01:07):

Alright, so first we're going to talk about the long-term solvency of Social Security, and then we'll look at the spousal benefits. So this is something that often gets misunderstood, so we'll talk through that. We're also going to talk about survivor benefits and how to maximize that in some of the things that you may not be aware of as far as how to coordinate benefits. And then we'll talk about something that's very often misunderstood and that is a lot of people confuse taxes with the earnings test. And then we will round it out here with the assumption that a lot of people have that they're going to have to pay taxes on 85% of their Social Security benefits. For some it's true, but for many people it's not. So we'll talk through that.

Ben (01:54):

I'll make sure you're clear on all five of these things. I want to start off with this first one, Ryan, because I know there's a lot of concern about the solvency of Social Security and it's one of the biggest questions I think involving Social Security. It's a great campaigning issue as well for a lot of politicians. So what did the trustees report tell us most recently?

Ryan (02:13):

Yeah, so the key thing here that we want to take a look at is I just want to share the summary of the most recent trustees report. So every year this gets released, and again, we're going to look at the summary. We're not going to go through and look at the, it's like 250 to 300 pages. The overall report. If you have insomnia, that might be the cure. I don't know, I mean it's long, but want to walk through this because one of the things that I hear oftentimes is that the Social Security Trust fund is being depleted, and as a result, if it runs out of money, will I not get any Social Security benefits or I won't get any Social Security benefits? Isn't that how that works? So let's walk through this. So here's what it says. Based on our best estimates, this year's report show that the Old Age and Survivors the OASI trust fund will be able to pay 100% of total scheduled benefits until 2033, which is unchanged from last year's report.

(03:18):

Now, key thing that OASI, these are your retirement benefits, okay? Now, at that time, the fund reserves will become depleted and continuing program income will be sufficient to pay 79% of scheduled benefits. So here's the deal, right? They are saying based on their projections that in 2033 here, they will no longer be able to pay a hundred percent of promised benefits. They'll have to reduce benefits by 21% down to 79 cents on the dollar. So there's no doubt the Social Security program is underfunded. There's going to be some tweaks that are going to need to be made in order to make the Social Security system viable long-term and be able to pay out a hundred percent of promised benefits if they decide to continue to do that all throughout. And so I believe that they are going to get together and are friends in Congress and make some decisions in order to shore up the system long-term.

(04:22):

Now, the real world here is that I highly doubt they're going to cut your benefits by 21% from one year to the next. Again, I believe they're going to institute some different changes along the way. We're not going to get into what those could be here today, but I believe they're going to make some changes to help shore up that system long term. Now, oftentimes I'm asked how is it possible the trust fund's depleted? But I can still get 79 cents on the dollar. And that's because of course, the way Social Security is funded, which is primarily through payroll taxes, meaning people working and paying into the system. So as long as there's people working, paying into the system, there's always people that are able to then receive the benefits there in retirement. Now, real quick, you'll see the next one. It says the Disability Insurance trust fund.

(05:13):

This is actually projected to pay a hundred percent of total scheduled benefits all the way to 2098. So that's pretty good. So based on their projections, of course that's in pretty good shape. Now I do want to do it just a real quick aside, because everyone's always asking me when we look at this together, the H I down here, what is this? The Hospital Insurance Trust Fund. This is Medicare Part A. And so their current projections are that they would be able to pay a hundred percent of total scheduled benefits until 2036, which is five years later than reported last year. And at that time, they'd have to reduce benefits to 89 cents on the dollar. Again, assuming no changes between now and then, alright?

Ben (05:56):

So I know a lot of the headlines make it feel like there's not going to be any money left for us, Ryan, once we get to 2033. But again, you can see the clear picture on what to expect and maybe there'll be some changes to where that stays a hundred percent of the benefits. We'll see what happens, but important to be aware of that trustee's report and what it's telling us. So some good information there. Alright, let's shift to number two then. I know spousal benefits is a big discussion point and it's something that's often misunderstood.

Ryan (06:24):

So this is definitely something that I come across quite a bit. In fact, it's important to understand with a spousal benefit that if the primary worker files for benefits, that the spouse can then take a spousal benefit off of their earnings record. And if the spouse waits until their full retirement age, they could get up to 50% of that primary worker full retirement age benefit. The PIA. Okay? Now, the thing that often gets misunderstood here is that the primary worker may think, well, if I go ahead and delay my benefit past full retirement age maybe until as late as age 70, then my spouse could take a benefit or a spousal benefit off of my earnings record and they would get half of mine. And the answer is they would get half of the full retirement age benefits. So maybe that's 66 and some months or 67, whatever your full retirement aage is, not half of the age 70, let's say benefit.

(07:31):

And you'll see that right down here. How the spouse's benefit is determined, this is right off the Social Security website. So your spouse's benefit could be up to one half the amount your spouse is eligible to receive at their full retirement age. If you choose to receive spouse's benefits before you reach full retirement age, your payment will be permanently reduced. So you can take it as early as 62 and it would be reduced there, but your spouse may have postponed or plan to postpone their retirement to increase their monthly benefit amount by earning delayed retirement credits. However, that's the key. However, your maximum spouse's benefit remains 50% of their full retirement age benefit, not their higher amount included, including delayed retirement credits. So in case you're wondering where does it show that? Because if you're like most people, you go on Social Security's website or other IRS Medicare website, other government website, and it can be complicated to find where to get the right answers. So that's where it is right here.

Ben (08:42):

All right, great to know where that is. And again, work with a professional to figure out the best approach for your benefits as well. If you have any questions. That's number two. Number three, Ryan is maximizing survivor benefits. And a lot of people don't know how to do that.

Ryan (08:56):

And so this is a big deal with survivor benefits because there's some unique claiming strategies that you can utilize with survivor benefits. You may be familiar with what's called the file and suspend or restricted application. These were strategies that married couples could utilize in order to coordinate benefits together where you could claim one or file and then you could suspend take a spousal benefit. You could do some different things. I'm not going to get into the detail on how that works because we can no longer utilize those strategies. But one thing that wasn't changed that a lot of people aren't aware of and just kind of assume that it was changed with everything else, is that it is possible now to claim a survivor benefit and then switch to your own benefit or claim your own benefit and then switch to the survivor benefit in the future.

(09:47):

Let me just give you a real quick example of what I mean by this. So let's say you're 60 years old, not 62, but 60. You can take a survivor benefit as early as age 60 and actually age 50 if you're disabled. But let's just say 60, you could take your survivor benefit at 60 and then allow your own retirement benefit to continue to grow, not take that one and then maybe switch over to your own retirement benefit at your full retirement age, or maybe age 70, maybe at that point it would've grown to a point where it's past your survivor benefit. You can make that switch. The other thing that you could do is you could take a survivor or you could take your retirement benefit as early as age 62 and then switch over perhaps to your survivor benefit at your full retirement age.

(10:37):

Now, you'd want to run the numbers, see what makes most sense here. But there's a lot of unique advantages that you have with claiming strategies with survivor benefits. And one other thing is it relates to survivor benefits. And as it relates to kind of the one that we were talking about just a minute ago, when there's that confusion about the spousal benefit and how much the spouse would get, if you claim your Social Security benefit past your full retirement age and then you pass away, then your spouse could be eligible then to receive the increased survivor benefits. So in other words, lelet me make that really simple. You decide to claim your Social Security at age 70. Your spouse, let's say, is going to take a spousal benefit off of your earnings record. Well, remember, they could get up to half of your full retirement age benefit if they took it at their full retirement age, but if you were to pass away, they would, if your benefit is now higher, they'll keep the higher benefit of the two. They would get your benefit with those delayed retirement credits that you would've earned by waiting till age 70. So that area is often confused between those spousal benefits and survivor benefits.

Ben (11:56):

Alright. So that's number three, not knowing really how to maximize that. So again, work with a professional to help you make those decisions when it comes to Social Security. All right, the next one, number four, Ryan, is confusing taxes with the earnings test. So explain this one to us.

Ryan (12:11):

So this is very often an area of confusion, this thing between understanding the earnings test versus taxes. So one of the things that will come up is let's say you're 62 years old, and I've heard people say this, that they turn 62, they're thinking about turning on their Social Security, but they understand they're still working and they think their benefits will get taxed. Now, they may get taxed, but the other part about this is it's the earnings test. So a lot of people start to think well over certain limits, aren't my benefits going to be taken away? So let me explain how all this works because it's definitely an area of confusion here. So with the earnings test, the idea is simply this. If you haven't yet reached your full retirement age, then your benefits could get withheld depending upon what your income is. And they have a couple of different thresholds here.

(13:07):

And what you'll see right down here below is that they will withhold $1 in benefits for every $2 of earnings in excess of the lower exempt amount, and then they'll withhold $1 in benefits for every $3 of earnings in excess of the higher exempt amount. So let's go down here to 2024. So right now, this year, that lower exempt amount is $22,320. Okay? So the way that works is, let's say that you're 62 and you make $32,320, they are then going to withhold $1 in benefits for every $2 that you make above that limit. Okay? So that's $5,000 in that case, okay? So it's not a tax, they're just withholding that benefit really, because they don't want you to be able to claim your Social Security prior to a full retirement age and still continue to work and be able to take the full amount of those benefits.

(14:08):

But what they will do here, if your benefits get withheld, is once you reach your full retirement age, they'll run a new calculation for those benefits withheld, and then they'll adjust your payments going forward with a positive adjustment. Okay? So that's how that works. If they were to take back your retirement benefit there, now in the year of your full retirement age, but before the actual month of your birthday, the limit is much higher. You can see there it's $59,520 and they only withhold a dollar for every $3 above that limit. And again, at full retirement age, they'll then correct that adjustment there. Alright, so that's the earnings test. Now, let's talk about taxes, and I'm just going to combine number four and five here. The big thing to understand with taxes as it relates to Social Security is that if your only income is Social security, you won't pay any taxes on your Social Security.

(15:09):

But the big area of confusion, which really gets into number five, is that a lot of people just assume that they're going to have to pay taxes on more than 80 or on 85% of their Social Security benefits, which oftentimes isn't the case. Now, it could be the case if your income is high enough, but we're going to take a look at a couple of examples here of what this actually looks like. So first off, right on Social Security's website, or actually IRS's website, you can see this and it will show that up to 85% of a taxpayer's benefits may taxable if they are filing single, for example, with income of more than $34,000 or married filing jointly with more than $44,000 of income. So again, I often hear this, this is a common mistake. Well, my income is above those limits, so I definitely will have to pay taxes on more than 85 or on 85% of my Social Security benefits at the federal level.

(16:12):

So again, it may or may not be the case. Let's look at a couple of examples here. So what I've got here, we're going to use a married couple filing jointly, both over 65, and we'll use the standard deductions that come with that. Let's just say for fun that each of them are going to receive $2,500 a month in Social Security. That's what, $30,000 a year, so that's $60,000. As you'll notice here, their total taxable amount is still 60. Their total after tax amount is still $60,000. They don't have any taxes whatsoever. And by the way, I'm just assuming California here, we could use any state here, but I'm just assuming California. So if their only income, like I said, is Social Security, they won't have to pay any taxes at all. Now, let's say that you have a million dollars in an IRA, and let's say you're going to go with the 4% rule, which I've talked about in the past.

(17:13):

I don't necessarily recommend that, but let's just say you were and you were going to withdraw $40,000 for the first year to do that. So that would be right here in this unearned income column. That's our $40,000. And you'll see right here, number one, notice this first, our total tax on all this is only about $4,200. Okay? That's it. So how is that happening and what are some key things to know? Well, again, first, most people would assume their income now is a hundred thousand, that they're paying taxes on 85% of their Social Security benefits. They're not, okay? Only in this case, $28,100 is subject to taxation. That's less than half in that case, okay? So it's because of the unique way that Social Security, the way the provisional income formula works, which I've talked about and actually have dove deep into in another video. But notice one other thing here. Notice what happens is that number $28,100, let's say they only had $30,000 that now dropped their total Social security down to taxable Social Security down to less than $20,000. So that's about a third is subject to taxation. So I'll leave it at that. But this is just so important when you're thinking through and developing that income plan in retirement is understanding how Social Security works and how it coordinates with your overall retirement income plan and taxes and all that. So that's it. That's all I got, Ben.

Ben (18:59):

So again, if you have questions, want to sit down, want to see these numbers for yourself, this is what Ryan and his team does at Cravitz Financial with people all the time. So I encourage you to reach out. CravitzFinancial.com. That is the website, or if you want to call, you can do that as well, 714-462-9155. He is located there in Orange, California, but working with people all over the country. So no matter where you're located, you want to talk Social Security, try to figure out the best plan for you is please be sure to reach out. Also, don't forget, please subscribe to the channel as well. We'd appreciate the support here on Ryan's YouTube channel and of course with this show as well moving forward. Ryan, thanks for the breakdown. I know these are five important things to go through. I'm glad we did today, so thanks for the time.

Ryan (19:37):

Definitely. Good to see you.