Recent Updates on Social Security Benefits

November 03, 2016

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Last week the Social Security Administration announced that recipients would receive a .3% increase in benefits in 2017. That means a person receiving $1,200 per month will receive an additional $3.60 per month. I hope they don’t spend it all in one place!

More on the bad news front: the Maximum Taxable Wage Base for those of us still working will raise from $118,500 to $127,200 or an increase of 7.3%. That means that an individual earning more than $127,200 will see an additional F.I.C.A. withholding of $539.40, or a total of $7,886.40. Those who are self-employed will see a maximum withholding of $15,772.80, or 12.4%. This does not include Medicare taxes, which are uncapped on earned income.

To put this in perspective: in 1977, the maximum wages subject to Social Security Taxes was $16,500, and the rate was 9.9% split between employer and employee (or $816.75 each). In 1987, it was 11.4% on $43,800. In 1997 it was 12.4% on $65,400. In 2007 it was 12.4% on $97,500.

One does notice a disturbing trend on the maximum earnings subject to tax. Thankfully the 12.4% has been constant since 1990, but no one knows what the future holds.

On the claiming side, the Earnings Test in 2017 will change from $15,720 to $16,920, which means an individual claiming benefits prior to FRA (Full Retirement Age) can earn $16,920 without seeing a reduction in benefits. In the year they reach FRA, the Earnings Test threshold changes to $44,880 up from $41,880.

And finally the Maximum Benefit (PIA) at age 66 + 2 months for anyone turning 62 in 2017 will be $2,888 per month. That is derived from taking the highest 35 years of earnings and indexing it to inflation. Thus a person who has maxed out their earnings for 35 years and claims benefits at 62 would receive $2,137. If they wait until 70 their check would be $3,783 + any cost of living adjustments (COLA) that might be paid.

When should I retire?  

Many Americans can’t wait until 62 to quit their jobs and claim Social Security benefits. They imagine they’ll move to a sunny, warm climate, play golf, drink pina coladas and dance the night away. However when looking at the financial aspects of this lifestyle, one might come to a different conclusion.

A recent white paper put out by the Economic Policy Institute, The State of American Retirement shows that 50% of American families have absolutely nothing saved for retirement. The median (50th percentile) family had only $5,000. The median for those with savings was only $60,000 and the mean savings for all families was $95,000. This tells us there is a great deal of inequality between rich and poor.

Rethinking when to retire is the key. Every American from 62 to 68 should reset their expectation of the retirement age to 70 as the starting point.

CASE STUDY: John and Mary Tilton

John’s primary insurance amount (PIA)  is $2,888 at 66 + 2 months (full retirement age). Mary’s PIA is $1,600. If John claims at 62, his check would be $2,222. At age 70 it would be $4,466. Between 62 and 70, John and Mary would receive over $300,000 by claiming at 62. However the breakeven between the two strategies is less than 9 years. With a long life expectancy, there is a $1,200,000 difference between claiming early and waiting until 70.

If either John or Mary were born before 1954, there are spousal claiming strategies they could implement. It also might make sense to have the lower-earning spouse (Mary in this case) claim her own benefits early while having John delay claiming his benefits until 70.

An important reminder:

It is extremely important that we practice the Carpenter’s Rule prior to claiming. Measure twice (maybe 3 times), saw once. Taking the time to think through your claiming strategy can result in a huge difference in your lifetime Social Security retirement benefits.
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Dave Zander

Back Nine Financial

After spending the first 25 years of his career on what he calls the “front nine” (the accumulation phase), Dave has dedicated the last 16 years to the “back nine” (the income phase). He ran both Aetna’s and Lincoln National’s income divisions before starting Back Nine Financial in 2005. Back Nine is strictly an educational, consulting and speaking firm. He primarily works with CPAs, corporations and individuals to help them understand and maximize Social Security benefits. Dave has conducted Social Security Workshop across the country for a variety of audiences, including the Texas CPA Tax Institute and the CPA societies in Houston, Dallas, San Antonio and Austin for each of the last 3 years. With 10,000 Baby Boomers turning 66 every day for the next 17 years, Dave feels it is incumbent upon financial advisors, CPAs, HR departments and other professionals to make sure their clients, employees and the American public best understand not only how to take Social Security, but to also understand and integrate that claiming decision with their other assets.
 Dave is a graduate from the University of Wisconsin – Whitewater with a BBA, majoring in marketing with a minor in accounting. He left EF Hutton and gave up Wisconsin winters in 1983, moving to Houston where he met Diane. They been married 30 years and have been blessed with 2 children, Macy and Miles, who have now graduated from college and are on their own. Dave & Diane live outside of Boerne, TX.
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