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Navigating Social Security Complexities And Its Sustainability For Retirees

Navigating Social Security Complexities And Its Sustainability For Retirees

April 22, 2023

Worried about the sustainability of your Social Security benefits? Learn how to ensure you get the most out of your benefits and secure a comfortable retirement. 

Social Security is one of the most critical retirement tools for retirees. As life expectancy increases and the number of younger workers in relation to retirees decreases, there are many questions about the program's sustainability. It’s critical to understand the challenges facing Social Security and what you can do to make sure you get the most out of your benefits.

Current Challenges Facing the Social Security System:

  1. The primary challenge facing Social Security is its funding gap.
    • This gap exists because payroll taxes that fund Social Security have not kept up with an increase in benefits over time. To close this gap, either taxes will need to be raised, or benefits will need to be cut—or both. Not exactly the political hand grenade most in Washington are eager to jump on... Expect political gridlock to continue for the foreseeable future.
  2. Other challenges facing the system are changing demographics as more Baby Boomers continue to retire. At the same time, birth rates have declined, and life expectancy continues to increase thanks to advancements in health care and technology.
  3. We also continue to observe changes in work patterns with the rise in the "gig economy" as fewer workers pay into the Social Security system through payroll.

With that said, it's important to remain grounded in focusing on what we can control (planning, timing, coordination, and tax planning.) Choosing the right time and method for claiming Social Security is an integral part of planning for retirement—one that shouldn't be taken lightly!

It's essential that you understand all of the various options available to you so that you can make an informed decision about which one makes the most sense, given your individual circumstances. 

Anchors to Consider for Optimizing Your Social Security Claiming Strategy:

1. Claim Early or Delay?

  • Claiming early can provide some financial relief if you have limited resources; however, delaying your benefits will increase the amount of money you receive in monthly payments, known as the delayed earning credit.
  • This amounts to ~ 8% annually, which in today's market environment is very attractive, especially for those in good health who expect to have reasonably good longevity living to age 80 or beyond.

2. Coordinating Spousal Benefits

  • Survivor benefits are also a common factor in deciding when to claim Social Security benefits. To be eligible for spousal benefits, the spouse must be at least 62 years old and the other spouse must be receiving Social Security retirement or disability benefits.
  • Spouses have the option to claim their own Social Security benefit or up to 50% of their spouse's benefit, whichever is higher.
  • The optimal claiming strategy will depend on a variety of factors, including each spouse's work history and earnings, age, and health. In some cases, it may be advantageous for the lower-earning spouse to claim spousal benefits first and delay claiming their own benefits until a later age to maximize their overall benefit amount.

3. Coordinating Income Tax Planning & Claiming Social Security

  • Depending on how much income you receive from other sources (such as retirement savings accounts), up to 85% of your Social Security income may be taxable. We often refer to Social Security as a tax-preferenced item on your 1040.
  • One area easily overlooked in retirement income and tax planning is coordinating with Medicare IRMAA costs. Those with higher incomes may be subject to additional Medicare premiums known as Income-Related Monthly Adjustment Amounts (IRMAAs).
    • These additional premiums can add up quickly and have a significant impact on your overall retirement income plan and healthcare costs. Therefore, it’s important to understand the thresholds for these additional premiums so that you can ensure that all other aspects of your plan are adjusted accordingly in order to avoid paying too much in additional premium costs. 
  • Other common tax planning strategies like Roth conversions have tradeoffs associated with them and require thoughtful coordination.

    • One strategy to minimize taxes and avoid IRMAA surcharges is to strategically time your Roth conversions to occur in years when your income is lower, possibly before you claim Social Security or during years when you are not subject to IRMAA surcharges.

4. Thinking About Claiming Early and Considering Part-Time Work? Approach with Caution!

  • In 2023, if you are under full retirement age for the entire year, you will be subject to a $19,560 earnings limit. If you earn more than this limit, your benefits will be reduced by $1 for every $2 you earn above the limit.

    • Once you reach full retirement age, your benefits will no longer be reduced, regardless of how much you earn. And even if your benefits are reduced temporarily because of your earnings, they will be adjusted upward later to account for the reduction.

Retirement income planning involves many complex considerations that require careful thought and analysis to ensure success. Understanding Social Security claiming strategies can ensure your savings last throughout your golden years without undue financial hardship or worry about outliving your resources.

With careful attention throughout the process, you can enjoy your well-deserved time off with peace of mind knowing you planned ahead for your future needs. Make sure that you consult with a qualified financial professional who understands all aspects of Social Security so they can give you personalized advice tailored specifically to meet your needs going into retirement!

Key Word - Coordination