Social Security has long been a cornerstone of retirement security in the United States, providing a source of income for millions of retirees. As concerns for the future solvency of the Social Security program grow across the country, it’s essential for financial planners and retirees alike to understand how these concerns could impact retirement planning.
The Future of Social Security: What You Should Know
The Social Security trust fund, which supports retirement, disability, and survivor benefits, is projected to face financial challenges in the coming decades. According to the Social Security Trustees' 2024 report, the trust fund is expected to be depleted by 2034 if current policies don’t change. After this point, the program will still have income from payroll taxes, but it will only be able to pay about 77% of scheduled benefits.
While this may sound alarming, it's important to remember that Social Security will not completely "run out,” rather there will be a shortfall in the available funds to pay benefits at the current levels. Lawmakers have several options to address this issue, such as increasing payroll taxes, raising retirement age, or modifying benefits. The good news is that this potential for reform means that even if future benefits are reduced, Social Security is likely to remain a significant source of income and safety net for retirees.
Incorporating Social Security into Your Retirement Plan
Given the current uncertainties surrounding Social Security, effective retirement planning has never been more crucial. In collaboration with your financial advisor, here are some focus areas to help navigate Social Security planning considering the potential future changes:
Pros of Deferring Benefits Past Full Retirement Age
One of the most effective strategies to maximizing Social Security benefits is to defer claiming them past your Full Retirement Age (FRA). Your FRA depends on birth year but generally ranges from 66 to 67.
- Increased Monthly Benefits: For each year you delay claiming Social Security beyond FRA up to age 70, your monthly benefit increases by roughly 8%. This means that if you wait until age 70, you can receive up to 32% more in monthly benefits compared to claiming at FRA.
- Enhanced Survivorship Benefits: Delaying benefits can also increase those available to your surviving spouse. A higher monthly benefit for the primary worker translates into higher survivor benefits, which can provide a more stable financial future for your spouse.
- Cost-of-Living Adjustments (COLAs): Higher initial benefits will compound with annual cost-of-living adjustments, potentially resulting in significantly larger benefits over time.
Spousal Benefits: Maximizing Joint Benefits
Social Security provides opportunities for spouses to maximize their combined benefits. You can best leverage these opportunities by doing the following:
- Spousal Benefits: A spouse can receive up to 50% of the primary worker’s benefit at their FRA. For example, if your spouse has a lower earnings history, it might be advantageous for them to claim spousal benefits rather than their own, especially if you delay benefits to increase the primary worker’s benefit.
- Claiming Strategies: Coordinating the timing of benefits between spouses can optimize overall household income. One common strategy is for one spouse to claim early while the other delays their benefits to maximize the deferred retirement credits.
- Divorced Spouse Benefits: If you were married for at least 10 years before divorcing, you may be eligible for benefits based on your ex-spouse’s earnings record, provided you are not currently remarried. This can be a valuable source of income if the ex-spouse had a higher earning record.
Taxation of Social Security Benefits
Social Security benefits are subject to federal income tax based on your overall income level. The taxability of benefits is determined by your combined income, including adjusted gross income, non-taxable interest, and half of your Social Security benefits.
- 0% of Benefit: 0% of the annual benefit amounts received is taxed as ordinary income if your combined income is below $25,000 for individuals or $32,000 for couples.
- 50% of Benefit: 50% of the annual benefit amounts received is taxed as ordinary income if your combined income falls between $25,000 and $34,000 for individuals or $32,000 and $44,000 for couples.
- 85% of Benefit: 85% of the annual benefit amounts received is taxed as ordinary income if your combined income exceeds these thresholds.
Tax planning is a critical component of maximizing Social Security benefits. By strategically managing other sources of income and withdrawals from retirement accounts, you could potentially reduce the impact of taxes on your Social Security benefits.
The potential future shortfall in Social Security funding only emphasizes the importance of proactive retirement planning. Understanding the benefits of deferring Social Security past Full Retirement Age, maximizing spousal benefits, and planning for the taxation of benefits can significantly impact the financial security of your future. While Social Security is a vital source of income, integrating these strategies into a comprehensive retirement strategy can help plan for a stable and prosperous financial future. Working with your financial advisor to adjust your retirement strategy in response to changing circumstances is essential for trying to meet your long-term retirement goals.
The opinions and analyses expressed in this newsletter are based on Curi RMB Capital, LLC’s (“Curi RMB”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. Curi RMB makes no warranty or representation, express or implied, nor does Curi RMB accept any liability, with respect to the information and data set forth herein, and Curi RMB specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of Curi RMB Capital.
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