Thinking about claiming Social Security in 2018? Here are the things you need to know to get the most money out of your benefits.

1) Know Claimant Ages – Those claiming Social Security in 2018 will be between 62 and 70 (born between 1956 and 1948). Hey if you were born in 1948, congratulations! You’re in the small minority of Social Security beneficiaries that waited until 70 to claim. The year in which you were born has a big impact on how your benefits are calculated. The Full Retirement Age chart is listed below for reference. Anyone born prior to 1955 has a Full Retirement Age of 66. Each year after that the Full Retirement Age increases by 2 months until 1960, when it levels off at age 67.

full retirement age chart

2) Know Your Claiming Strategy – Before you walk into the local Social Security office or call them up to file, make sure you know how much you and your spouse will receive at different filing ages. I showed a great example of a couple who figured out how to add over $400,000 to their lifetime retirement income. They added $261,000 in their lifetime Social Security benefit amount just by optimizing their filing dates. They simply sat down and ran the numbers with a very astute CPA who showed them various claiming options and how to get the most from Social Security. You can do this on your own with a $40 piece of software that does all the work for you. Either way you should meet with a fee-only CFP or CPA or get the software if you’re a do-it-yourselfer type.

3) Know How Much You Should Get – Ok, you’ve decided to file. Now you need to make sure Social Security is giving you the correct monthly amount. Again, before going into the Social Security office or calling them, it’s good to have all the information at your fingertips. It’s like going into the car dealership with the Kelly Blue Book printout. I know how much the last 35 years of my labor paid in at 6.2% on my side and 6.2% on the employer’s side is worth!

The first step is to go to SSA’s Social Security Retirement Benefit Calculator. This tool is simple to use and pulls in your actual earnings history. It’s linked to your mySSA online account so once you set that up you can use this tool. You can pick different incomes you expect to earn from now until you start your benefits and the tool will give you an estimated benefit amount at each level of income.

Example: I’m currently 62 and and want to see what I’d get in Social Security at age 62 (filing now), age 66 and 2 months (at FRA) and age 70 (max benefit). You put in what you expect to make from now until age 70, if anything, and the tool will generate your estimated monthly benefit amount.

How Much Social Security Will I Get

You should also go on to at least one other online calculator to compare it to the SSA estimate. I looked at all the main Social Security calculators on the web and wrote about the pros and cons of each in this article. Every calculator shows an estimate and not your actual amount because of all the nuances of Social Security. Boston College has a great tool that shows you a very holistic retirement picture, accounting for more than just Social Security.

Now that you are armed with various estimated amounts, you can go into the Social Security office knowing about how much you’ll walk away with. This exercise also provides you with an opportunity to put some thought into how filing at various ages affects your benefit amount. It doesn’t hurt to be armed with this information and also don’t be afraid to discuss with other people who have just gone through the process.

4) Know How Your Social Security Will be Taxed – One of my favorite things to do as a CPA is to research how to reduce people’s tax liability. And not just this year or next, but over a lifetime. There are all sorts of variables we need to consider when making financial decisions. One of the largest expenses is taxes and it’s one that you should work to avoid.

Some folks go to the extreme: moving to a different state to reduce their tax liability. A lot of people around me move to Delaware or Florida when they retire: Delaware for the low property taxes and no state income tax on Social Security and Florida because of the weather and no state income tax.

You don’t have to be extreme about it. Simply knowing how your state taxes Social Security is important in the overall financial planning process. States tax Social Security in various ways but for the most they fall into 4 different categories:

  1. States that don’t tax income, including Social Security income. Congratulations if you live in one of these states and are staying there for retirement: Florida, Tennessee, South Dakota, Wyoming, Nevada, Washington, Alaska, New Hampshire, Texas (Note that New Hampshire & Texas tax interest income and dividend income only)
  2. States that don’t tax Social Security income. Congratulations if you plan to live in one of these states in retirement: ME, MA, NY, NJ, PA, DE, MD, DC, VA, NC, SC, GA, AL, MS, LA, AR, OK, OH, IA, KY, IN, MI, IL, WI, ID, OR, CA, AZ, and HI. None of your Social Security is subject to state income tax.
  3. States that tax Social Security income to the extent it’s taxed by the Feds. These states tax Social Security similar to how the Federal Government taxes it: up to 85% of your Social Security income is taxable if you make above a certain threshold. If you’re only pulling in Social Security in retirement, your taxable portion will be very low. Vermont, Rhode Island, West Virginia, Minnesota, North Dakota, Nebraska follow the federal government’s rules for taxing Social Security.
  4. States that tax Social Security income that falls outside of the norm. These states have to be different.
    1. Connecticut – Social Security benefits are exempt as long as your adjusted gross income is less than $60,000 combined (filing jointly). Taxpayers above an AGI of $60,000 have 75% of their Social Security income taxed.
    2. Kansas – Social Security benefits are exempt as long as your federal adjusted gross income is less than $75,000, regardless of your filing status.
    3. Missouri – Allows you to deduct taxable Social Security benefits from your income if your adjusted gross income is less than $100,000.
    4. Colorado – If you fall within a certain age limit, your retirement income (Pension & Social Security) can be excluded if it’s taxed at the federal level.
    5. Utah – Similar to Colorado but you get a credit and that credit is phased-out at a certain income level.
    6. Montana – Social Security income is not taxed if your joint income is less than $32,000 and other exemptions may apply.
    7. New Mexico – Social Security income is taxable but you may apply for an exemption if you’re 65 or older.

 

Social Security Tax Map

5) Know How to Apply for Social Security Benefits. This is the easy part. Usually things that the government runs aren’t that easy to do. They’re usually behind the technology curve quite a bit. That’s not the case with Social Security. You can file online, by phone (1-800-772-1213), or in person at your local office.

Make sure you have your Social Security card and birth certificate handy. Once you file it can take Social Security up to 6 weeks to process your application. Give them incorrect information and it can take even longer.

 

 

6) The Maximum Social Security Benefit is $2,788 at Full Retirement Age in 2018. Let’s face it: you’re not going to make a killing on Social Security. That’s not the purpose it was designed for. Social Security is a progressive system due to the bend-point formula used to calculate it. Poor and lower-middle income people get more as a percentage of what they paid in than upper-middle and high income beneficiaries.

The bend-point formula is applied like this using 2018 numbers:

  • The first $895 of your average indexed monthly earnings (AIME) is multiplied by 90%
  • Amount of AIME between $895 and $5,397 is multiplied by 32%
  • Amount of AIME above $5,397 is multiplied by 15%

If your AIME is $1,895, then your monthly benefit is $1,125.50 (90% x $895 + 32% of $1,000). This is your primary insurance amount (PIA) and the monthly amount you’d receive as a benefit at full retirement age.

Social Security is likely not enough to live on for most people. I would argue that lower income households will have an easier time getting by on Social Security income alone because of the bend-point formula and the fact that they’re used to living on a lower income.

7) Know When Social Security Will “Run Out” and What that Means. It’s a common scare tactic among insurance salesmen selling annuities to say something like, “Social Security is bankrupt and you can’t rely on it. Come and buy a high-fee super-complex annuity that you’ll never be able to get out of from me.” This is a bunch of garbage. I wrote an article on the fate of Social Security using real data – not fake hype. But here’s the gist of it:

  • The Social Security Trust had $2.85 trillion (with a “t”) in assets (reserves) at the end of 2016, which represents an increase of about $35 billion from December 2015.
  • Reserves will continue to rise through 2021 because Social Security income is greater than what it pays out. What, a surplus? Yes, that’s right. Social Security collects more from employees and employers than it pays out to beneficiaries. Reserves will be about $3 trillion by 2022.
  • The Social Security Trust will be drawn from $3 trillion to $0 from 2022 to 2034 due to more people collecting benefits.

What does this mean for people claiming Social Security in 2018? Your benefits are good for the next 16 years. Then, your benefits may be cut by up to 25% or Congress will have to increase payroll taxes by 2 – 4%. There’s another possibility that we could get enough people in America being paid higher wages that we could compensate, at least partially, for the shortfall. I’m not sure how that would play out because I don’t have the data.

Conclusion

The most important thing to do before claiming Social Security in 2018 is to make sure you understand the implications of filing at different ages. Make sure to consider all your assets when filing and not just focus on Social Security. You may be able to get a lot more money over the life of your retirement with some careful planning.

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