I regularly speak to groups around northern New Mexico on the topic of Social Security. (In fact, I’m giving such a talk next week in Santa Fe – details are at the end of this column.) It’s a financial planning topic that people have plenty of questions about.
That’s understandable, since it’s a topic rife with confusion. Adding to that, Social Security Administration employees, by law, cannot provide advice about your individual situation. They can offer you information about your benefits, but that’s about it.
One point of confusion is that people are often uncertain about the actual amount of the benefit they will receive. On average, Social Security constitutes nearly 40 percent of the income stream for Americans. That’s pretty significant, although it’s generally not enough to live on, without additional sources of retirement income.
Another misconception concerns the solvency of the system. Unless changes are made at some point in coming years, the system will be strained. But it’s misplaced, to worry that it will “go broke” before the Baby Boomers can claim their benefits. For the past 40 years, there have been scares that the system would go broke, so the fears are nothing new.
The retirement age has been gradually raised, part of an ongoing effort to keep the system solvent. For people born between 1943 and 1954, the full retirement age is 66. It rises incrementally for the subsequent years, until it hits 67 for people born in 1960 or later.
Another factor that contributes to ongoing solvency is that many people begin taking Social Security at age 62, rather than waiting until full retirement age or later. That means they receive a lesser amount for the rest of their lives. If more people waited, the system would be strained to a greater degree, and that would affect solvency.
There is also some confusion about the degree to which Social Security provides income for the disabled and workers’ survivors. The program offers protection for the long-term disabled. If a worker becomes disabled, his or her family may also be eligible for benefits.
Another valuable source of support for your family is Social Security survivor’s insurance. If you were to die, certain members of your family, including your spouse, children, and dependent parents, may be eligible for monthly survivor’s benefits that can help replace lost income.
Many people are concerned about losing their Social Security benefits if they work after retirement. After full retirement age, earn as much as you want – it won’t put a dent in your benefits. However, before then, one dollar in benefits will be deducted for every two dollars above $15,120.
The year you reach full retirement age, one dollar in benefits will be deducted for every three dollars you earn above $40,080. That annual limit is changed regularly.
Another myth surrounds Social Security benefit taxation. In reality, you may be required to pay taxes on your benefits if you have additional income. If you earn money from a job or your own business, or if you have significant income from your investments, you may owe federal income tax on up to 85 percent of your Social Security benefit.
There are plenty of rules to navigate, but these are just a few key points to remember. Above all, keep in mind that Social Security is not likely to provide all the income you will need in your non-working years. Before you reach retirement age, keep contributing to tax-deferred investments such as 401(k)s and IRAs. If you max out those accounts, keep stashing money away in taxable accounts. This is the best way to ensure that you have enough income to enjoy the lifestyle you desire after you stop working.
Join me for a free Social Security seminar from 12:30-1:30 p.m., Tuesday, July 9 at the La Farge Branch Public Library, 1730 Llano Street in Santa Fe. To register, call (505) 490-6474, or email: seminarNM@portfoliollc.com.
Editor’s note: Kate Stalter is a financial advisor with New Mexico-based Portfolio LLC. Prior to joining the firm, she was a stock-trading coach and radio host. She is a regular columnist for TheStreet.com’s RealMoney, Forbes.com, and Morningstar Advisor Magazine. Stalter has an MBA from Northwestern University’s Kellogg School of Management. She works with financial planning clients in Los Alamos, Santa Fe, and throughout northern New Mexico.
Direct contact: firstname.lastname@example.org, Twitter: @KateStalter