How can individuals maximize the benefits of Social Security and use it to its full advantages?
A few years ago, the Obama Administration made some major cuts to Social Security. Let me be clear, the Social Security trust fund has no money in it. It’s a Ponzi scheme. Some people pay into the trust, but far more of the trust is paid out. Every Administration, for the last 25 years, has tried cutting off various loopholes or raising taxes to shore up the system. The Obama Administration eliminated some of those loopholes that would’ve allowed a person or their spouse to maximize this benefit. Today, those loopholes have been eliminated.
The good news, however, is that they’ve made it easier for individuals to calculate their benefits. What does everyone need to know?
First, everyone should go to the Social Security website www.ssa.gov, log in, enter their personal information, create an ID, and generate their Social Security report. Once that’s done, the report is going to tell them what their income will be at age 62, 66, 70, and which is the age that guarantees the largest benefit.
When should individuals take their Social Security? That depends on a lot of factors. Primarily the state of their health, whether or not they like working, and if they have other savings or investments in play.
As an example, I’ll tell you about a client of mine, Jim, who was facing the same scenario. Jim retired two years ago and is 63 years old. We set up a strategy to determine when he should take his Social. Jim has money in cash, money in a Roth IRA, and money in his 401(k). Not only that, but his retired wife is receiving a monthly pension and taking her own Social Security.
The first strategy is, once retired, Jim is to live by spending down his cash first, which is tax free. When Jim turns 66 ½ years of age, he’ll continue to live on cash and he will begin collecting his Social Security. He’s going to pay nothing in taxes because he’s living off his cash (which he’s already paid taxes on), his Social Security income will be tax free, and he also has money in his Roth IRA which he can drawdown tax free. At the age 70 ½, Jim will start taking money out of his 401(k) and his IRAs, but he’s going to take out his minimum distribution, and by doing that, he’ll pay as little in tax as possible.
Some people might say, “Charlie, I don’t want to wait until I’m 66 ½ or 70 to collect my Social Security. I had a father who worked his whole life, stopped working, died the next month, and then never collect a dime from Social Security.”
That’s an important consideration. Just bear in mind, if an individual starts collecting Social Security at 62, and they are still working, they’re going to pay taxes on their Social Security benefit. Basically, for every dollar earned, they’re going to pay 30%, 40%, or even 50% tax on money earned while working.
However, I know there are still a lot of people who want to get their money as soon as possible. What’s the best solution for them? Again, it depends on how much they have in savings, what they have in their 401(k), how much they have in a Roth account, and other factors. Is there a history of health and longevity in the family? Psychologically, can they wait to take Social Security benefit? Every year that passes will earn an 8% return on that benefit. That’s a guaranteed return.
Now, I know there are also some out there saying there’s no money in the Social Security System and wondering what happens if this is true. If an individual is 55 or older, that individual can count on Social Security to be there for them. If that individual is 50 or under, depending on how much money that individual has at retirement, it is possible that the Social Security System may begin to use a “means” to test Social Security benefits. That means, if an individual makes too much income from investments, that individual may not receive any Social Security or that individual may receive a reduced benefit.
If you’d like to schedule a call with me to discuss or analyze Social Security options, I’d be delighted to do so. All you have to do is send me an email and we’d be happy to set up an appointment. Stay tuned for my next video, where I will cover some strategies you can use at no cost to help individuals create that paycheck for life and be even more successful than they are today.