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Social Security 1 2 3

A recent survey found that fewer than one in ten adults know the factors that determine their maximum social security benefit. Fortunately, the same survey also identified that more than nine in ten adults are eager to learn more about social security. (1)

In this month's white paper WT Wealth Management felt an overview was appropriate. In other words, this is your opportunity to learn a little more.




The Basics

Social security is the major source of income for most of the retired and elderly. (2)


Regardless of generation (Boomer+, Gen X, Millennial), roughly 60% of those who are not yet retired are worried they aren't saving enough for retirement and most believe they will need more income in retirement than what they expect to be provided by social security. (1)

And they are right to believe that. Social security was never intended to be a retirement plan on its own. It was designed to be a supplement. Relying on social security without independent savings can be extremely risky. Generally, clients will need about 70% of their pre-retirement earnings to maintain their pre-retirement standard of living. With average earnings, social security retirement benefits will replace only about 40%. (3)

Social security is a complex, and at times confusing, program. Since it can be the primary, or even sole, source of income for many retirees, a poorly informed decision can potentially have significant unintended consequences. As we sit with our pre-retiree clients, we found many just did not sufficiently understand the primary role that social security will play as a source of income during retirement or how to maximize benefits.

There are three key factors that should be discussed and reviewed when faced with decisions about social security benefits: timing, working in retirement, and taxes.

Timing

One-third of American workers claim social security benefits at 62. This is not full retirement age, but the earliest age at which they become eligible. By doing so, they lock in a lower-than-expected benefit for the remainder of their lives. (3)

The Social Security Administration has prepared a table showing the impact of claiming early social security benefits at 62. (4)

Primary and spousal benefits at age 62




It is important to remember that these reductions are not "corrected” once you reach full retirement age. They are permanent reductions that impact your social security benefits all the way through retirement.

So, if you don't desperately need the benefit at 62 when you first become eligible, it's financially wiser to wait. The benefits are even greater if you can wait until 70. (5)




Working in Retirement

It is becoming more and more common for people to work and earn income during retirement – some by choice and others by necessity.

But earning too much can be costly if you are claiming social security benefits early. With the social security earnings test, as it is commonly known, you forfeit one dollar in social security benefits for every two dollars you earn over the income limit – which is $18,960 in 2021. (6)

Happily, the social security earnings test disappears after you reach the full retirement age. So if you claimed social security benefits early, the excess taxation will end once you reach full retirement age. And if you wait until the full retirement age to begin taking social security income in the first place, additional income from continuing to work will have no impact on your social security benefits.




Taxes

If you receive income in retirement from sources other than social security, you may have to pay taxes on a portion of your social security benefit. For example, if a married couple file jointly, and their combined income is $44,000 or above, up to 85% of their social security benefits could be taxed. (7)

Taxation is not determined by a person's age, but by income level and the corresponding tax bracket. While someone's tax bracket cannot be changed or appealed, there are ways to reduce or manage taxable income levels and thereby reduce effective tax rates.

At WT Wealth Management, we believe every client that is pulling retirement income from a variety of sources (e.g., IRAs, 401(k)s, annuities, pensions, social security, or simply continuing to work) should be working with a tax professional to identify every opportunity to reduce taxable income and minimize tax burden wherever possible.




Start Social Security Conversations Now

Because each person's circumstances are unique, there is no one-size-fits-all answer on when to begin taking social security benefits. But understanding how social security benefits are calculated can help you make the most informed decision.

Somewhere between just 30% to 40% of Americans work with a financial advisor. However, not all of those advisors are providing advice specific to social security benefits. (1) So most Americans are left to figure out the complexities of social security on their own, making them vulnerable to making mistakes.

If you are approaching retirement age and have not discussed a social security strategy with your financial advisor, it is not too late! WT Wealth Management has access to industry leading social security analysis software that, combined with your advisor's extensive knowledge and experience and the guidance from tax experts at WT Tax Accounting, can help you make the best possible decisions for you and your family regarding your social security benefits.

Please reach out to your advisor if you would like to discuss more about retirement planning and the role of social security as you prepare for your golden years.


SOURCES:
  1. The Nationwide Retirement Institute® Social Security Consumer Survey
    NationwideFinancial.com

  2. Fact Sheet - SOCIAL SECURITY
    SSA.gov

  3. Complexities of Social Security
    HartfordFunds.com

  4. Benefit Reduction for Early Retirement
    SSA.gov

  5. Workers With Maximum-Taxable Earnings
    SSA.gov

  6. Social Security Basics
    Kiplinger.com

  7. Taxes on Social Security Benefits
    Nolo.com



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At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

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WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

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