With so many rules and different claiming strategies, it’s easy to understand why there are so many myths about Social Security retirement benefits. Here are a few we’ve frequently encountered at Shore Point Advisors and what we understand to be the truth behind them.
Myth #1: It won’t be there when I go to collect
According to the 2018 Annual Trustee Report on Social Security, it’s true that 2018 is likely to be the first year since 1982 that outlays exceed income.
However, the report says that reserves used to pay current benefits won’t be depleted until 2034. Thereafter, projections show current scheduled tax income will be able to pay three-quarters of the scheduled benefits until 2092.[i]
While we can’t answer how Washington, D.C. will respond (higher taxes, reduced/delayed benefits, increased borrowing?), Social Security is so important to so many retirees that drastic changes to benefits are unlikely. It’s that dreaded, charged “third rail” that no American politician wants to go near.
Myth #2: It’s best to claim early
It may seem satisfying to receive benefits as early as age 62 but our ever-increasing life expectancy may make this a very short-sighted decision.
By claiming early, one receives a reduced benefit and smaller cost-of-living adjustments for the rest of his/her life. With Social Security being a life-long annuity, the higher monthly income from postponing benefits can be very significant late in life.
An analysis, particularly if one is healthy, expects a long life and may leave a surviving spouse, should be done to consider all the options.
Myth #3: The benefits aren’t taxed
Sadly, many pre-retirees believe this one only to learn it’s not true once they start collecting: Social Security benefits may be subject to taxes based upon Modified Adjusted Gross Income (MAGI.) The IRS says that one-third of recipients end-up paying taxes on their benefits.[ii]
What is MAGI? Very briefly, it’s your adjusted gross income with half of your Social Security benefits and any “tax-free” municipal bond income added-in. Based upon this MAGI, up to 85% of your benefits may be subject to income tax. (You can delve into more details with IRS Publication 915.)
This becomes particularly problematic when Required Minimum Distributions (RMDs) from IRAs beginning at age 70 ½ push the MAGI through the upper limits, not only subjecting Social Security benefits to taxation but also resulting in a higher marginal tax rate and higher Medicare premium. This is known as the dreaded “tax torpedo”[iii] which sneaks up, unknowingly, on many middle income folks.
Strategizing with tax location diversification (that is, having funds in non-qualified, Roth and HSA accounts) may help to reduce or eliminate the taxes on Social Security benefits.
Myth #4: If I receive benefits, I can’t work anymore
Do you really think the government is going to discourage you from working?
Well, there is something called the “Social Security Earnings Test” if benefits are claimed prior to Full Retirement Age (FRA). And it’s more that the government is trying to discourage you from claiming early if you have some type of income.
In 2018, if you’ve claimed early, have not yet reached FRA and are making more than $17,040, the Social Security Administration will withhold $1 of benefit for every $2 of earnings above that amount. If you reach your FRA this year, $45,360 is exempt whereupon $1 of benefit is withheld for every $3 of earnings above that amount. (Don’t despair completely – the SSA will take those withholdings and apply them to your benefit once you attain your Full Retirement Age.)[iv]
So, the question is – should I really be collecting Social Security early if I’m still working and earning enough to cover my cash-flow needs? This is a topic worthy of its own discussion (which we’ll address in a future post.)
Myth #5: I’ve already started claiming and presently don’t need the benefit, but I can’t do anything about it
Okay – there may be some truth to this one but there may still be an opportunity to increase your future benefits.
If you have reached your Full Retirement Age, you can “voluntarily suspend” your claim and start accumulating delayed retirement credits until the age of 70 or when you start claiming again (whichever comes first.)
If you haven’t reached your Full Retirement Age and started receiving Social Security within the past 12 months, you can withdraw your application by suspending benefits and paying back the accumulated amounts. It’s as if you never collected. But if your spouse is receiving spousal benefits on your record, those will be impacted and must be repaid.
If it’s been more than 12 months that you’ve received benefits and you have not yet attained Full Retirement Age, this myth is correct: there is nothing you can do until you reach FRA where you can “voluntarily suspend” the benefit as mentioned above.[v]
If you’re not yet 70, don’t necessarily think you’re “locked-in” as there may be some maneuverability to increase your future benefits.
While such myths may help to encourage discussion, they can be harmful for the false beliefs or misunderstandings they perpetuate. Given the significance of Social Security benefits, it’s important to have the correct information to make the best-informed decisions. At Shore Point Advisors, we have the education and the tools to help separate the fiction from fact. We welcome you to be in touch with us.
Jake Rue, the author, is the Portfolio Manager at Shore Point Advisors and is a Retirement Income Certified Professional (RICP®) and Accredited Asset Management Specialist (AAMS®).
 Full Retirement Age (or Normal Retirement Age) is when a recipient is entitled to their full Social Security benefit. For people born in 1954 or earlier, the FRA is 66. For those born in 1960 or later, the FRA is 67. For those born between those years (that is, 1955 – 1959), the FRA steps up 2 months from 66 for each year after 1954.
[i] “The 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” June 5, 2018, https://www.ssa.gov/OACT/TR/2018/tr2018.pdf
[ii] “What is Modified Adjusted Gross Income?” https://www.irs.com/articles/what-modified-adjusted-gross-income
[iii] Polyak, Ilana, “Will the ‘tax torpedo’ blow up your retirement?”, CNBC.com, Oct 30, 2017, https://www.cnbc.com/2017/10/29/will-the-tax-torpedo-blow-up-your-retirement.html
[v] Anspach, Dana, “How to Stop Social Security Retirement Benefits”, The Balance, June 25, 2018, https://www.thebalance.com/how-to-stop-social-security-retirement-benefits-2388914
Shore Point Advisors is registered as an investment adviser with the State of New Jersey. Shore Point Advisors transacts business only in states where it is properly registered, or is excluded or exempted from registration requirements. Registration with the United States Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training. All investment strategies have the potential for profit or loss. The firm is not engaged in the practice of law or accounting. Content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change. The views presented do not necessarily represent the views of the Social Security Administration. The Social Security Adminstration has not approved, endorsed or authorized this material. Contact the Social Security Adminstration for complete details regarding eligibility of benefits.