I’ve taught a social security retirement benefits class for the last four years. In fact, I’ve taught the class over one HUNDRED times. I never meant to become an expert on social security, but after helping thousands of Baby Boomers strategize for their benefits, it just kind of happened. I am the only person I know that can get this excited about social security! It is foundational — a vitally important component of the rest of your life.
After presenting the social security workshop over 100 times, I’ve heard a lot of the same questions. In fact, some questions I hear nearly every class, so I thought this would be a good time to answer the five most common ones.
What is provisional income?
In 1983, thanks to Ronald Reagan, social security benefits received became taxable to many retirees. To determine whether or not you need to pay federal income taxes on your social security you need to determine your provisional income. The calculation is pretty simple:
½ of your social security
+ traditional pension payments
+ retirement account withdrawals
+ plus earned income (if still working)
=Your Provisional Income
If your provisional income exceeds certain limits, you must pay federal income tax on your social security (at whatever your overall tax rate is). For married couples, the limit is $44,000 and for single filers the limit is $34,000.
What is the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)?
These dastardly bylaws apply to workers who held government jobs where they were not required to pay into social security. For example, teachers and other state employees in Ohio do not pay social security tax. Certain federal employees do not pay social security tax.
If you fall into this category it really complicates your social security. The Social Security Administration doesn’t want you double-dipping, so even if your social security statement reports that you are eligible for a benefit, that benefit could be drastically cut by the WEP and GPO.
Let’s say a teacher worked in Ohio for 20 years (never paying into social security) and then moved to Florida to teach for another 20 years. Since teachers in Florida are required to pay social security taxes, this person would have started to receive a social security statement. But when this teacher applies for benefits, he/she will get a nasty surprise.
They will not receive what their statement says they will receive.
They will receive less. Oftentimes A LOT less.
This is one of the most complicated facets on the entire system. It also applies to foreign citizens who worked long enough in the U.S. to be eligible for benefits, but also are eligible for social security from their own home countries.
If this applies to you, you can calculate the penalty here.
When should I start my social security benefits?
This is obviously dependent on your particular situation, but over the years I have learned some tricks of the trade that apply to most situations.
If your spouse was receiving a larger social security benefit than you and they pass away, then you will start getting their check and stop getting your own. Therefore, it generally makes sense for the larger wage earner to wait as long as possible to take their benefit. By deferring the larger of the two social security benefits, you are providing a large foundational check that will be coming in as long as ONE of you is alive.
The “breakeven” age is 80. If you take your social security at 62, 66, or 70 and die right around 80, you will receive the same total amount of money.
I know — no one likes to talk about their own mortality. Bear with me. This is practical information that can help you worry less after you retire.
If you are in good health and expect to live past 80, you may want to defer. If, on the other hand, you think you won’t live to 80, you may want to take it earlier. (As you can imagine, this is not an exact science.)
Remember than once you take your benefits, you will be getting that same check for life. You may get cost-of-living increases here and there, but they are generally minimal. You can’t think in terms of the next few years, you need to think in terms of 20-40 YEARS.
Can I work while on social security?
Yes, you can. But if you have not yet reached your Full Retirement Age (which is 66 for most people) you are limited to how much earned income you can make.
In 2018, you can make up to $17,040 a year while on social security. Beyond that you will be penalized $1 for every $2 you earn over the limit. Only earned income is considered; don’t worry about pension payments or retirement account withdrawals.
Once you reach your Full Retirement Age there is no limit to how much you can earn. Make a million dollars! Your social security will be taxed, but not penalized.
Is social security going to go bankrupt?
There is a lot of rhetoric about the health of social security out there. But I am here to tell you that you have nothing to worry about. I am not a political guy, so I just want to relay the facts. The system is in much better shape than many media outlets will allow you to believe. As is, social security is fully funded for about 20 years and 75% funded for decades after that. There are a myriad of ways for the government to prop up the system including increasing payroll taxes (which won’t affect retirees).
A few bonus tips from my class.
If half of your spouse’s benefit is more than all of yours, you will get half of your spouse’s benefit. Even if you not eligible for any social security, you can still get half of your spouse’s.
As long as you were married for ten years, you can collect benefits from your ex-spouse’s social security, as long as you are not remarried.
You have up to one year to change your mind and withdraw your application for benefits. You will be required to pay back any money you have already received.
I hope this helps.