Posted on Monday, April 8, 2019

How To Calculate Your Social Security Benefits

Today, I want to show you how to easily calculate your Social Security benefit without a fancy calculator, software or help from someone who doesn’t really care if the information they give you is correct or not (like you may get at the Social Security Administration). With this article, you’ll know how to do this calculation on your own in just a few simple steps.

Why Do I Need To Know How To Calculate My Benefits?

So you may be thinking, “Why do I need to know how to calculate my own Social Security benefits? After all, the SSA will give me an estimate at any time.”

That’s true! You can go to your My SSA account online and see an up-to-date copy of your benefits estimate. So why would you need to know how to do this calculation on your own?

It’s important for a few reasons.

First, it never hurts to understand the mechanics behind an income stream that’ll probably be a large part of your overall retirement income.

Secondly, the SSA makes projections about your future income as part of your benefits estimate.

On the benefits statement they say plainly that they assume your earnings will continue at the same level until your retirement age, and if they are different, your benefit will not match the estimate AND they “can’t provide your actual benefit amount until you apply for benefits.”

This all means that if your earnings are different than their projections, your benefit will not match the estimate.

So, understanding how to do this calculation is especially important if you plan to retire early or later than “normal” or if you have a significant earnings change in the last few years of working.

Only Three Steps To The Calculation

To do this calculation, there are only three steps. Each step has some sub-steps as well.

First, you’ll need to find your Average Indexed Monthly Earnings, or AIME. Then you apply that AIME to the benefit formula and then adjust for filing age.

How To Calculate Your AIME

So let’s jump in with calculating your AIME. To do this, you’ll need to get set up with a tool like Excel, Google Sheets or just a notepad.

You’re going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.

The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says “view earnings record.” If you don’t have an online account, it’s very easy to set one up.

This may seem a little redundant to put the year and your age, but it’ll make another step a little easier.

Now you just need to copy down the information from the SS earnings history. You’ll want to use the part that says “your taxed Social Security earnings.” Don’t skip a year, even if there were no earnings. Just put a zero in.

Once you have all of your historical earnings recorded, it’s time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.

Important note here…only your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.

Also…When you’re getting your indexing factors, you have to be careful to use the factors specific to your age. The easy way to get these is to visit the SSA web page on indexing factors.

At the bottom there is a box where you’ll put the year you turn 62. I know I said your earnings at 60 and beyond are not inflated, but their system is designed to give you your factors based on your age of first eligibility. So be sure to put the year you attain age 62 in this box. When you do, you’ll get indexing factors that you’ll need in the next step.

Indexing Factors

You’ll notice that the factor is 1 for the years you are 60 and 61.

Now that you have your indexing factors, just copy them on to the sheet. Be sure to keep your years matched up.

Once you have your indexing factors written down, you simply need to multiply your actual earnings by your indexing factor. This will give you your indexed earnings.

Now, all you have to do is extract the highest 35 years of indexed earnings.

NOTE: If you don’t have 35 years, and don’t plan to continue working, you’ll have to use zeros.

If you’re still working and don’t have 35 years, you’ll need to estimate what your future earnings will be and apply the indexing factors just as you would for actual historical earnings. This is where you can start to play around with the numbers to see the various impacts of retiring early, or working later or maybe having variable earnings close to retirement.

Your Highest Earnings

Once you have your highest 35 years in the last column, you just need to sum them up and divide by 420. You divide by 420 because that’s the number of months in 35 years and we need to get your average earnings expressed as a monthly number.

Once you do this, congratulations…you have your AIME and have finished the first (and hardest) step of the calculation. It’s downhill from here.

To keep walking through this example, I’ve assumed a certain amount of wages and years of work. When I do that calculation I get an AIME of $5,726.02. Yours will be different! This was simply the result of my example calculation and I needed an example to continue explaining this calculation.

Time To Apply The Formula

Now that you have your AIME, it’s time to run it through the formula to see what your full retirement age benefit amount will be.

IMPORTANT NOTE HERE: This formula is calculated in the year you turn 62. That’s important because this formula is made up of two numbers that’s often referred to as bend points. These numbers change EVERY YEAR AND YOU HAVE TO USE THE BEND POINTS FOR THE YEAR YOU TURN 62 TO GET AN ACCURATE RESULT.

Let me show you a 2019 example and then I’ll talk you through how to get these for yourself if you don’t happen to be exactly 62 in 2019.

Bend Points

In 2019, the bend points are $926 and $5,583. But the formula is calculated based on three separate percentages of different portions.

First you have the amount up to $926, then the amount between $926 and $5,583 and then the amount over $5,583. Three separate portions, but only two numbers.

Then you take your average indexed monthly earnings and apply it to the grid. Using the AIME number from my example, the first $926 would be used at 90%. The amount from $927 to $5,583 would be used at 32%. Anything over $5,583 would be used at 15%.

Once I’ve ran my AIME through that grid, I simply sum up the far right column and the result is my full retirement age benefit also known as my PIA or primary insurance amount.

But what happens if you aren’t 62 yet? In that case you’ll have to forecast what bend points will be in the year you turn 62.

Thankfully…it’s not that hard because I have a calculator on my website.

The first thing you’ll want to enter is your year of birth. This will do the math for you to figure out how many years until you turn 62.

Then you need to put in the current year bend points. I’ve left this field unpopulated since they change every year.

To get the current year numbers, just click on the link for the SSA page that has these numbers. Just be sure to use the bend points for the PIA formula and not the family benefit formula.

Once you have the current bendpoints plugged in you need to decide how much inflation will occur. In my calculator you can choose 2, 3 or 4%. The Social Security trustees believe the average wage index will increase at around 4% per year, and this index is what controls the bend points, but you may choose to believe that’s too optimistic and want to use a lower number. This is completely up to you.

Once you hit calculate, you’ll see the future bendpoints below. This is what you would use in your formula. Keep in mind that the bendpoints change every year, but the percentages stay the same.

One other thing…if you are beyond age 62 you can find the bend points for the year where you were 62 at that same link.

Now that you’ve calculated your average index monthly earnings and applied them to the PIA formula, you simply need to figure out how your filing age will impact your benefit amount.

Discovering Your Filing Age

The easy way to look at it is to think about it in annual numbers.

Your benefit will be lower if you file at 62 and higher if you file at 70. But there are three separate bands with different adjustment amounts.

The red line is your full retirement age. This is where you receive the amount of the benefit you calculated plus any cost of living adjustments that happen between now and then.

If you file after your full retirement age, your benefit will increase by 8% per year. If you file in the 3 year window immediately prior to your full retirement age your benefit will decrease by 6.66% per year of early filing. For anything more than 3 years before your full retirement age, your benefit will decrease by an additional 5%.

A lot of people don’t want to retire on their birthday so it’s important to break this down by a monthly amount.

Monthly Increase/Decrease Percentages

After your FRA, your benefit will be increased by .667% per month you delay. For the 36 month period before full retirement age your benefit is reduced by .556% and for more than 36 months it is reduced by .417% per month.

And that is it!

It’s your retirement!

Before we go I want to thank you for taking the time to get informed. So many people just float into retirement hoping everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

I’d recommend staying connected with my content so you won’t miss anything. In many cases I’ll publish my newest stuff on YouTube and then share it on my Facebook page. Then my content team does their magic and cleans it up into an article for those who enjoy reading. (Again…the article is shared on my Facebook page.)

Be sure to subscribe to my site so you won’t miss any of the new content coming out, plus you will receive the blueprint version of my book for free. Alternatively, you can just head over to Amazon and buy the full version. I can’t guarantee this, but I’m pretty sure you’ll get more value than the $12 it costs.

Thanks for reading…have a great day.

Posted on Thursday, April 4, 2019

The Republicans’ Plan To Save Social Security

How do the Republicans plan to save Social Security and keep it solvent for the generations to come? If you think a possible Social Security fix may only impact those with a high income, you need to check this out. This is a plan that will affect EVERYONE!

Changes Are Necessary

Whatever your political affiliation is, I’m sure you’ll agree that SOMETHING needs to be done about Social Security. We are now within 15 years of facing the real possibility of benefit cuts. Most projections suggest that benefits will have to be cut by around 25% if nothing is done. Most people CANNOT afford this!

In 2018, the average monthly social security benefit was $1,413. If that was cut by 25%…the average benefit would go down to $1,088. That’s only $77 dollars above the poverty line.

Needless to say, something needs to be done before this cut happens. While the wheels of change are moving PAINFULLY slow, both parties have suggested multiple fixes in an effort to ensure these cuts DO NOT happen.

Which Way Will it Go?

In all of these proposals that have been suggested there are two that continue to come up over and over as the individual political party’s favorite:

How do the Republicans plan to save Social Security and keep it solvent for the generations to come? If you think a possible Social Security fix may only impact those with a high income, you need to check this out. This is a plan that will affect EVERYONE!

The Democrats would like to increase the taxable earnings cap. This would be a tax increase on higher income individuals. (More detail on this shortly.)

The Republicans’ plan that is most popular is to increase the full retirement age. Their rationale for this is that the full retirement age hasn’t been adjusted since the 1983 amendments and the system needs to adjust for increasing life expectancies.

When you look at the data, they have a valid point. In 1940, life expectancy for a 65 year old was 76.9 years for a man and 78.4 years for a woman. Since that time, life expectancy has risen by more than six years for 65-year-olds, to 83.1 years for men and 85.6 years for women. So, a promise to provide retired workers with a certain monthly benefit for the rest of their lives is significantly more expensive than the same commitment made to recipients in 1940.

Consequences of Change

Individuals are living longer and these payments are being paid for a lot longer. If you stop there, it makes lots of sense to raise the full retirement age as the Republicans are suggesting. However, as with everything, there would be a few unintended consequences.

For example, if the full retirement age is increased, this means that the corresponding reduction for filing early would be much steeper as well.

Currently, if your full retirement age is 67, and you file at 62, you’ll receive 70% of your full retirement age benefit amount. If the FRA is raised to 70, and the reductions stay the same, an individual would only receive about 55% of their full retirement age benefit at 62.

To put this into numbers, imagine that an individual’s full retirement age benefit is $1,413. If the FRA is 67, the penalty for filing at 62 would be $424 which would result in a benefit of $989. If the FRA was increased to 70, the penalty for filing at 62 would be $636, which would result in a benefit of $777.

One of the big questions here is whether the filing behaviors would change. Currently, about 33 percent of all retirees simply file at the earliest age possible…age 62. If the increased penalties didn’t change this behavior, and individuals continued to file at the earliest age possible, we’d see more seniors with household incomes under the poverty line and possibly a further drain on other government programs to help meet their needs.

How to Mediate the Issue

Some have suggested that the fix for this is to increase the minimum age of eligibility to around 65. If this happens, you could see a scenario where more individuals may begin to file for disability benefits—which are not reduced for filing age. This is because nearly half of all workers leave work earlier than they expected and 61% of those individuals cite health reasons.

This means that 30% of all workers are leaving work earlier than they want to for health reasons. If the only Social Security benefit that’s available in your early 60s is disability, I would expect those applications to skyrocket. IF the SSA saw a big uptick in the number of disability cases, it could easily dampen the effect of having increased the full retirement age.

How Your Income Could Be Affected

Those opposed to the idea of increasing the full retirement age say that though raising the retirement age affects everyone  equally in a rough sense, as it affects  incomes  unequally. This is because those with a low income tend to depend on the income from Social Security MORE than those with a high income.

(This is one of the reasons that the Democrats say they will not accept this as a standalone plan because the impact would be greatest on lower income individuals.)

My opinion is that the full retirement age WILL BE increased as part of the overall solution to shore up the trust fund. How much it will increase is likely the only question that remains. I suspect that it will only be raised by a small amount and will take several years to get there. So you can probably see by now that the fix isn’t as easy as it seems on the surface. But as new proposals are made, I’ll be sure to keep you informed.

Stay Informed!

I want to thank you for taking the time to get informed. Being informed gives you choices – and can make a big difference in YOUR RETIREMENT! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Monday, April 1, 2019

The $37,983 Social Security Mistake

Whether you are close to retirement, or in your early working years, there is a step that you need to take today. It can’t wait! If you ignore this it could cost you THOUSANDS of dollars in missed Social Security benefits. And its just a small little step that will take less than 5 minutes. I’ll tell you what this mistake is and the steps you need to take TODAY to avoid it.

So what is this little step that you can take that may help you avoid a big reduction to your Social Security benefits? It’s a mistake in your Social Security earnings record. This earnings record is a history of your lifetime earnings that will be used for the purpose of calculating your Social Security benefit.

Your Recorded Earnings

If your Social Security earnings have been recorded incorrectly, or worse…not at all…it could make a big difference in your benefit amount.

Why is this such a big deal? It all goes back to how your benefit is calculated. The Social Security Administration uses your highest 35 years of earnings as a cornerstone of the benefit calculation. If any of these 35 years are incorrect, or missing altogether, the average is skewed.

Mistakes in the Social Security earnings record are fairly common. For proof, look no further than the Earnings Suspense File. (This is where earnings reports are stored that have a mismatched name and SSN combination.) Since the inception of Social Security, there have been a total of $1.2 trillion in wages that could not be matched to an earnings record and thus were added to the Earnings Suspense File. In tax year 2012 alone, the Social Security Administration reported $71 billion added to the file!

Mistakes on Earnings

Why are there so many mistakes? Most of these mistakes are not the fault of the Social Security Administration. A good number of the mismatches are due to employer reporting errors or simple name changes after marriage or some other clerical error.

Thankfully, the Social Security Administration has a pretty good system for figuring these mistakes out and assigning the earnings to the correct record.

But nearly half of the mismatches are never corrected. Some of these are due to the fraudulent use of Social Security numbers where there simply is no fix. (For example, illegal immigrants using stolen SSNs to gain employment.)

The other mismatches are often legitimate earnings that just never get corrected. Unless you’re vigilant about monitoring your earnings record, you could have earnings gap that could have a substantial impact on your Social Security benefit calculation.

And there is a time limit for getting this corrected, too. Unless you meet an exception, you have 3 years, 3 months and 15 days to fix an error. I want to come back and talk about those exceptions later…

How This Can Affect Your Benefit Amount

Let me give you an example of how this can affect your benefit amount:

I used the actual online calculator from the Social Security Administration. I love this calculator. It does have some limitations but as far as I’m concerned it’s the best calculator on the SSAs website.

If you want to follow along you can just go to the Online Calculator.

In the example calculation I ran, I simply assumed the following:

Individual has 35 years of earnings that started in 1984 and ended in 2018. Instead of going for a really high annual earnings amount, which would have exaggerate the effect, I assumed that this individual started in 1984 with a salary of 35K and had a 2% raise every year. Now this video is all about doing this calculation for yourself, and to do that you’ll need your own earnings history.

Under that assumption, this individual would have a full retirement age benefit of $2,418 dollars. So that’s the baseline.

What happens if earnings are missing? At random, I started at 1990. For one missing year, the benefit would decrease to $2,385 dollars. For two missing years, it would decrease to $2,353 dollars. For three, it would be $2,322. For four, it would be $2,291 and for five, it would be $2,260…a difference of $158 dollars per month.

So you may be thinking…Devin…that doesn’t sound like such a crisis. But how would this affect you over your entire retirement?

If we take those same amounts and assume a annual cola of 2%, you’ll see that the effect is now measured by thousands of dollars. For one year, it’s nearly $8,000. For two, it’s over $15,000. For three, it’s slightly over $23,000. At four years, it’s more than $30,000, and at 5 years, it’s nearly $38,000. I don’t think anyone would willingly give up any of those amounts.

Hopefully you’ve seen the value of making sure this earnings record is correct…heres how you can check yours.

Go to ssa.gov/myaccount. Once you log in you should see “earnings record” in the right hand sidebar. Once you click that you’ll see a complete copy of your earnings history. It’s that easy. The hardest part is remembering the security questions when you log in.

So what happens if your earnings history isn’t right? If there’s a mistake, here’s how to correct it.

First, gather your proof of income. This could be from tax returns, W2s, 1099s and a few other documents. If you can’t find these…don’t let the SSA tell you that there’s nothing that can be done! In their manual, they state that an oral or written statement from the employer will serve as primary evidence of wages. Once you have this proof of income you simply need to contact the SSA. They may have you fill out a SSA-7008 or they may do it for you. Just call the main number or your local office.

Earlier, I referenced a time limit for correcting an earnings record mistake. Generally speaking, it is 3 years 3 months and 15 days. There are exceptions and there’s one BIG exception that covers almost everything. They will revise the record to correct a mechanical, clerical or other obvious error. About the only time I interpret when an exception doesn’t apply is when you didn’t file your taxes before the time limit. You’ll still have to pay the SS taxes, you just won’t get credit.

So you may be asking yourself, why all the fuss and urgency? Here’s why. Like many of the Social Security rules, the rule on time limits are broad and sometimes not completely understood by the technicians at the Social Security Administration. I’ve seen cases where there was a clear exception, but the technician refused to enter the earnings because they did not understand the rule. Thankfully, this client was able to get help from a financial planner who understood the rules and helped the client draft a request for review letter. A few weeks later, the earnings were back where they should be…on the client’s earnings history.

Listen…please do this small little step today. It could make a big difference to you and potentially your survivor benefits if you should pass away.

Take Action!

Before we go I want to thank you for taking the time to get informed. Being informed gives you choices – and can make a big difference in YOUR RETIREMENT! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Thursday, March 28, 2019

2021: The Year Social Security Changes Forever

Social Security benefits are changing forever at the end of 2020. Once the calendar rolls over to 2021, you’ll never be able to get as much in benefits.

Full Benefits From Social Security

Under the original Social Security Act of 1935, workers had to reach age 65 to receive a full retirement benefit. This “full retirement age” was actually simply based on the fact that many state pension systems and the Railroad Retirement Benefit system used age 65, so, the Committee on Economic Security – the group that designed the US SS system – decided to go with an age that was already commonly used. Just as a side note…they also considered using age 70, but ultimately decided that age 65 was more reasonable.

The full retirement age didn’t change from the beginnings of SS all the way until 1983. (By the way, this was the other time in history where the SS trust fund faced a crisis and nearly ran out of money.) To keep this from happening, The NATIONAL COMMISSION ON SOCIAL SECURITY REFORM (which is more commonly referred to as the Greenspan Commission) made a series of recommendations to Congress about how to keep the program solvent for the next 50 years.

Increasing the Full Retirement Age

One of their big recommendations was to increase the full retirement age to age 67. To make this change a little easier to digest, they recommended that the change only impact those who were more than 20 years away from full retirement age and that the change would gradually phase in over a period of 22 years.

The first changes began by changing the age from 65 to 66. It stayed at 66 for 11 years. But now…it’s going up again.

For those born between 1955 and 1959, the full retirement age will be somewhere between age 66 and 67. For everyone born in 1960 or later, the FRA will be 67 (for now).

This takes us back to the beginning where I said that you’ll never be able to get as much in benefits in 2021 or later. Here’s why.

For years we’ve used nice round numbers when calculating the impact of filing for social security benefits early, or later. We’ve said if you file at 62 you’ll get 75% of your FRA benefit amount and if you wait until 70 you’ll get 132% of your benefit amount. NOT ANYMORE!

Because the increases and reductions are calculated on a monthly basis, once FRA increases, there will not be as many months for benefits to increase by. The inverse will also be true, the reductions for filing at the earliest age will be steeper because there will be more months between age 62 and full retirement age.

This is why I stress understanding how to calculate the reductions and increases on a monthly basis.

How The Changes Will Affect Social Security Benefits

Here’s how this changes the benefits and reductions if we look at filing at the earliest age and at the latest age.

Currently, the SS filing window is between 62 and 70. You can’t file before 62 and it doesn’t make sense to file after 70.

So, for those born between 1943 and 1954, the FRA is 66, you are entitled to 100% of your benefit. You can file as early as 62, but you’ll only receive 75% of your benefit. If you file at 70 you’ll receive 132% of your benefit. Once the FRA starts moving up, it all changes. Once the changes are fully implemented, you’ll still be able to file at 62, but you’ll only receive 70% of your FRA and if you delay…your benefit will increase to 124% instead of 132%.

It’s your retirement!

Many people just hope everything will work out in retirement. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Monday, March 25, 2019

When Most People File For Social Security

We’re talking about the age when most people file for Social Security benefits. There’s one age that’s the most popular BY FAR. I’ll tell you what that is and give you 5 reasons when I think filing at this age makes sense.

The Most Popular Age

If we look at the data from the Social Security Administration, it doesn’t take long to see that there is ONE AGE that’s the most popular to file for Social Security. That’s what I want to talk about, but the other filing ages are also interesting.

For example, 4.2 percent don’t file until they are 70 or older. That just doesn’t make a lot of sense unless they were either incarcerated or still working in an attempt to qualify for a benefit.

So before we move on to the other ages, please understand…you cannot increase your benefits by delaying beyond 70. Once you’ve reached that age, your benefit will stop growing except for the cost of living adjustment and a possible recalculation if you continue to work.

As we move on and look at the other ages…there are nearly 9 percent that file between 67 & 69, 15.45 percent that file at 66 (that’s likely because that’s the full retirement age for individuals who are 66 right now), there’s right at 10% that file at 65 and about the same percentage that file at 63 & 64. So obviously this doesn’t leave much of a secret what the most popular age is.

Nearly a third file for benefits at the earliest age possible…62. Now I’m not a staunch opponent of filing at 62. I think there are times when it makes sense.

5 Reasons Why Filing At 62 Makes Sense (For Most People)

There are five times I think it makes sense to file at 62. However, it doesn’t always make sense for everyone.

So I’ve never been a big believer in the broad rules of thumb when it comes to filing for social security. There are just too many factors. However, it is true that in most cases it makes the most sense to delay filing for social security until at least your full retirement age. But here’s 5 times when I think it makes sense to file as early as possible.

Reason 1: Income

Number one…if you need the income. Sometimes there is no strategy. You’re no longer working and you need income. The employee benefit research institute found that nearly half of all workers leave their job before they planned to retire.

When you dig into the numbers, 55% was from a disability, 24% was from downsizing and 17% was so that the worker could care for a sick spouse. One thing to mention here before we move to the next point…if you left work early due to a disability, you should apply for SSDI. Instead of having your benefit reduced for early filing, youll receive 100% of your FRA benefit.

Reason 2: Single with Health Issues

Number two…you are single and have health issues. We talk a lot about strategy for married couples. If you are single, you really only have your own income needs and life expectancy to consider. This is one of the few times where I recommend using a break-even analysis. This will tell you the age at which you would have to live until to receive the same benefits for a later filing age.

Reason 3: Spousal Issues

Number three…spousal issues. There are two separate spousal issues that have to be discussed.

The first is if your spouse is the higher earner and has health concerns which will shorten their life expectancy. Since their earnings were higher, their SS benefits will likely be higher. If they pass away early, your lower benefit will drop off and you’ll begin to receive their higher benefit. So, if you delay for several years to increase your own benefit and eventually get SS from a spouse, it wouldn’t have been worth it.

The next spousal issue is that if your spouse is the lower earner and older than you. If your spouses earnings were so low that a spousal benefit from your record will be the highest benefit they will receive, keep in mind that they cannot receive that benefit until you file for your own benefit. This means that by filing early, you will receive a reduced benefit, but your spouse will become entitled to a benefit as well. The reason we include this is that once your spouse reacher his/her FRA, their spousal benefit will not increase. So if they are older than you, this could make sense in certain conditions.

Reason 4: If You Have A Survivors’ Benefit

Number four…if you have a survivors benefit.

A few years ago there were a few filing strategies that were closed for almost everyone, EXCEPT SURVIVING SPOUSES. Let’s walk through an example and see how this works. Assuming your own benefit at a FRA of 67 is $1,500 and your survivors’ benefit is $1,750, we know that the reduced amounts at age 62 are $1,050 for your own and $1,394 for your survivors’ benefit. Since the survivors’ benefit still allows switching back and forth, you could file for your survivors’ benefit at 62 (or even 60) and switch back to your own benefit at 70 at which point it would’ve grown to $1,860.

When it makes sense, a variation of this can also be done in reverse. If you want to know more about this, check out the video I did on the survivors benefit filing strategy.

Reason 5: If You Have Minor Or Disabled Children At Home

Number five…the last one…is if you have minor or disabled children at home. If so, they may qualify for a benefit when you file. So by delaying your filing, you are missing out on your own reduced benefit plus the benefit payable to your child.

There’s a video that I posted on Social Security Family Benefits. Just keep in mind with all of these strategies that if you file before your full retirement age, the earnings limit will apply. Once you pass your full retirement age, the earnings limit will no longer apply.

It’s your retirement!

Before we go I want to thank you for taking the time to get informed. So many people just hope everything will work out in retirement. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Thursday, March 21, 2019

Is Social Security A Good Investment?

We’re talking about what kind of value you actually get from your Social Security taxes. Is this a good investment? If you could stop paying in your part to SS and invest it instead, could you create as much income? We’ll do a side by side comparison of your SS benefits vs. investing and find out…the results may surprise you…

I receive a lot of comments about opting out of SS and investing the money instead. Since my research tends to be driven by curiosity, I decided to take a deeper look at the numbers and see which would work out better…

Investing the tax you pay in or sticking with Social Security?

To get the results I made a few assumptions.

First, I assumed that your goal would be to create income in retirement as opposed to buying a vacation house or something else that would require a lump sum.

Second, I assumed that you took only your part of the SS tax and invested it.

For a refresher…the total FICA tax is 15.3%. If you are an employee you only pay ½ of that or 7.65%. Of that amount, 1.45% goes to Medicare and 6.2% goes to Social Security. It’s that 6.2% that I assume you invest.

We could chase the rabbit trails of investing the full SS tax, but if opting out were allowed, I hardly think an employer could be compelled to give you 6.2% to invest. (At least not the ones that I’ve worked for….)

And ultimately, I wanted to look at ‘what if you could invest the dollars that are currently taken out of your pocket?’

Then we assume a 7% return. Obviously you may do better than this or not as well as this.

At your full retirement age, the invested balance would be used to fund an income stream that would be equal to the amount of SS for which you would have been eligible. There are multiple ways to illustrate the withdrawal, but this is the only way to keep it apples to apples.

Finally, I looked at multiple income levels while working in a job from age 19 to 66. To get a baseline I used the national average wage index which is published by the Social Security Administration.

The first income level was for an individual at 50% of the national average wage index. Then I looked at 100%, and then at 150%. For a maximum SS benefit, I also looked at an individual who would’ve earned the maximum taxable wages for every year he or she was working. With these earnings figures, I used the calculator on the SSA website to calculate what the benefit for each of these income levels would be at full retirement age. I then increased that amount by 2% per year to keep up with the SS cola. That is the number that I illustrated withdrawing from the portfolio accumulated from the invested SS taxes.

I don’t want to overcomplicate this, but at this point there is really another assumption to consider. Would you continue to get 7% return in retirement, or would you move your money to an investment that may have less market risk?

If you did, you’d most likely get a lower return. So, in retirement I modeled out two rates of return. One at 7% and one at 3%. Now that you know all of the parameters and assumptions, are you ready for the results? Here they are…

Results

For an individual at 50% of the average wage index, the portfolio value would last beyond the expected 85 year life expectancy if invested at 7%. If the portfolio received a 3% return, it would run out at age 80. This is because a lower income individual would have a larger SS benefit relative to the amount of taxes they’ve paid in. So the withdrawal percentage would be higher for them.

Next I looked at an individual at 100% of the National average wage index. At 7% their money would last well beyond age 100. At 3% return they would be out of money at age 84. This is where things change… If an individual had earned 150% of the NAWI they would see their benefit increase and would have more in their account when they died than when they started. At 3% it would still last until around age 90.

And finally an individual who had earned the maximum wage base on an annual basis would see similar results except this time they would never run out of money in either scenario during a normal life expectancy.

To make sure my numbers were right, I spoke with Dr. Brandon Renfro. Dr. Renfro is a finance professor and a numbers guru. Things checked out!

So what’s the point of all of this? Can you opt out and invest it? No you can’t. This is mostly to satisfy the curious who have wondered…could I do better on my own. It appears that the answer to that is your income level. If you’re lower income, it would be tight. If you’re higher income, you probably could.

Take Action!

Hey remember…THIS IS YOUR RETIREMENT. Stay curious and STAY INFORMED. You’re making the right moves by reading articles like these, but don’t use this as specific advice for your own situation. Do your research and talk to your own advisors. Most importantly, continue to educate yourself.

Thanks for reading…have a great day.

Posted on Monday, March 18, 2019

Comparing The Two Social Security Reform Proposals

We’re doing a side by side comparison of two Social Security proposals that are quickly gaining steam. One already has enough sponsors to clear the House and the other is from a 2020 presidential candidate. Which one is better?

Within the past few weeks, there has been two big proposals for Social Security reform. There’s the Social Security 2100 Act, sponsored by rep John Larson, and the Social Security Expansion Act from Senator Bernie Sanders.

Similarities Could Make It Easier To Get The Votes

What’s interesting is that these proposals are very similar in a lot of areas. Furthermore, one is from a Congressman and one is from a Senator. I think it’s likely that these two proposals could be companion legislation which could make it easier to get to a vote in the Senate should it pass the House. So today I want to compare the most notable parts of these proposals side by side and see how they differ.

Cost Of Living Inflation Measurement

The first thing is the change to how the cost of living adjustments are calculated.

Currently the SSA uses the CPI-W. There is a another inflation measurement that isn’t official, but the Bureau of Labor statistics has been updating it for some time on an experimental basis. It’s called the CPI-E and is meant to track expenses for households where at least one member is 62.

BOTH bills propose switching to the CPI-E.

Increase To Minimum SS Benefit

Then there is the increase to the minimum SS benefit.

If an individual worked for at least 30 years, their benefit couldn’t be lower than 125% of the poverty level for a single individual.

This change is suggested by both proposals.

Combining Both Trust Funds

The next change is to combine the two SS trust funds into one trust fund.

Currently, there is a trust fund set up for retirement and survivor benefits, known as the old age and survivors insurance fund or OASI and then there is the disability insurance fund, known as DI. When you pay your 12.4% SS taxes, 10.6% goes to the retirement and survivors fund and 1.8% goes to the disability fund.

SIDE NOTE: Unless you’re self employed, you only pay ½ of that and your employer pays the other half.

The rational behind combining these is that even though these two trust funds are already collectively referred to as the OASDI fund, there are arguments among the politicians when transfers need to happen between the funds. Combining these would simplify the accounting. Both plans have an across the board benefit increase built in. This increase would be a SS formula change that would be a bigger benefit for low income individuals.

Increase Maximum Wage Base

Then there is the big change that both plans suggest, and that is to increase the maximum wage base.

Both of these plans suggest the current cap stay in place but after a certain amount of earnings the tax will kick back in.

The SS 2100 Act has the tax kicking back in at $400,000 and Senator Sanders plan has it coming back in at $250,000. This is where the two proposals get a little different. The SS 2100 act has provisions to reduce taxes on SS benefits and the SS expansion act does not. Additionally, the SS 2100 Act is the only one to suggest a gradually increase to payroll taxes. The SS expansion Act has the BIG change of imposing SS taxes on dividends and capital gains taxes for individuals with incomes over $250,000. The SS 2100 Act left investment type incomes alone.

Childrens’ Benefits

The last point of difference between the two bills is that Senator Sanders’ proposal will extend childrens benefits to age 22 if they are in college or vocation training.

This side by side comparison doesn’t have every change from these two proposals but it covers the ones that I thought were important. I hope this was valuable for you.

Take Action!

Before we go I want to thank you for taking the time to get informed. These changes are BIG! So many people just float into retirement hoping everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

Thanks for reading…have a great day.

Question: Which one do you think would be better for the American people? I look forward to seeing your thoughts in the comments below.

Posted on Thursday, March 14, 2019

The Social Security 2100 Act

Sweeping Social Security reform could happen SOON! I’m not talking about some minor adjustment to an obscure clause in the regulations, I’m talking about nearly everything changing. I’m going to break down the 6 BIG Changes that’s likely to affect YOU.

April, 2017

This bill was first introduced in April of 2017. Since the house was still controlled by the Republicans, it died a quick death. Now it’s back. This time, the Democrats are in control of the house and there is gossip that President Trump may be on board with his support.

This is one you need to watch! It already has nearly enough co-sponsors to pass it through the House.

The Senate is still controlled by Republicans, so it’s not as certain there, but at the very least, this proposal will show you what’s on the mind of the Democrats and give us a hint at how much support the Republicans are likely to give to a bill with these sorts of provisions.

This proposal would include both tax cuts and tax increases, a change in the way cost of living adjustments are calculated, and an across-the-board benefit increase.

Noteworthy

After reading the Bill I want to share with you the 6 things I think will have the most impact on the majority of Americans. Just understand…this is not a deep dive into each of these topic areas. It’s likely to change as the process moves forward and we’ll save the deep dive for a series when and if we get a final signature-ready Bill. Also, the purpose of this post is not to share my opinion of the proposal. Although I’m certainly not scared to do so, there are a few things that need working out before I can decide if I view this bill favorably or not. What I intend to do is give you a quick summary of this proposal that is devoid of the hyperbole that I’m sure you’ll hear from each side. Let’s get started with the 6 Big Changes that’ll come from this Bill.

Number one: A benefit increase.

There will be an across the board increase to benefits. This will be retroactively applied to everyone who is currently receiving benefits as well. The way they’ll accomplish this is by a slight change to the Social Security formula.

Currently, your historical earnings are applied to a crediting formula at age 62 to determine your benefit amount. The only change is that the top number in this formula will change from 90% to 93% credit to your benefit amount for the earnings in that range. The estimate is that benefits will increase by an average of 2%.

Number Two: The second big change is a switch to CPI-E.

Currently the cost of living adjustment is calculated with the CPI-W. This methodology has been criticized for not taking into account that a retirees expenses are not the same as a working person.

The BLS has kept up with an experimental inflation number for the past several years called the CPI-E. In this measurement, they use households over the age of 62. From December 1982 through December 2011, the CPI-E rose at an annual average rate of 3.1 percent, compared with increases of 2.9 percent for the CPI-W.

When you look at a side by side comparison, it easy to see where a retiree’s expenses are different. The green bars represent the expenses of individuals over the age of 62. You’ll quickly see that housing and medical care take up a lot more of a retirees income. If those categories increase at a rate faster than inflation, the current method just doesn’t keep up.

Number Three: Increase the Minimum Benefit

Big change number #3 is to increase the minimum benefit. Now there’s not much said about the Social Security minimum benefit. This is the lowest amount an individual can receive who worked a certain number of years.

It’s meant to offer a base income for those who had very low paying jobs. In 2019, the minimum is $872.50 for those who worked for 30 years. The new minimum benefit will be 125% of the poverty level for those who worked for 30 years.

Number 4: A decrease to social security taxes.

This needs to happen! The numbers haven’t been modified since they were introduced in 1983 and 1993. This is one of the areas of the bill that is somewhat unclear to me. But I think I’ve got it.

Currently there is a grid system that your benefits move through. For the married filing jointly, there is no tax if your provisional income is less than $32,000.

For the amounts between $32k and $44k, 50% of your benefits are included as taxable income. For amounts over $44k, 85% of your benefit is taxable income.

It appears that they are going to simplify this, and let’s say if your provisional income is less than $100k, there is no taxes on your social security benefits. If it crosses over, 85% of your benefits are taxable.

Number 5: To increase the maximum wage base.

Currently, you only pay social security taxes on the first $132,900 of earnings. For earnings over that, you do not pay the 12.4% tax.

The new law would put a gap in how this is taxed. If an individual’s income exceed $400,000, the FICA tax would kick back in. Those “excess earnings” as this bill calls it would not be applied to your benefit calculation at the same rate as they currently are. Instead, a new bracket would be added to credit your benefit by 2% of the excess.

Number #6: An increase to payroll taxes.

It would happen gradually, only .05% per year, but by 2043 employees and employers would each be paying 7.4%. This means that the total FICA tax would increase from 14.3% to 17.7%.

SO that sums up what I think are the BIG changes that could come from the Social Security 2100 Act. As it is written currently, these provisions would eliminate the much discussed insolvency of the social security trust fund in 2034. That’s a good thing! The publicity pieces around this bill say that it would extend the solvency of social security into the year 2100 (hence the name).

This is a Bill that I will be watching VERY carefully. When something big happens, I plan to let my subscribers know about it quickly!

Take Action!

I want to thank you for taking the time to get informed. So many people just float into retirement hoping everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Monday, March 11, 2019

Bernie Sanders’ Plan For Social Security

We’re talking about Senator Bernie Sanders’ proposal to expand Social Security. He’s already announced he’s running for president in 2020 so this proposal is one you need to watch. Let’s take a closer look.

A few days ago, Senator Bernie Sanders released his proposal to reform Social Security. It can really be summed up in three words:

Scrap The Cap

This is not the first time he’s proposed such legislation.

A Major Platform Piece

This was one of his key platform pieces when he ran for president in 2016. Now that he’s announced he’s running again in 2020, you’re probably going to see this a few more times so you need to make sure you understand this.

In fact, I would say that even if he drops out of the race early…you’ll see Social Security reform as a central part of any candidate’s platform in the upcoming election.

And just a side note to the Republicans…WAKE UP if you don’t want to be known as the party that doesn’t care about social security! In the past few weeks there have been two serious proposals to reform social security and they were BOTH sponsored by Democrats. Enough of the political stuff…

5 Key Changes Proposed to Social Security

There are 5 key changes in Senator Sanders’ proposal that deserve the most attention. As of the time of this recording, the text of the Bill has not been released, so I’m depending on summaries and fact sheets mostly published by Senator Sanders’ office. If you watched my video on The Social Security 2100 Act, you’ll probably notice some similarities, but there are some big differences too and I plan to do a side by side comparison at a later time.

The most notable difference is going to be number 5. For anyone that files as an S corp, or if you just have an investment account that produces interest, dividends or capital gains, this could be huge.

#1 – Benefit Increase

The first change is a benefit increase. Without the text of the bill its hard to tell how this will be accomplished but I’m sure it will be through a change to the SS formula where the lower earnings get credited to a benefit at a higher rate.

This is also a feature of the SS 2100 Act and it will increase benefits by about 2% on average.

#2 – Cost Of Living Adjustments

The second change is how the cost of living adjustments are calculated.

Currently the SSA uses the CPI-W. There is another inflation measurement that isn’t official, but the Bureau of Labor statistics has been updating it for some time on an experimental basis. It’s called the CPI-E and it is meant to track expenses for households where at least one member is 62.

If you look at a comparison of these two measurements, there are certain categories that are higher for older Americans, which means that the CPI-W, the current method, isn’t keeping up.

#3 – Children’s Benefits

The third notable change is to increase the age for which children are eligible for a benefit.

Currently, a child is eligible for a benefit if a parent retires, is disabled, or dies. However, that benefit stops when the child turns 18, or 19 if they are still in high school. This would extend that age to 22 if the child is in college or vocation training.

#4 – One Trust Fund

The fourth change is to to combine the two SS trust funds into one trust fund.

Currently, there is a trust fund set up for retirement and survivor benefits, known as the old age and survivors insurance fund or OASI, and then there is the disability insurance fund, known as DI.

When you pay your 12.4% SS taxes, 10.6% goes to the retirement and survivors fund and 1.8% goes to the disability fund. Unless you’re self employed, you only pay ½ of that and your employer pays the other half.

The rational behind combining the two trust funds is that even though these two trust funds are already collectively referred to as the OASDI fund, there are arguments among the politicians when transfers need to happen between the funds. Combining these would simplify the accounting.

#5 – Increase to the Maximum Wage Base

Then there is the big change… And that is to increase the maximum wage base. But this one has a twist. Currently, you pay SS taxes on the first $132,900 in wages or self employment income. Amounts above that are not subject to SS taxes. Senator Sanders’ proposal has the tax kick back in when income reaches $250,000. But this isn’t just for wages…This will also include all investment income. And it’s not clear whether an individual will receive any credit to his or her SS benefit from the excess taxes they’ll have to pay.

That is the quick summarized version of the Bernie Sanders’ plan, but as new details come out, I’ll be sure to keep you informed.

Take Action!

Before we go I want to thank you for taking the time to get informed. Being informed gives you choices – and can make a big difference in YOUR RETIREMENT! Please continue to stay informed!

Thanks for reading…have a great day.

Posted on Thursday, March 7, 2019

Taxing The Rich Will Not Fix Social Security

Today we’re talking about why taxing the rich will not fix social security as many believe. And I’m backing this up with facts.

Make The Rich Pay More

One of the most popular suggestions that I hear for fixing social security is to simply increase or eliminate the maximum taxable wage base thus making high income individuals “pay the same as everyone else.”

It’s widely believed that the issue with the social security system is income inequality and a system that’s stacked in the favor of the wealthy. While it’s true that income inequality does exist, I wanted to find out if the insolvency of the social security trust fund could really be fixed by raising taxes on the wealthy.

Thankfully, I didn’t have to launch my own research project and hire a room full of Ph.Ds. The Congressional Research Service has already done the heavy lifting for me in this report which was updated in late 2018.

How Much Is Subject To Tax?

Before we get into their findings, let’s take a look at what the issue actually is.

Currently, in 2019, the first 132,900 dollars in wages is subject to the 12.4% social security tax. Taxes over that amount are not subject to that tax. This leads lots of politicians and talking heads to suggest that the easy fix to all of the SS funding can be found within two options (both of which involve raising the amount of maximum taxable earnings).

Option 1: Eliminate Minimum Wage

Option one is to completely eliminate the maximum wage base. If you make a million dollars you should pay social security taxes on that full million.

Option 2: Have A Gap On Taxable Income

The other option is to have a gap where the current maximum would stay in place and if earnings would have to exceed a certain level for the tax to become applicable again.

The amounts we’ll examine today is where the tax kicks back in at 250,000 as Bernie Sanders has suggested, 300,000 and 400,000. But one of the big conundrums that the increased taxes brings up is, if the cap is modified, do the increased taxes add to a social security benefit.

For example, if my current benefit at full retirement age is $2,500 but I begin having to pay additional taxes for social security do I get credit for that? Will my eventual benefit increase?

There’s been a few suggestions around this but its mostly split between not giving any credit for the additional taxes and an approach that would use a new formula to credit a small part of the taxes to a benefit. Those are the scenarios I want to look at.

What If Scenarios

First, lets look at the most obvious and clear cut method. What if the taxable base is completely eliminated? If there is no credit given to benefits, and those tax dollars paid in have no benefit returned, it would fix 83% of the 75 year shortfall.

If the current formula is used, which it wont be, this would fix 68% of the shortfall. If they use the new formula, which would credit the increased taxes to your benefit at a 2-3% rate, it would fix 76% of the shortfall.

If they use the threshold or gap method you’ll see similar results. If the tax kicks back in at $250,000, this would fix 75% of the shortfall. At $300,000 it would fix 71% and at $400,000, it would eliminate 67% of the shortfall.

Does it seem like something is missing? The closest that any of these get to fixing the shortfall is the method where the taxable wage base is completely eliminated and there would be no credit to his or her future benefit amount.

Is it likely that a social security payroll tax increase will be part of the overall solution? Yes, but by itself it WILL NOT fix the problem. Next time you hear someone shouting that, tell them you know better.

It’s your retirement!

Before we go, I want to thank you for taking the time to get informed. Don’t be one of the people who just float into retirement and hope everything will work out. Sometimes it does, but sometimes a lack of planning can ruin what should be your best years. This is your retirement! Please continue to stay informed!

Thanks for reading…have a great day.

Question: Do you think the maximum cap should be eliminated? Please let me know in the comments below.

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