fbpx

The Danger Zone in Social Security Taxation

by

The gradual phase-in of taxes on Social Security benefits can deliver some unexpected and unpleasant results if you fail to recognize the “danger zone” to avoid. The calculation the IRS uses to determine how to tax Social Security income creates a category where taxes on benefits are amplified.

Fall into this danger zone, and you could pay a much higher tax rate on some of your retirement income. Here’s what you need to know about the taxes on Social Security benefits and how you can avoid the pitfall of paying way too much in taxes on that income.

Know Which Category You’re in for Taxation

Individuals fall into three basic categories for taxation on Social Security:

  1. None of your benefit is taxable income
  2. Between 0% and 85% of your benefit is taxable income (this is the danger zone!)
  3. 85% of your benefit is taxable

In the first category, you have no real need to fear slipping into the danger zone unless you have other income that could push you into the second category.

If you’re in the third category, you have few options to exercise to pay less in taxes.The only real choice you have is to somehow lower your reported income so that you qualify for the first or second category.

This is probably unrealistic, as people who find themselves in the third category are there thanks to large incomes from pensions, required minimum distributions, or some other source. You may need to accept that 85% of your benefit is taxable.

But if you find yourself in the second category, you may have more control over how much of your benefit is taxed.

Understanding the Danger Zone

I call that second category the danger zone because this is where taxes can nearly double on income.

For some, this “danger zone” of magnified taxes can easily be avoided with a strategic, well-thought retirement income plan. The first thing you need to be able to do is to calculate your combined income.

This is the number the Social Security Administration uses to determines how much of your benefit is taxable. It’s also referred to as “provisional income,” but we’ll use the specific term combined income since the Social Security Administration uses that term.

Combined income can be roughly calculated as your adjusted gross income, plus any tax exempt interest (such as interest from tax free bonds), plus 50% of your Social Security benefits.  

Once you’ve calculated your combined income you can apply it to the threshold tables to determine what percentage, if any, of your Social Security benefit will be included as taxable income.

Thresholds for Social Security Taxes If You File Single

If your total combined income is less than the base amount of $25,000, none of your Social Security benefits will be taxed. But if your combined income is between $25,000 and $34,000, up to 50% of your benefit may be taxed.

If your combined income is more than $34,000, up to 85% of your benefits may be taxed.

Thresholds for Social Security Taxes If You’re Married Filing Jointly

If you file a joint return and you and your spouse have a combined income that is less than the base amount of $32,000, none of your benefits will be taxable.

If your total combined income is between $32,000 and $44,000, up to 50% of your benefit is taxable.

If your combined income is more than $44,000 up to 85% of your benefit may be taxable.

This system is a gradual phase-in of tax on Social Security benefits where, as income rises, more of your Social Security benefits are subject to taxation, until eventually a maximum of 85% of all benefits are subject to taxation.

For a more in-depth reading check out my article on the taxation of Social Security benefits.

What Happens to Social Security Taxes in the Danger Zone

Because of the way Social Security income phases into taxation through this formula, there is a “danger zone” when every dollar of increase in combined income pulls more Social Security into taxation.

In this zone, the effective tax rate on this other income skyrockets. For example, if an individual is in the upper end of the danger zone and takes $1.00 from his IRA account, they’ll not only have to pay tax on that $1 but also on $.85 of their Social Security benefit.

Effectively, because they took out $1 they had $1.85 added to their taxable income. This has the effect of increasing the marginal tax rate well beyond what your tax bracket might suggest you are paying.

If your tax bracket is 25% you would ordinarily pay $0.25 on the dollar you took out of your IRA. However, since that $1 increased your taxable income by $1.85, you will have to pay $0.46 in taxes. Since that $0.46 in taxes is solely due to your $1 distribution, you’re paying a 46% tax rate on that dollar!

This whole effect has been referred to as the tax torpedo — but for purposes of this article we’ll refer to it as the “danger zone” since my goal is to help you identify a specific range of provisional income where one should be hyper-vigilant about the effect of taking IRA distributions.

The danger zone ends when the results of your combined income calculation reaches 85% of your social security benefits. At this point, 85% of your benefit will be taxable, so increased combined income will not have the magnified effect.

For example, if you take $1 in IRA distributions it will not expose an additional $0.85 of Social Security benefits to taxable income since your benefit is already taxable.

Also, since all Social Security benefit amounts are not the same, the point where the danger zone ends will be different for everyone. Below we’ll break down the different ranges for those married filing jointly and those filing single.

Where the Danger Zone Ends If You’re Married Filing Jointly

For those who are married filing jointly, exercise caution when combined income income rises over $32,000. At this point, your Social Security benefit will be added to your taxable income at the rate of $.50 for every additional dollar in combined income (signified by yellow on the chart below).

At $44,001 of combined income, your Social Security benefit will begin to be included in taxable income at the rate of $0.85 for every additional dollar in combined income (see the red areas of the bars in the chart below).

You’ll notice that the point at which someone can exit the danger zone varies based on the benefit amount. This is because the exit point is the point where the full 85% of your benefit becomes taxable.

The danger zone ends for those who are married filing jointly at around $88,000 for those who have a maximum benefit in 2019 and half of their benefit is being paid as a spousal benefit.

Getting Out of the Social Security Taxes Danger Zone for Single Filers

You need to start paying attention when your income rises above $25,000. At this point, your Social Security benefit will be added to your taxable income at the rate of $.50 for every additional dollar in combined income (signified by yellow on the chart below).

At $34,001 of combined income, your Social Security benefit will begin to be included in taxable income at the rate of $0.85 for every additional dollar in combined income (see the red areas of the bars in the chart below).

The danger zone ends for single filers around $63,000 in combined income for those with a maximum benefit (2019). For individuals with lower benefit amounts, you’re in the clear sooner.

The Opportunity Zone

In some cases, there is nothing to be done that will help lower the amount of taxes on Social Security. It could be due to required minimum distributions, pensions or a variety of other income sources.

Whatever the reason, some people will simply have incomes that are too high to make it possible to lower back into a zone of less than 85% Social Security taxation.

However, there are opportunities for planning around this danger zone. This opportunity not only exists for those who are in the danger zone, but also for those just over or under the line of the danger zone.

For those just over the line, it may be possible to defer capital gains, IRA distributions, or some other type of income if you could reduce the percentage of your taxable Social Security income by a few points.

Fully understanding how much range you have before Social Security benefits become taxable can be a big help in making choices about realizing capital gains, extra income from a job, or even deciding what type of account to use to fund your travel plans.

If you’re inside the danger zone, be aware that any increase in combined income will have an amplified effect on taxation. Instead of waiting until you are in that zone, there are a few steps you can take before it becomes an issue.

For starters, consider using a Roth IRA. This is possibly the most valuable tool for planning around tax on Social Security. Why? Distributions from a Roth are not counted in your combined income!

If you think you may eventually be in this danger zone, consider building a pool of money in your Roth account. You may be able to contribute to a Roth IRA up to $6,000 ($7,000 if over the age of 50).

Check with your retirement plan at work, as well, to see if they offer a Roth option. Using a Roth in 2019 will allow you to put in up to $19,000 per year ($25,000 if over the age of 50).

Finally, you may want to consider converting traditional IRAs to Roth IRAs. There’s certainly a lot to consider when doing so, but since the tax benefits could extend beyond the tax free nature of the Roth, this could be a winning move.  

One thing is for sure, planning your retirement income stream is worth the effort! If I can be of assistance, please contact me at https://devincarroll.com/contact/

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

One last thing…I’d like to give a huge thanks to two individuals who helped me with this article. Jim Blankenship, CFP, EA for his expertise on taxation and social security and Brandon Renfro, Ph.D. for his assistance on the research behind these calculations.

Are Social Security Payments Guaranteed?

by

Many Americans believe that future Social Security payments are an “earned right” when they retire. As nice as that would be, that’s not the case.

The truth is, you are sadly mistaken if you believe you’re entitled to these benefits down the road — even if you pay FICA taxes!

And if you’re sitting there, nodding your head, saying “that’s right, you’re not entitled to anything!” …you might want to sit down and read the rest of this post, too.

Social Security isn’t a guarantee, and it is in fact an entitlement program.

Scratching your head yet? Let me explain… and more importantly, let me try to reduce some of the inflammatory language around this conversation.

Why Aren’t Social Security Payments Guaranteed?

The government almost encourages the belief that Social Security benefits are guaranteed. In fact, in a 1936 pamphlet from the Social Security Administration, it specifically states, “The United States government will set up an account for you … The checks will come to you as a right.”

Whether or not it was intended this way, this pamphlet implied that the new tax would be somehow credit a personal account to which the worker would be lawfully entitled to receive. It didn’t take long for that to get “clarified” by the Supreme Court.

Not long after the Social Security began, a shareholder of the Edison Electric Illuminating Company challenged the tax that funded the program. He wanted to stop the company from making the tax payments and deductions from wages on the grounds that the Social Security Act of 1935 was unconstitutional.

For a period, it appeared that he won. The U.S. First Circuit Court of Appeals held that Title II of the Social Security Act (the heart of the program) was void as it was in direct opposition of the tenth amendment.  However, once the case reached the Supreme Court, things changed.

The Ruling That Nixed Future Guarantees on Your Benefits

In Helvering v. Davis, the Supreme Court reversed the lower court’s opinion and held that the Social Security Act of 1935 was constitutional.

That in itself was not the interesting part. What was interesting was the language that was used in the written opinion. It said, “The proceeds of both taxes are to be paid into the treasury like internal-revenue taxes generally, and are not earmarked in any way.”

That eliminated the idea of the separate, personal account that the Social Security pamphlet originally implied.

Other Court Cases Made It Clear: Social Security Payments Not Guaranteed

In 1960, another case came up that made it clear how the government felt about the individual’s “right” to Social Security benefits.

Ephram Nestor was a Bulgarian immigrant who paid Social Security taxes from 1936 until his retirement in 1955. In 1956, he was deported for his membership in the Communist Party during the 1930s.

In accordance with a 1954 law Congress had passed a law saying that any person deported from the United States should lose his Social Security benefits, Nestor’s $55.60 per month Social Security checks were stopped.

Nestor sued, claiming that he had a right to Social Security benefits regardless because he paid Social Security taxes.

This case made its way to the Supreme Court in Flemming v. Nestor. In the Social Security Administration’s summary of the court’s findings, they state the following:

“There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law.”

If there was any doubt left about an individual’s “right” to a Social Security benefit, this case should’ve banished it.

But just in case people forget that benefits can be changed or stopped altogether at any time, the Social Security Administration puts this reminder on every statement they create:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time.”

Paying FICA Taxes Does Not Make Your Social Security Payments Guaranteed

The big takeaway is that your payment of FICA taxes is not necessarily paying for your future access to Social Security benefits. The criteria for eligibility could change with the whims of politics.

Ultimately, you should heed the advice that’s also printed on each and every Social Security statement:

“Social Security benefits are not intended to be your only source of income when you retire. On average, Social Security will replace about 40 percent of your annual pre-retirement earnings. You will need other savings, investments, pensions, or retirement accounts to live comfortably when you retire.

The Social Security Administration today makes it clear that you have no legal right to Social Security benefits, and there are multiple court cases that set precedent to back this up.

Whether or not you agree does not change the reality that paying FICA taxes does not provide you a guarantee to any future benefit from the program.

While Benefits Aren’t Guaranteed… Social Security Is an Entitlement Program

Given the current level of political division, its no surprise that the dialogue about government entitlement programs has gotten really heated.

Many of our congressmen and senators have discovered how polarizing the use of the word “entitlement” is and that they can associate it with words like welfare, handouts, or charity.

Then they can fire up their supporters by loudly proclaiming SOCIAL SECURITY IS NOT AN ENTITLEMENT!

What’s happened here is that they’ve effectively redefined the word “entitlement” into something that is divisive and dirty. How handy.

Here’s the truth: the federal government has referred to Social Security as an entitlement program for several decades.

On their website, you can see hundreds of uses of the word. In fact, they go so far as to explicitly state “The social security benefit programs are entitlement programs.”

What Does Entitlement Really Mean, Anyway?

If you examine the definition of the word “entitlement,” you’ll see there is no mention of welfare, charity or handouts:

  • The Merriam Webster dictionary defines it as “a government program providing benefits to members of a specified group.”
  • The Cambridge dictionary defines it as “something, often a benefit from the government, that you have the right to have.”
  • The glossary of the United States Senate defines the word as “a federal program or provision of law that requires payments to any person or unit that meets the eligibility criteria.” 

The fact is, the phrase “entitlement program” is simply a term for any government program guaranteeing certain benefits to a segment of the population who qualify for them under specific terms and conditions.

That’s exactly what Social Security is. You have to work for at least 10 years with a certain amount of earnings to be entitled to your own benefit. There’s nothing dirty, shameful or beggarly about this word.

But in the highly politicized world that we live in, what words actually mean and the meaning given to words aren’t always the same. 

I hope this helps keep you grounded in the reality we’re working with, and not get swept away by anyone else’s political rhetoric.

Have More Questions?

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 100,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. 

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

Social Security Scam Alert!

by
In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!
In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

Social Security scams cost seniors millions of dollars.

These scammers have recognized a winning formula to steal your money and have doubled their efforts to get you into their trap.

I don’t want you or anyone you care about to get caught up in this. Here’s how you can avoid being victimized by this scam!

Social Security Scams Over Time

There are some scams that have a longer life than others. The most recent Social Security scam has been around since about 2017 and has started to explode. The number of those affected by this increased ten-fold in 2018 and 2019 is already on its way to being even bigger than 2018.

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

There’s nothing incredibly new or savvy about this scam, but it’s working better than most. That’s probably because it’s being aimed at those who count on Social Security payments to buy food, pay for utilities and other necessities.

The Scam

The phone rings, and the person on the other side tell you your social security number has been suspended, and you need to talk to them to get it straightened out. When you talk to them, they’ll have to “verify your identity” and in the process gather all sorts of personally identifiable information that will allow them to get to your money.

Currently, there are two version of this scam. Here’s how the first sounds. 

“YOU HAVE RECEIVED THIS PHONE CALL FROM OUR DEPARTMENT TO INFORM YOU THAT WE HAVE JUST SUSPENDED YOUR SOCIAL SECURITY NUMBER BECAUSE WE HAVE JUST FOUND SOME SUSPICIOUS ACTIVITY. SO IF YOU WANT TO KNOW ABOUT IT…”

This sounds like a pre-recorded bot voice, not an actual person, and the computerized call will continue to tell you how to reach the “department”.

Then there’s the second version that ups the ante with the threat of arrest! The message is much like the first one, but the difference is that the voice says if you do not contact them immediately, they will issue an arrest warrant and arrest you for the suspicious activity.

Keep Yourself Safe

I understand why scams like this work. To an older generation that is not as familiar with technology, it sounds very convincing and scary!

Here are four things to remember:

Number 1…don’t trust your caller ID! In many cases these scammers appear to be calling from the Social Security administration’s phone number. There’s spoofing technology to make it appear that way.

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

Second, the Social Security administration will NEVER threaten arrest.

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

Third, a social security number can’t be suspended for any reason that I know of. They can suspend benefit payments, but not your social security number.

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

Lastly, NEVER EVER EVER provide your social security number to any unknown individuals.

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

If you are contacted by a scammer and want to make sure everything is ok here are three ways to find out:

First, contact the social security fraud hotline to report the contact.

Second, if you just want to make sure everything is fine with your benefit payments, call the main SSA number at 800-772-1213. If you want a shorter hold time you may want to just call your local office. You can find that number at ssa.gov/locator. 

In 2018, a Social Security scam cost seniors millions of dollars. The scammers recognized a winning formula and have doubled down in 2019. I don’t want you or anyone you care about to get caught up in this. Keep reading; I am going to tell you how you can avoid being victimized by this scam!

You may be in the same situation I’m in where you’re pretty sure that you’d never fall for this type of scam. But you may know someone who could be more vulnerable to this. Please share this article with everyone who needs to be aware.  

It’s Good To Be Proactive

You’re making a smart move by learning all you can and reading sites like these. It’s your retirement! If you know more about Social Security, and what retirement will look like for you, you will be in a better position to make sound decisions when it’s time. This is why I talk about Social Security … so you know what’s going on in the world around you.

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.)

If you still have questions, you should join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too.

Also…if you haven’t already, you should join the 100,000+ subscribers on my YouTube channel!

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

Thanks for reading…have a great day.

Social Security Change of Address (3 different methods)

by

social security address change

If you’re receiving Social Security benefits or Medicare and have recently moved, your Social Security change of address needs to be high on your priority list.

The Social Security Administration makes it clear how important this is in their publication What You Need to Know When You Get Retirement or Survivors Benefits.

“Even if you receive your benefits by direct deposit, Social Security must have your correct address so we can send letters and other important information to you. We’ll stop your benefits if we can’t contact you.”

Ouch! You don’t want that to happen.

Thankfully, it’s pretty easy and painless to get your address changed. You just have to choose which of these three approaches will work best for you.

Read more

The Delay of Social Security Delayed Retirement Credits

by
Today we're taking about delayed retirement credits and how they get added to your benefit. If you plan to file after your full retirement age, you may be disappointed when you get your first check because those credits aren’t added right away. Let me explain what you should expect and when to apply for benefits to minimize this delay.

What do you know about Social Security delayed retirement credits — and how confident are you in that knowledge?

If you don’t fully understand how delayed retirement credits work and how they get added to your benefit amount, you might be disappointed when you receive your first Social Security check after you file.

You should know that when you delay filing for your Social Security benefits after your full retirement age, your delayed retirement credits aren’t added right away.

Here’s why, what else you need to understand, and when you should file instead to minimize the delay.

Why You May Be Missing Credits

Does the Social Security Administration have a little trick up their sleeves when it comes to delaying your benefits?

It can look that way! They do not add your credits immediately if you file after full retirement age.

To be honest with you, this is a little puzzling to me and I’m not sure why they do this. It’s not as if they don’t have the systems in place to do the calculations. After all, if you file early, the reductions are applied immediately!

So why don’t you get the same treatment when you delay filing?

I’m going to show you how this works — but let me give you a little context around this first.

Know How to Calculate Monthly Changes to Your Benefits

I often discuss the monthly reductions for filing early or increases for filing early, and understanding that is a fundamental part of today’s discussion. Let’s take a look at this chart to start:

Today we're taking about delayed retirement credits and how they get added to your benefit. If you plan to file after your full retirement age, you may be disappointed when you get your first check because those credits aren’t added right away. Let me explain what you should expect and when to apply for benefits to minimize this delay.

You can file for your retirement benefits between the ages of 62 and 70. The red line in the chart above represents your full retirement age.

Knowing this, you can calculate how much your Social Security income benefits should increase if you delay filing — as well as how much those benefits might decrease if you file before full retirement age.

If you file early, decreases are broken up into two separate bands. First, you have the 36 month period immediately prior to full retirement age where benefits are reduced by .555% per month, and then anything more than 36 months, benefits are reduced by .417%.

But if you file after your full retirement age, your benefit will be increased by .667% for every month. These increases are referred to as delayed retirement credits.

What Happens If I File After My Full Retirement Age?

It’s important to understand that there is a difference in how the increases and reductions are applied.

If you file at any time before your full retirement age, your benefit will be calculated by these reduction amounts and immediately reduced beginning with your first check.

That is not the case for the increases.

Today we're taking about delayed retirement credits and how they get added to your benefit. If you plan to file after your full retirement age, you may be disappointed when you get your first check because those credits aren’t added right away. Let me explain what you should expect and when to apply for benefits to minimize this delay.

In the Social Security Administration’s operations manual, you can see there are two times retirement benefits are increased for delayed retirement credits:

  1. The month you attain age 70
  2. In January of the year following the year you earned the delayed retirement credits.

Let’s look a specific example to better understand this.

Make Sure You Understand the Full Impact of When You Choose to File

Let’s assume your birthday is in February, and this is the year you hit your full retirement age.

Six months later, you decide to file for benefits and you receive your first check in September of that same year.

You’ve probably already calculated in your head that you should receive 6 months of delayed retirement credits; that works out to 4% increase to your full retirement age benefit.

When you get your first check deposited in September, therefore, you might be surprised to find that check is for the same amount as it would have been had you filed for Social Security benefits back in February.

The delayed retirement credits would be added — eventually. The fact that they don’t kick in immediately throws many people off!

You’d probably see the delayed retirement credits come through starting in January of the following year, which means you wouldn’t see it on your actual checks until that February.

And no, you don’t receive any sort of payment to make up for those months that you missed.

Can You Get Your Delayed Retirement Credits Faster?

One way to lessen the lag is to file later in the year.

If you want to avoid this lag altogether, you could wait until your 70th birthday. Then, no matter what month it falls on, the delayed retirement credits are added immediately.

Maybe in the future the Social Security Administration can figure out how to do this for any filing age after full retirement like they do before. It can’t be that hard, right?

One would think!

But for now, this is how the system is set up. It’s important to know this so you can get proactive and plan accordingly — and not get hit with a nasty surprise after you’ve already delayed filing so you can get a bigger benefit.

Take Control, Because It’s Your Retirement and Your Benefits

You’re making a smart move by learning all you can and reading sites like these, but don’t use this as specific advice for your own situation. I encourage you to do your research and talk to your own advisors. Most importantly, continue to educate yourself and stay curious!

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 400,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage.

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

Social Security Benefits: File Early And Invest It?

by
File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?
File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

We’re taking a look at the math behind a social security strategy that’s been around for a while. Here it is: File early, invest the monthly benefit, and you’ll be able to generate more income than someone who waited until later to file.

Effectively…you can do better on your own. But does it make sense to file early and invest the money?

A Decade of Positive Returns Creates Optimism in Investing

There’s nothing like a decade of positive returns in the market to create optimism for investing. We’re starting to see this optimism affect how individuals file for social security.

A few years ago, there weren’t many people saying they were big believers in the market. We were still recovering from the worst market since the Great Depression, and news was still (mostly) negative.

A few years later, individuals started seeing a few years of positive returns. Some of those have been double digit returns, and optimism began rising.

And so I’ve started to hear more people say things like “Devin, I think I could file early for Social Security, invest it, and create more income down the road than what I would’ve had with Social Security.”

So, You Think You Can Do Better?

Now, I’ve heard things like that for a while, but I’ve never gotten into the numbers to see what was really possible. So…I decided it was time for a closer look.

Let’s consider someone with a $2,000 benefit at their full retirement age. For this example, we’ll assume full retirement age is 67.

You can file as early as 62 and get $1,400 or as late as 70 and get $2,480.  

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

Let’s look at two scenarios: First one is where you need to start your income at 67; and the other is where you need to start your income at 70.

In both cases, I’ll assume that you file for benefits at 62. That benefit has a 2% cost of living adjustment (COLA) applied and that you invest the monthly benefits check.

Here’s how that investment would accumulate at various rates of return from the beginning if age 62 to the beginning at age 67:

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

First, let’s assume you didn’t make anything. That $1,400 would be worth $87,427. At 4, 6 and 8 percent it would gradually increase and the highest rate of return I assumed was 10 percent where your balance would be $116,985. These amounts would be the available balance to use in supplementing your income.

So now let’s look and see what the income gap would be after we adjust for the annual cost of living adjustments. Your benefit would start at $1,400, but by age 67, it would be approximately $1,546 if there was a 2% annual COLA.

The age 67 benefit was $2,000, but when you add the COLA to it, that amount would now be $2,208. So there would be an income gap of $662 that you would need to create from the invested Social Security benefits.

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

I’m assuming there are two ways to generate this income. First, is an immediate lifetime annuity. This is the closest thing to your Social Security benefit in that it offers a fixed payment that’s guaranteed for your lifetime. The way these work is that you give a lump sum of money to an insurance company and they send you the payments. The other option I assumed was leaving your money invested and taking a 5% annual withdrawal to supplement the income.

And The Results Are In

Here were the results: If you need to generate an income stream of $662 per month, it would require an annuity of $115,539 and an investment portfolio of nearly $160,000.

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

For the annuity, this would mean that you’d have to achieve an annual return of 10% and for the portfolio option you’d need to get a return of 21%.

Keep in mind…these are the returns needed to break even. You’d have to exceed that to do better that what you’d get with almost no risk from the Social Security administration. I’m not sure how you feel about your capabilities to get consistent investment returns like these, but if you can…maybe you should start a hedge fund. I can tell you that there’s no way I would take that chance with a client’s money. 

What If You Invest It For A Longer Period of Time… Does That Work Out?

But what if you have a longer time period?

Let’s say that you don’t need the income to start until you’re 70. In this scenario, you’d have from the beginning of age 62 to the beginning of age 70 to receive benefits and invest them. How would the time/value of money change the outcome?

By the time you take your age 70 benefit, it would have grown to $2,905 with an annual 2% cost of living adjustment. That’s an income gap of $1,265 you’d need to cover. Since you’d have a few additional years to invest, the balance of the investment portfolio would be higher than in the prior scenario ranging from 144,000 to 224,000 at 10% annual return.

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

Now we know you may have saved, but how much would it take to replace $1,265?

You need an annuity of $200,000, and an investment portfolio of around $300,000. This means that for the annuity to work you’d need to get about a 7% return and for the portfolio to work you’d need about a 17% return.

File early, invest the monthly benefit, and you'll be able to generate more income than someone who waited until later to file. Does it make sense to file early and invest the money?

Again…those numbers are just to give you the dollar amount of income that you’d get from Social Security without taking hardly any risk. And, the risk is not the only difference here.

For example, the annuity options do not have survivor benefits, the taxation of an annuity vs. investment portfolio vs. social security is all different so the net amount would not be the same. The annuity options were calculated with today’s interest rates and there’s just no way to know what the interest rates would be in the future and how these annuities would be affected. The investment returns I illustrate are compounded annually and would be slightly different if compounded on a monthly basis. The amount of your social security benefit would also affect the required rate of return on the other options.

This article is based on what we know today with a set benefit amount, but your mileage may vary with your own circumstances.

It’s Your Retirement!

Ultimately, remember…I’m not your financial, legal or tax advisor. This article is meant to help educate you, but not as specific advice for your specific situation. I’d highly recommend that you keep learning and stay curious!

Questions?

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. Also…if you haven’t already, you should join the 100,000+ subscribers on my YouTube channel!

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

Are President Trump’s Economic Policies Saving Social Security?

by
#socialsecurity #retirement #devincarroll
The other day, a piece of economic data came out that is good news for the longevity of the Social Security trust fund. It could mean that the fund DOES NOT RUN DRY in 2034 as was previously forecast. I’ll tell you what it is and why its so important to watch this moving forward.

The other day, a piece of economic data came out that is good news for the longevity of the Social Security trust fund. It could mean that the fund DOES NOT RUN DRY in 2034 as was previously forecast. I’ll tell you what it is and why its so important to watch this moving forward.  

Are The Headlines Right About Trump Fixing Social Security?

Not long ago I saw a headline that said something like “Trump Administration policies are fixing Social Security.” I couldn’t find the exact one I was looking for but it’s no secret that President Trump has long advocated that the fix is neither benefit cuts nor tax increases, and instead it’s a simple matter of growing the economy and everything will fall into place.  And there’s truth to that but we are getting so close to the point where even record setting economic numbers will be too little too late. But what we are seeing is promising!

The specific number I’m referencing is the unemployment rate. Economists believe this to be one of the most important economic indicators because of its far-reaching effect.

Unemployment Rate as a Factor

In the Social Security trustees’ report, they list the unemployment rate as one of the factors that will determine how long the funds last. In a very simplified explanation, this impacts the trust fund because with more people working, there are more taxes being paid into the social security trust fund. Thus, the retiree to worker ratio is improved.

Now, in this report they forecast an intermediate cost, high cost, and low cost scenario for all of the various factors.

The other day, a piece of economic data came out that is good news for the longevity of the Social Security trust fund. It could mean that the fund DOES NOT RUN DRY in 2034 as was previously forecast. I’ll tell you what it is and why its so important to watch this moving forward.

The intermediate cost is where they get the assumption that the SS trust fund will be dry by 2034. If the cost goes down, the trust fund will last longer. If the costs go up, it won’t last as long.

The intermediate cost assumption they are using for the unemployment rate is 5.5%. The lowest cost scenario they show is 4.5%. But, for the first time in a very long time, the unemployment rate has dipped below 4%.

As of the last report it was at 3.8%. If it stays down here for long, the Social Security trustees will have to revise their estimates.

What Does This Have To Do With President Trump?

So what does this have to do with President Trump?

Well, he’s the president while unemployment rates have been pretty impressive.

The other day, a piece of economic data came out that is good news for the longevity of the Social Security trust fund. It could mean that the fund DOES NOT RUN DRY in 2034 as was previously forecast. I’ll tell you what it is and why its so important to watch this moving forward.

Since 1969, unemployment rates for the year end have only gone under 4% twice. 2002 and 2018. The question is, is this a result of the policies of Donald Trump?

Yeah…I’m not about to answer that.

If you look at unemployment rates for the last decade, you can see that except for an increase at first, they’ve been coming down for the last nine years.

Is this because of the policies of President Obama? Could it be because of President Bush’s policies before President Obama was in office are finally being felt? We could take this back for decades.

The truth is, I think the President has less to do with the economy than we think. I mean, they don’t control monetary policy, so at best they have short term impacts on the stock market and an indirect effect on the economy.

The point is not to play politics or any of that nonsense. Its to remind you that these trustees’ reports are using assumptions THAT CAN and do CHANGE.  And as things change, you can count on me to let you know.

It’s Your Retirement!

Before we go, I want to thank you for taking the time to get informed. So many people rely on hope that 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! 

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

Thanks for reading…have a great day.

How To Calculate Your Social Security Benefits: A Step-By-Step Guide

by
Quantifying the Value of Social Security Income

It’s important for you to have a clear understanding of the process used to calculate your Social Security benefits. If you understand this calculation, you may be able to spot mistakes and fix them before it’s too late.

Like anything with Social Security, the rules can seem complex at first. But once you get under the surface, they are actually pretty easy to understand. To help you, I distilled the several pages of calculation rules down into four easy-to-understand steps.

Why Do I Need To Know How To Calculate My Social Security 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, your benefits estimate from the Social Security Administration is probably wrong. This is because their estimation methodology has two serious flaws:
1) They assume your future earnings won’t increase
2) They use today’s social security formula

This means that these estimates are less accurate for younger workers but more reliable for workers who are close to retirement.

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. 

To do this calculation, there are only four steps.

  1. Adjust all earnings for inflation
  2. Calculate your Average Indexed Monthly Earnings (AIME)
  3. Apply your AIME to the benefit formula to determine primary insurance amount (PIA)
  4. Adjust PIA for filing age

Social Security Calculation Step 1: Adjust all earnings for inflation

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

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.

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.

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 of that webpage it says, “Enter the year of eligibility for which you want indexing factors.” This should be the calendar year you turn 62. It’s really important to use this year to make sure you get the correct indexing factors.

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

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

Social Security Calculation Step 2: AIME Calculation

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

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.

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. 

NOTE: If you die before accumulating 35 years of earnings, there is an alternate calculation. See my article “If You Die Early: How To Calculate Social Security Survivor’s Benefits.”

Social Security Calculation Step 3: Primary Insurance Amount (PIA) Calculation

Now you’re ready to determine the heart of your benefit; your primary insurance amount (PIA). The PIA is simply the result of your benefit calculation and is generally your full retirement age benefit amount.

This is calculation is accomplished by using the “bend point” formula that’s in effect for the year you attain age 62. If you aren’t 62 yet, you’ll need to forecast what the bend point formula amounts will be in the year you turn 62. These change annually based on the change in annual wages and generally increase at 3-4%.

There are two numbers that make up this formula which are separated into three separate bands: The amount up to the first number, the amount between the first and second number, and the amount above the second number.

  1. For earnings that fall within the first band, you multiply by 90%. That is the first part of your benefit.
  2. For earnings that fall within the second band, you multiply by 32%. That is the second part of your benefit.
  3. For earnings that are greater than the maximum of the second band, you multiply by 15%. This is the third part of your benefit.

The sum of these three bands is your benefit amount at full retirement age: your PIA, or Full Retirement Age benefit amount.

In the example image below we illustrate an individual with an AIME of $6,000 being applied to the bend point formula.

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.

Social Security Calculation Step 4: Adjust for 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.

social security filing age

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! Once you’ve gotten through this step you’ve successfully calculated your Social Security benefit.

It’s your retirement!

Before you leave 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 (with more than 400,000 subscribers!) and then have a discussion in my Facebook group.

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.

2021: The Year Social Security Changes Forever

by
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.

Social Security benefits are changing forever at the end of 2020.

Here’s what’s going on.

Let’s Start with a Critical Factor: Your Full Retirement Age

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. 

They also considered using age 70, but ultimately decided that age 65 was more reasonable. Bottom line? Their choice was pretty subjective!

This full retirement age didn’t change from the beginnings of Social Security all the way until 1983.

This was the other time in history where, like today, the Social Security 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. 

How Changes to FRA Impact Your Ability to Get Full Social Security Benefits

One of the Greenspan Commission’s 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. 

Why You’ll Never Get As Much in Benefits After 2021

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.

Well, guess what? 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. (by the way…the full retirement ages, age-based reductions, and a lot more are all covered in my easy to understand Social Security Cheat Sheet. This is where I took the most important stuff from the 100,000 page website and condensed it down to just ONE PAGE! Get your FREE copy here)

How The 2021 Changes Will Affect Social Security Benefits

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.

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.

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%. 

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.

Don’t Just Hope Everything Will Still Work Out — Get Proactive and Plan Now!

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. You should start by getting your FREE copy of my Social Security Cheat Sheet. This is where I took the most important stuff from the 100,000 page website and condensed it down to just ONE PAGE! Get your FREE copy here.

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 274,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage.

One last thing: There is a tremendous amount of misinformation out there about the changes in 2021. Help me clear up the confusion by sharing this article on Facebook. Thanks!

Is Social Security a Good Investment?

by
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…

If you had to replace your Social Security benefits with another form of income, how much would you need to save up in order to live off of in the future?

It’s probably more than you think.

The fact is, the income you receive from Social Security may deserve more respect than it currently receives. It’s easy to dismiss your benefits as “too little” or “not enough.”

And it might sound crazy to call Social Security a good investment.

Can We Call Social Security a Good Investment?

But to be honest with you, in all the years that I’ve helped folks with retirement planning, Social Security income is the only income stream that I’ve seen with the following attributes:

  • It’s adjusted almost every year for inflation
  • It’s not 100% taxable
  • It’s backed by the US Government
  • It will pay you for as long as you live

That’s a long string of benefits for one income source. So how much would you need to replace your benefit? Another way of asking that question is, what kind of value you actually get from your Social Security taxes?

Or, even better: is Social Security a good investment?

If you could stop paying into the Social Security system and just invested that money on your own instead, could you create as much income for your future self?

We can do a side-by-side comparison of the Social Security benefits you can expect to receive and the result of investing the money you have to pay in on your own instead to determine if it’s true Social Security a good investment.

What’s Better: Investing the Tax You Have to Pay on Your Own, or Paying In and Receiving Social Security Benefits?

This isn’t just a random question to ask. I receive a lot of comments about opting out of Social Security, and investing the money you’d normally have to pay in to the system on your own 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…

To get the results I made a few assumptions.

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…

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 Social Security tax you currently pay and invested it.

Why? Because the total FICA tax is 15.3%. If you are an employee you only pay half 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 for the purposes of these calculations.

We could chase the rabbit trails of investing the full Social Security tax, but if opting out were allowed, I hardly think an employer could be compelled to give you the other 6.2% to invest on your own.

And ultimately, I wanted to look at “what if you could invest the dollars that you currently have to put into the system?”

Next, we assume a 7% return. Obviously you may do better (or worse) than this.

This in itself raises another assumption to consider: Would you continue to get a 7% return on your investment in retirement, or would you move your money to an investment that may have less market risk when you actually needed to rely on being able to withdraw from your nest egg for income?

If you did, you’d most likely get a lower return at some point in the future. So, in the calculation, I modeled out two rates of return after retirement: 7% and 3%.)

Then, at your full retirement age, the invested balance would be used to fund an income stream that would be equal to the amount of Social Security income 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 Social Security 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 cost of living adjustment provided by the Social Security Administration, and that’s the number that I illustrated withdrawing from the portfolio accumulated from the invested Social Security taxes.

Now that you know all of the parameters and assumptions, are you ready for the results?

Here they are…

Do the Numbers Say Social Security Is a Good Investment? The Results

For an individual at 50% of the average wage index, the portfolio value of the money invested would last beyond the expected 85 year life expectancy if invested at 7%.

But if that portfolio received a 3% return instead, this person would run out of money at age 80.

This is because a lower income individual would have a larger Social Security benefit relative to the amount of taxes they’ve paid in, and the withdrawal percentage would be higher for them.

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…

Next I looked at an individual at 100% of the national average wage index. At a 7% return, their invested money would last well beyond age 100.

But they too would run out of money if they only received a 3% return, although they’d at least get a few more years out of it. The money would run out 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.

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…

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. 

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…

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!

If You’re Wondering Is Social Security a Good Investment… It Depends on Your Income

Considering we don’t actually have the option to withdraw ourselves from the system regardless of what these results tell us, it’s fair to ask: what’s the point of all of this?

Hopefully you can see that, depending on your income level, Social Security provides a better chance of having income throughout your life than investing on your own and hoping for a big enough return.

If you’re a lower income earner, then investing on your own may leave you in a worse spot than paying into the Social Security system and receiving benefits. And if you earn more income? Then you have a better shot of your own investments providing more money — but again, that depends on your investment choices and your returns. It’s certainly not guaranteed the way a Social Security benefit can be.

Take Action!

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.

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group.

It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 100,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage.

One last thing that you don’t want to miss: Be sure to get your FREE copy of my Social Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.