Retire | robergtaxsolutions.com

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I hear this question all the time. We all put our own money into Social Security so how can it run out of money?

First, let me point out that Social Security is not out of money. It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet. But, how could it run out of money if it only pays out what we pay in? The problem is–and I hate to call this a problem, but we’re living too long. (Like I said, hate to call that a problem.)

Let me use a real example of a real person. I’ll call him Sam. Over the years, Sam has paid $120,698 into Social Security. His employers have paid $131,693. So all together, $252,391 has been paid in.

According to Social Security, Sam will receive $2,611 a month in benefits. At that rate, Sam basically uses up all his money in just over 8 years. ($252,391 divided by $2,611 = 96.66 months. 96 months divided by 12 months = 8 years) So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.

But you don’t quit getting social security when it runs out. Social security payments go on until you die.

But what about interest? Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things. The Social Security trust funds are invested in “special issue” securities of the US Treasury. For 2012, the annual effective interest rate of return was 4.091%. (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)

There is no social security withholding on wages over $113,700. Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too. Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits? That would actually make the situation worse than it already is.

Let’s go back to Sam for our example. If Sam lives to age 80, that’s 4 extra years of social security. At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in. In reality, Sam earns well above the social security base wage. Let’s say his contributions to social security are unlimited. Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.) Now if Sam lives an extra 4 years, that’s $360,000 more than what he paid in. So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.

So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

If you are going to life past that age of 83, then Social Security comes out ahead if you take your retirement benefits early.

Social Security would rather have you retire at age 62 than at your full retirement age. That sounds a little backwards, but it’s all about money. (Of course!)

When Social Security started back in 1935, the average person died before ever claiming any benefits. Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.

So, if the Social Security Administration is paying out so much money, why would they want you to retire early? Let’s do the math. (Don’t worry, I’ll keep it simple.)

Frank has worked all his life and he’s tired. He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores. If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month. If he retires at age 62, he’ll get $1,500 a month.

So the first round of math is going to be–how much does Frank get before he ever turns 66? He’s got 4 years of benefits, 12 months in a year, at $1500. So he gets $72,000.

$1500 per month x 12 months = $18,000 per year

$18,000 per year times 4 years = $72,000 per four years

So at first blush, it makes a whole lot of sense for Frank to take the money and run.

If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting? He’d catch up at age 77. So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire. You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.

But what if Frank comes from a family with an average life expectancy of 90 years? What then?

Remember, by retiring early, Frank loses 25% of his payment every month. In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.

According to Social Security Statistics, the average person today lives to be 83 years old. Going by the numbers, Social Security saves money on people claiming their benefits at age 62.

This is a very simplified example. Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live? What other benefits might he be entitled to? Social Security won’t tell you all of your options. If you call them to file for benefits, they take your application and you’re done.

At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options. At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.