Myths, realities, and how to better prepare

Long gone are the days when most people could count on the income received from a company pension plan combined with their Social Security benefits to provide for a comfortable retirement. A generation ago, the vast majority of American retirees (84%) were covered by some sort of pension plan. By 2017, that number had dropped to just 24%.¹

Not only has the responsibility for providing income in retirement been steadily shifting away from em­ployers and onto the shoulders of individuals, as a nation we are living markedly longer lives than ever before. When the Social Security Act was passed as part of the New Deal in 1935, the average retirement only lasted about 10 years. Today, however, there’s a 50% likelihood that one member of a married couple will live to age 92 or older. A healthy individ­ual with a family history of longevity therefore needs to plan on funding a retirement that may potentially last 30 years or longer.

The confluence of these two factors serves to highlight the pivotal importance of working with your BLBB advisor to create a thoughtful and comprehen­sive income plan. While it’s not at all uncommon to hear financial pundits downplaying the importance of Social Security, these benefits still play a major role in your income plan. A maximum monthly ben­efit at full retirement age (FRA) is currently $2,861 adjusted for inflation. Over a 25-year retirement, that would add up to an impressive $858,300 asset! Yet far too many investors still have a great deal of confusion regarding this critical income source. The following are four of the most common miscon­ceptions:

“I can’t impact how much I get from Social Security”

While your Social Security benefits are calculated based on a formula that factors in your income from your 35 highest earning working years, there are nevertheless ways in which you can exert control over your monthly benefit amount. That’s because the age at which you choose to retire and begin benefits – whether early, at FRA, or delayed – has a significant impact on the amount of your benefit.

If you were born in 1959 or earlier, the Social Secu­rity Administration has set your FRA at age 66. For those born after 1959, FRA is age 67. As shown in the graphic below, your benefit is reduced by 6.7% for each year before FRA (beginning at age 62) and increased by 8% for each year after FRA (up to age 70).


Essentially, it’s a trade-off of between short-term cash flow and potentially higher lifetime benefits that requires a careful assessment of your current health and family history of longevity; whether you plan to work during your retirement (since earned income can reduce your benefits); your current tax situation; and whether there’s any meaningful age disparity between you and your spouse.

Timing decisions don’t just impact the amount of your benefit. They also affect how much your spouse would receive in the form of survivor bene­fits if you die. While he or she will only be eligible to receive 82.5% of your benefit if you started col­lecting at age 62, that amount gradually increases up to a maximum of 132% of your benefit if you waited until age 70.

“Once I start collecting, I’ll lose all my benefits if I go back to work”

It’s true that working while receiving Social Security benefits may subject you to withholding of benefits up until the month you reach full retire­ment age. For the years prior to FRA, if you earn more than the allowable amount ($17,640) $1 of your benefits will be withheld for every $2 earned above that amount. During the year in which you reach FRA, the earned income threshold rises (to $46,920) and the benefit reduction formula also changes. $1 in benefits will be withheld for every $3 in earnings that exceed the allowable amount.

What’s important to note, however, is that these benefits are withheld not forfeited! Not only are all withheld benefits credited back to you after you reach FRA, but those extra working years could poten­tially help enhance your overall benefit calculation if they serve to replace years where you may have had little or no income. And once you reach FRA, if you choose to continue working, no benefits will be withheld regardless of how much income you earn.

Perhaps you decide to take an early retirement and then subsequently (whether for financial, social, or intel­lectual reasons) choose to go back to work. How will that impact your Social Security benefits? If you make the decision within a year of when you first begin receiving benefits, there’s a simple solution – you can opt for a “do-over.” All that’s required to withdraw your benefit claim is to complete Social Security Form SSA-521 and pay back any benefits that you and your family received since making your initial claim. Alternatively, you could also choose to suspend your benefits while you return to work (enabling you to perhaps increase your monthly benefit amount when you reinstate it).

“Why work in retirement when any income I earn will get taxed so heavily”

Given the revised tax brackets implemented as part of the 2017 Tax Cuts and Jobs Act, someone who’s married and filing jointly can earn up to $77,400 annually in retirement and still remain in just a 12% federal tax bracket. Even with the addition of a 3.07% PA state tax and a 6.2% social security tax, a working retiree is still able to retain about 80% of their earned income.

On the tax front, though, there is one concern that high income earners in retirement need to plan for. Medicare recipients who earn in excess of $85,000 annually ($170,000 for married couples filing jointly) are required to pay an additional surcharge for their Medicare Parts B and D premiums. Depending on your income level (and Part D plan) this could mean an extra $60 – $380/month added to your monthly premiums.

“I’m eligible for my own benefit, so I can’t collect spousal benefits”

Anyone who’s at least age 62 and married to an individual who has filed for Social Security benefits may be entitled to spousal benefits. Even if you are divorced and your ex has filed, you may be entitled to collect spousal benefits if you were married for at least 10 years. If you wait until your FRA, you’ll be entitled to 50% of your spouse’s benefit (that percentage is reduced if you choose to retire early).

For couples where there’s been a considerable income disparity or a spouse was out of the work force for a considerable number of years, claiming a spousal benefit for the lower earning spouse may be more advantageous than each individual claiming their own benefit.

Plan early – plan smart

Retirement income planning isn’t solely about effectively managing your taxable and tax-advantaged investment portfolios. There are a host of ancillary decisions – from Medicare choices and long-term care options to Social Security benefit planning – that need to be carefully considered. Like any planning, the sooner you begin, the more options you’ll have to choose from.

Working in retirement can be a tremendous way not only to supplement income to fund the lifestyle you desire, but also to stay active and remain intellectually and socially engaged. Your BLBB advisor can help you plan accordingly, to model “what if” scenarios, and identify the choices and decisions that will help to maximize your income in retirement.

¹ U.S. Department of Labor, December 2018


BLBB does not provide guidance with respect to taxes and clients should consult their tax advisor to review personal tax situations.