Navigating Social Security as part of a retirement strategy is complex. This is where advisors can deliver tremendous value to their clients, guiding them along the path of retirement planning. Here are five common misconceptions your clients might have related to Social Security and the insight needed to help close these knowledge gaps.
1. Big Changes in 2021
According to Jim Blankenship, a financial advisor and the author of A Social Security Owner’s Manual and Social Security for the Suddenly Single, “There is a misconception, brought about by some frothy advertisements, that there are big changes coming to Social Security in 2021.” In reality, the only change of any consequence for 2021 is slight (two months) in the age that people need to attain to reach their full retirement age (FRA) for benefits. This change has been in the rules for more than 40 years, the last time there was a major Social Security overhaul, says Blankenship.
2. Social Security Is an Entitlement
This is often heard in a political context. The reality is that Social Security benefits are based on work and earnings history. In order to qualify for benefits, your clients will generally need 40 quarters of work history. Benefits are based on indexed monthly earnings over the top 35 years of earnings history. All the while, clients will have paid into Social Security throughout their working career.
3. Working Longer Doesn’t Help
Clients who continue to earn money from employment or self-employment can increase the level of their benefits even if they’ve already accumulated a 35-year earnings history. Continuing to work a few more years can increase the amount of their benefit if these additional earnings will replace some of the lower-earning years that make up that 35-year history, perhaps some of the early years in their working careers.
4. Social Security Account
Blankenship cites the misconception that many have about having their own Social Security account. He says, “A big misconception about Social Security is that each individual has a specific “account” which holds all the money you’ve had withheld from your paycheck over the years. Nothing could be further from the truth… the Social Security system is a pay-as-you-go system (largely) where withholding today is used to pay benefits for current recipients.”
5. Benefits Are Tax-free
Many people think Social Security benefits cannot be taxed. But if your client’s income exceeds certain levels, their benefits will be taxed. For single individuals, if their income is above $25,000, a portion of their benefits will likely be subject to taxes. For married couples, the floor is $32,000 of combined income – an income formula that adds a portion of their benefits plus tax-exempt interest to other income. Taxes apply to all types of income that clients might have, not just earned income from employment or self-employment. And taxes will apply regardless of the client’s age. Beyond federal taxes, Social Security benefits are taxed all or in part by 13 states.