3 days ago
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By Dr. Jim Dahle, WCI Founder
I received a question via email recently which made me realize that despite writing about Social Security multiple times in the past, there is still a lot of misunderstanding about how it works. I thought it would be useful to write a post about the basics of this important retirement income stream. Other posts about Social Security can be found at these links:
Here are the main parts of the email I received:
“My physician husband and I are 61, married 39 years. I have been a stay-at-home mom and thus have only 34 work credits. My husband intends to keep working until at least 67 if health holds. We may wait until 70 to kick in his Social Security benefits.
Is there any reason that I should try to work to pick up the missing six credits to be eligible for myself? I’m not entirely certain what my status is should something happen prior to his receiving any benefits. I understand there are reduced benefits at 62. He has his own disability insurance through his current employer, so I think we are more than covered there. He also has two term life policies totaling $3.5 million, so I could maybe live on that before tapping into Social Security.
He does have a MySocialSecurity account so I know the estimate per month for him each year as it is recalculated, but I don’t quite understand what I am eligible for. Would I be eligible for his entire Social Security benefit if he passed or a percentage? I am assuming even if not, it would still be more than what my own would be with just 40 credits? I currently have none. I have not been employed since 1988.
Am I fully eligible for Medicare at 65 if he should become disabled or pass before 65? If we are both living at 67 and start Social Security then, is there a monthly spousal benefit added in addition to his?”
8 Key Facts About Social Security
There are (at least) eight things that everyone should know about the Social Security program.
#1 Social Security Is Going to Be There
The first thing to realize is that despite the fear-mongering you hear from time to time, Social Security isn't going anywhere. Yes, the pot of government IOUs that make up the Social Security Trust Fund will eventually disappear IF there are no changes to how Social Security is taxed and distributed. What does that mean? That means that the program can only pay 77% of promised benefits using current revenues. What is the likelihood of that happening? Well, it's not zero, but it certainly rounds there. Go ahead. Show me 60 senators who are going to vote for a massive cut in Social Security (much less abolishing the program completely). I'll wait. Oh? You could only come up with four or five? Me too.
So, how will Social Security be fixed? It's actually not very complicated. It's just math. It will be a combination of some or all of the following:
Higher Social Security tax rate Higher wage limit (i.e. the amount of income high earners pay Social Security tax on) Higher full retirement age Lower inflation adjustment More means testing on Social Security benefits Lower benefitsNot complicated, but there is a political fight there. The conservatives will argue for lower benefits while the progressives will argue for higher taxes. They'll wait until the last possible minute and then make some sort of compromise so it works out. I wouldn't spend any time worrying about it. If you want to worry about a government program for the elderly that could implode, worry about Medicare.
#2 You Get Either Your Benefit or 50%-100% of Your Spouse's Benefit
As the email above demonstrates, lots of people don't understand exactly how this complicated program works. Admittedly, there is plenty of complexity. But the basics aren't hard to understand. While you both live, you get either your earned benefit OR 50% of your spouse's earned benefit, whichever is higher. When one of you dies, the other is left with 100% of the higher of the two benefits.
#3 Most People Will Get Less Than They Think
The annual statement you get in the mail or by downloading from MySocialSecurity projects out what your benefit will be. This is what my most recent statement (and my wife's) showed:
As you can see, the projection now thinks my wife will be better off with her own benefit than half of mine. That wasn't the case just a few years ago. But that's not my point. My point is that most people misunderstand this chart. Most people think that this is the benefit they have now earned. That's not the case. If I quit working today, I would NOT get a benefit of $4,521 per month when I turn 70. That projection assumes that I will continue to work until age 70, earning at least as much in Social Security taxable income each year as I did last year (above the 2024 Social Security wage limit of $168,600). In reality, if I retired today, my benefit would be significantly less.
If you really want to get into the nitty-gritty, you can download your complete Social Security earnings record from the MySocialSecurity website and then plug it into a great calculator like Mike Piper's OpenSocialSecurity or the SSAtools calculator and find out what your benefit would be if you quit working this year. I'm not sure why the Social Security statements don't just do this for you. Maybe the government doesn't want to encourage people to retire early. Or maybe it doesn't want people to know that their benefit really won't be going up all that much compared to how much they will pay in future Social Security taxes. I don't know, but what you need to know is that this is how the process works.
The longer the period of time between when you stop working and when you start taking your Social Security benefit, the less accurate this projection is. Also, the shorter the period of time you have worked, the less accurate this projection is—especially if you are now paying maximum Social Security taxes but have not been doing so for very many years (like an early-career doctor).
When I use the tools at SSAtools, I discover that if I quit working today, my primary insurance amount (what I would get at age 67) is not $3,611 but only $2,637. Big difference. That's 27% less. For Katie, it's not $2,943 but $1,464, 50% less.
#4 Social Security Is the Best Annuity Deal Out There
Delaying Social Security to age 70 is the right financial move for the vast majority of people who can afford to do so by living off of other assets until age 70 or by working until age 70. Obviously, there are exceptions—like if you're diagnosed with terminal cancer at age 62. The reason delaying is such a good idea is that your benefit payment will be higher. That makes sense. It should be higher since it won't have to be made for as many years since you're now older and will thus collect benefits for fewer years.
However, this ignores the insurance aspect of Social Security. Not only will it pay out every month until you die, but it is indexed to inflation. Since it includes everybody—not just the healthy people who buy annuities—it is also priced better than the annuities that you can buy from an insurance company (which won't sell you an inflation-indexed annuity these days anyway). Delaying Social Security is the best deal in annuities on the market. It's idiotic to take Social Security at 62 and then buy an annuity. You'd be better off living off the assets you're using to buy the annuity and delaying Social Security.
#5 Social Security Is More Than an Old-Age Pension
Social Security is more than just a retirement benefit. It also includes a disability benefit, although this is generally much lower (mine is $3,319 a month) than what most docs get from an individually purchased disability insurance policy. Social Security disability is also dramatically harder to qualify for than a good true own occupation disability policy since it requires the disabled person to not be able to do any work at all.
Social Security also includes a survivorship benefit. If you die, your heirs get a one-time $255 benefit plus a monthly benefit for any kids under 16 and your spouse caring for any kids under 16. In addition, your spouse is covered for a retirement benefit even if they never work a day in their life and even if the two of you divorce. Despite the fact that your Social Security statement talks about Medicare, the two programs are separate and paid for with different taxes.
#6 You Don't Always Need 40 Quarters
The emailer talks about getting six more quarters of work to qualify for her own benefit. As mentioned above, she doesn't have to do that to get a benefit. She qualifies based on her spouse's work for 50% of his benefit while he's alive and 100% of his benefit when he dies. You also don't need 40 quarters to get a survivor's benefit if your spouse qualifies. The younger the worker, the fewer credits that are needed to get a survivor's benefit. In fact, they can be had for as few as six credits in the previous three years. The disability benefit doesn't require 40 quarters either. The younger you are, the less credits that are required. If you're under 24, you only need six credits in the prior three years. Even a 41-year-old only needs 20 credits in the prior 10 years.
#7 Social Security Has Bend Points
Social Security is a really good “investment” in the beginning. You get a lot of bang for your buck for your Social Security tax dollars when you don't earn much and haven't been earning it for very long. That's why it is kind of a tragedy to see low earners working “under the table.” They wouldn't be paying much if anything in income tax, and their Social Security taxes would be a great use for their money.
Social Security subsequently transitions twice (technically three times) into a less and less attractive “investment.” These transitions are known as “bend points.” The SSAtools site provides a great demonstration of the bend points. Here are the charts it provides for me and for Katie based on our earnings records.
As you can see, I am just about at the second bend point. Katie is not, as you can see below:
Before the first bend point, every dollar of SS taxed earnings increases your Social Security benefit by 90 cents. Between the first and second points, additional earnings increase the benefit by 32 cents per dollar. Between the second and third points, additional earnings increase the benefit by only 15 cents per dollar. At a certain point, additional earnings don't increase your benefit at all as seen in this generic (although slightly dated) chart.
Lots of people who are interested in FIRE figure there is little point for them to work beyond the second bend point. By the time you get there, you've certainly earned enough money to have saved up enough to live on for the rest of your life, and the Social Security Administration isn't going to reward you much for additional work. You can use this data in other ways, too. For example, once I hit the second bend point, all else being equal, it makes more financial sense (at least when applied to our personal lives) for WCI to pay Katie more and me less.
#8 You Can Get Medicare Based on Your Spouse's Work
Medicare and Social Security are separate programs with their own associated tax, but I thought this one was worth throwing in as a bonus (and in response to the emailer). Just like you can qualify for a Social Security pension based on your spouse's work, you can also qualify for Medicare based entirely on your spouse's work. If your spouse qualifies, there's a good chance you do too, even if your spouse has died. Here are the rules:
You must be 65 AND one of the following:
You are currently married and your spouse is eligible for either Social Security retirement or disability benefits You are divorced and your former spouse is eligible for either Social Security retirement or disability benefits AND you were married for at least 10 years AND you are now single You are widowed, currently single, and were married for at least nine months
Social Security makes up a large part of the retirement income for most retirees (for 40%, it's the only source of income) and a substantial part even for high earners, like most WCIers. (Even if we quit working today, Katie and I would get $60,000+ a year from Social Security starting at age 70.) Make sure you understand how it works.
What do you think? Was any of this information new to you? What have you learned about Social Security that surprised you? Comment below!
The post 8 Things You Must Know About Social Security appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.
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