If you find yourself reading the business section of the Advocate every Sunday, specifically every other Sunday when our firm’s articles are published, you may have noticed a trend in our firm’s recent articles. We have been covering Social Security as a way to add insight from different perspectives within our firm. Our staff is made up of diverse backgrounds with different personal and professional experiences, but how many different ways can you really talk about Social Security? How much advance planning should you really do for a filing decision that doesn’t have to be made until your mid-60s?
Would you be shocked if I told you that I believe the answer could be somewhere around 40 years in advance? Like so many other things in life, the decisions that you make throughout your career, or maybe lack thereof, cause a ripple effect when it comes to your financial well-being, specifically your Social Security benefits, in retirement. I’ll walk you through a few examples and how to plan for them:
Breaks from the workplace: When analyzing clients’ Social Security statements, it is not uncommon to see that one spouse had left the workplace altogether or took a cut in income to accommodate for parenthood and the admirable job of raising children. Since Social Security looks at your earnings history for 35 years, any year that there is not income will draw down your potential benefit amount in retirement. This was part of the reasoning behind the creation of spousal benefits in 1939; to allow non-working spouses to receive 50% of the working spouses benefit amount. When planning for retirement and a lower Social Security benefit, it could be advantageous for individuals taking a break from the workplace to maximize a retirement account like a spousal IRA.
Self-employment: When owning your own business, it’s logical to think about and plan for ways to maximize your tax deductions. While as a self-employed individual you’ll be paying more out of your own pocket in Social Security taxes (15.3% when you combine the employee and employer tax), you’ll most likely see a smaller Social Security benefit. In order to offset a potentially lower Social Security benefit in retirement, self-employed individuals should plan to take advantage of retirement vehicles at their disposal, like a SEP IRA, solo 401(k), or even an HSA if you or your spouse have a high deductible health insurance policy.
Work in the public sector: If you or a family member have ever worked in the public sector in any form, you are probably familiar with the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These two provisions can affect how much, if any, benefits you may receive from Social Security. While some employers or professions in this sector may allow you to decide if you will have money withheld, others may not. If you fall into this group, it is crucial that you working with a professional to guide you down the right path. In two separate cases, I have worked with a pastor and a school administrator to decide what the correct answer was for their financial plan. Both had different outcomes, but both moved forward with confidence knowing that they had made the right decisions based on their personal financial situations.
When it comes time to draw your Social Security benefits, don’t look back wishing you had known how your choices over the last forty years would affect your retirement. This income source that you can’t outlive is too important to wait until age 62 to know the answer. Work with a CERTIFIED FINANCIAL PLANNER™ professional, to ensure that you’re making the right decisions for YOU and your financial future.
Published in the Victoria Advocate
Sara Potts is a CFP® Professional and Operations Manager with KMH Wealth Management, LLC