Why Social Security Should Be Included in Your Retirement Portfolio

                                         

Last week was Social Security Week. One of the biggest questions of those near retirement or in retirement ask is, “Will I have enough income during retirement to cover my living expenses?" The second biggest question asked is “Should I factor in Social Security (SS)”? Retirees should always include Social Security when creating their retirement portfolio.

The first thing you need to find out is if you are eligible for SS benefits. The time to find this out is at each job you work or by calling the Social Security Administration.

A common misconception by most people is that if SS taxes are taken out of your paycheck then you must be eligible for SS benefits. This is not true. As of 2015, anyone who earns up to $118,000 pays SS taxes. Some employers do not pay into SS but are required to participate in a retirement plan. Find out whether your employer participates in SS and whether your position is be covered by SS. If jobs you work are not eligible for SS benefits and do not offer a retirement plan, you will need to create an alternative to make up for the missing income. Many federal government employees, certain railroad workers, and employees of some state and local governments are not covered by SS.

You will need at least 40 credits to be eligible to collect SS benefits provided you meet all the other requirements. If you are eligible for SS benefits the amount shown on your yearly statement, is an estimate and is not the amount you will receive when you begin collecting SS benefits. This is due to the windfall elimination provision reduction formula the Social Security Administration applies to determine your monthly SS benefit.

However, there are limits on how much you can earn while collecting SS benefits, and if you exceed those limits, your SS benefits will be considerably reduced. If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. At full retirement age, no income restrictions apply and there is no penalty for additional income earned.

According to research by Prudential, SS benefits for those aged 65-74, accounts for 54 percent of total retirement income, for those aged 75-84, 61 percent and those 85 and older 66 percent.

One advantage of collecting SS benefits - it is guaranteed income for life that increases over time due to a mandatory Cost of Living Adjustment (COLA). COLA increases SS recipients’ benefits by a specific percentage because of yearly inflation. SS benefits also include spousal coverage. Benefits of a deceased recipient can be passed to a current spouse or child under age 18.

You must contact a Certified Financial Accountant (CPA) to determine the portion of your SS benefits that will be subject to taxes. You will also need to consultant a financial advisor to find out the best strategy to maximize your SS benefits. The best approach is to setup a meeting with your CPA and Financial Advisor and ask them to develop a strategy for you.

Most financial advisors do not calculate replacement rates the same way the Social Security Administration does which substantially changes the retirement income calculation. Ensure your financial advisor uses the Social Security Administration’s replacement rate to determine the most accurate retirement income calculation.

Unfortunately, most employees do not have a pension plan or retirement plan so their only income during retirement is Social Security. Pension plans are nearly extinct and employees now have to rely on employer provided retirement plans or their own personal savings in addition to SS benefits. In many instances, a combination of these is required to meet basic financial needs during retirement; some retirees may need all three sources. One factor to consider is living cost increases and many retirees are living longer. Other factors to consider: where you live, your needs, your health status, and your other financial obligations that can quickly erode your fixed monthly income. There are three options that you can take when collecting SS benefits:

·        Early retirement. If you take your SS benefits at 62, your monthly payments will be permanently reduced between 20% and 30%, depending on your date of birth.

·        Normal retirement. The "normal" or "full retirement age" that ranges from 65 to 67 depending on your date of birth.

·        Late retirement. You can wait until 70 to take your SS benefits.

According to a recent Bankrate.com survey, the average Social Security payout is approximately $15,000 per year, which stresses the need to have additional sources of income during retirement. State without pension plan and social security taxes are: Alabama, Alaska, Florida, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wyoming. The cost of living varies state by state and city by city. New York City has the highest cost of living in 2015 followed by Washington DC, San Francisco, California, Chicago Illinois and Boston Massachusetts and Cocoa Beach Florida has the lowest.

Retirement must be carefully planned and must include the expertise of professionals such as a Certified Financial Accountant and Financial Advisor to ensure that you maximize your SS benefits and minimize your tax liabilities.

Can Social Security Benefits Be Taxed

Many people may not realize that the Social Security benefits they receive may be taxable. All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits. Taxing of your social security benefits depends on your income. If your only income is from social security benefits you will not be taxed.

However, if you have supplementary income sources your social security benefits may be taxed. If your social security benefits are taxed the taxable portion cannot exceed 85% of your total benefits. As your income rises and passes certain thresholds, the proportion of social security benefits that becomes taxable also increases.

The good news is that only 34% of recipients pay taxes on their social security benefits. Unfortunately, some states tax social security benefits. Verify the laws in your state to see if you are required to pay taxes on your benefits. The IRS provides 7 tips to help you determine if your social security benefits are taxable.

1. How much. To determine if any of your social security benefits are taxable depends on your total income and your marital status. Use the worksheet in the Form 1040A or Form 1040 Instruction booklet to determine if you will be taxed.

2. Taxable. If Social Security benefits were your only income for 2011 your benefits are not taxable.

3. Additional Income. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

4. AGI. Your taxable benefits and modified adjusted gross income (AGI) are figured on the worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software can also compute it for you.

5. Calculate. You can do the following quick computation to determine whether some of your benefits may be taxable:
• Add one-half of the total social security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income.
• Compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2011 base amounts for benefits are:
• $32,000 for married couples filing jointly.
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
• $0 for married persons filing separately who lived together during the year.

7. For additional information on taxing of social security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits on the IRS website or by calling 800-829-3676.