LOSING Social Security & 3 Ways to Avoid It

Every year people are losing social security benefits, a major source of retirement income in the United States. I want to share with you how much you can expect and 3 ways to avoid losing social security. I have over 30 years experience in the business as an expert in retirement and social security.

Complexity of Social Security

Social Security is such an important topic, yet few people understand the complexity of it. Not a lot of advisors understand the 567 different strategies which leaves many to rely on the Social Security Administration personnel for advice.  They are not allowed to give you advanced strategy suggestions by law. They can tell you what the numbers are today, but picking and choosing strategies is not their job. United Income did a study that showed Americans were leaving trillions on the table by making the wrong decision. Their conclusion was that 96% of people were choosing Social Security at the wrong age. The last thing you want is a surprise income reduction.  

Why are people losing Social Security?

About one half of all social security recipients are paying some portion of their benefits back to Social Security. The number of people are expected to get higher, along with the proportion of benefits they are expected to receive. This is a 40 year old law and basically a means test. In 1983, under the Reagan administration, the first implementation was to have upwards of 50% of Social Security benefits be taxed. 10 years later, another layer was added, where upwards of 85% of your Social Security benefits could be taxed. For many, this is a surprise because this was constructed to include an inflation adjustment. Going back to 1983, there is a concept called provisional income. Your adjusted gross income, plus one half of your Social Security benefit, plus any tax exempt interest. Typically, municipal bond income is your provisional income. If you are filing jointly and married, under $32,000, this notes Social Security benefits subject to tax. If it’s over $44,000, which it is for the majority of folks, up to 85% of your Social Security benefit could be taxed. And if you’re single, that number was in 1983, $34,000. Now the interesting part about this is, these numbers are still the numbers today, 40 years later. So what this means is a small percentage of people who were going to receive tax back in 1983 is now a lot larger. The expectation is upwards of 11% of your benefits will be given back as a result.

Social Security and 3 things to Consider

Before I get there, I want to give you a free chapter of my book, Don’t Outlive Your Money in Retirement. It’s devoted exclusively to Social Security, click here to get the free chapter. It’ll provide clarity with regards to what you should and should not be doing and when you should collect your Social Security.  

#1: Roth IRA

The first thing you might consider is contributing to or converting to a Roth IRA. I’ve talked about Roth IRAs in other videos, take a look here. There’s two important components here. First and foremost, any of the income coming out of the Roth account is tax free. It doesn’t come into play with regards to the provisional income. Assuming you’re on Medicare you’ve also got the IRMAA to consider. IRMAA covers how much income you are declaring therefore, how much premium you will have to pay on a year over year basis for your Medicare. If you’re taking money out of your Roth account, it doesn’t impact the premiums, because no income is shown in regards to IRMAA.  

#2: Charitable Distribution

The second option is to consider a qualified charitable distribution. Assuming you have a charitable intent, you could take money out of your IRA. You could send it directly to the qualified charitable organization. In so doing, you’re taking money out of your IRA as a required minimum distribution and you have to show it as income. Therefore, there’s an impact on your social security and potential taxes. If you take out $100,000 per person, it goes directly to the qualified charitable organization and won’t show up as income.  

 #3: Earnings Limit

The third option for you, and it’s really just being aware of what we call, the earnings limit. The annual earnings test says for every $2 you earn over $19,560 in 2022, $1 in benefits will be withheld. This is assuming you are taking your Social Security before your full retirement age, and you work. A story I have told is about a client of mine who wanted to take her grandkids to Disney. She wanted to earn an extra $1,000, but as it turns out, she had the perfect storm. She had all the thresholds and was actually going to have to pay 78% back to the government. Our recommendation to her was to find another way to fund this wonderful trip. If you take Social Security while working and before full retirement age, be aware of what the earnings limits are.