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Retirement Solutions

Complete Guide To Maximizing Your Social Security Benefits

As the primary retirement program in the United States, Social Security currently benefits 66 million people, 51 million of them retirees and dependents. It also serves 8 million workers with disabilities and 5 million survivors of deceased workers.

The program began with the Social Security Act in 1935, part of President Franklin Roosevelt’s “New Deal” response to the Great Depression.

It is administered by the Social Security Administration (SSA), an independent federal agency that operates through 1,200 field offices nationwide, as well as its website and 37 Teleservice Centers.

How Social Security Benefits Work

Social Security is not a pension plan, but rather an insurance plan to supplement a retired worker’s pension and savings. In 2022, about 182 million workers contributed to the program through Social Security taxes.

Most of those taxes are paid through employers’ payroll withholding, while self-employed workers pay Social Security taxes when filing their federal income tax returns.

The amount retirees receive depends on their pre-retirement income and the age at which they choose to begin receiving benefits.

To be eligible for Social Security, workers must have earned 40 credits. One credit is earned for earnings of $1,640 in 2023, with a maximum of four credits for earnings of $6,560 available per year. Thus a person who earns four credits per year for 10 years is eligible for Social Security.

The amount of your Social Security benefit is based on your highest 35 years of earnings. Workers with fewer than 35 years of earnings will receive lower benefit amounts because years without work represent zeroes in benefit calculations.

How Social Security Benefits are Calculated

To compute your benefit, Social Security indexes your actual earnings using the national wage indexing series. The goal is to make future benefits reflect the changing standard of living during the person’s lifetime.

Social Security then takes your average indexed monthly earnings from your highest 35 years of work and applies a formula to determine the benefit you will receive at your full retirement age (FRA), currently between 66 and 67 depending on your year of birth.

Your actual benefit changes depending on when you begin to start them. Turning benefits on before your full retirement age will lower the benefit amount while turning them on after the full retirement age will raise them.

The Maximum Social Security Benefit

For people who begin taking Social Security retirement benefits at the full retirement age in 2023, the maximum benefit amount is $3,637 per month.

For those who start receiving Social Security this year at age 70, the maximum Social Security benefit is $4,555. Meanwhile, for 62-year-olds who begin benefits this year, the amount is $2,572.

Social Security Special Minimum Benefit

Stemming from legislation enacted in 1972, the Social Security special minimum benefit provides low-earning workers with a primary insurance amount (PIA).

For 2023, the lowest PIA available for at least 11 years of work is $49.40 per month. For workers retiring after 30 years of earnings, the PIA is $1,033.50 per month.

Unlike regular Social Security retirement benefits, special minimum benefits are calculated not on income but solely on the number of years worked.

People who turn on benefits early will receive a lower benefit. Those who retire late will not receive a higher benefit—unlike regular Social Security.

Full Retirement Age

For people born between 1943 and 1960, the full retirement age increases gradually up to age 67. People born in 1955 have already reached the full retirement age in 2023. Below is a chart showing the full retirement age for people born in this period.

Year of birth Full retirement age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

 

Cost-of-living Adjustments (COLA)

Social Security retirement benefits increase as the cost of living rises. The increase is based on the Department of Labor’s Consumer Price Index (CPI-W). The goal is to keep benefits in line with inflation, offsetting a higher cost of goods and services with higher benefits.

In 2023, retirees received a large increase in their Social Security benefits of 8.7 percent, an average of $140 per month.

Determining the Best Age to File for Social Security Benefits

As noted above, retiring early lowers the benefit amount, while deferring retirement past the full retirement age raises it. The earliest you can begin receiving benefits is age 62, but the benefit amount is reduced by about 7 percent per year for each year prior to the full retirement age.

The chart below lists the percentages, with the full retirement age of 66. At age 62, a person receives 75 percent of the full benefit.

62 75%
63 80%
64 86.7%
65 93.3%
66 100%
67 108%
68 116%
69 124%
70 132%

The question is, if you turn on benefits at the earliest age, 62, at what age will you break even, or begin wishing you hadn’t retired early? In general, that age is between ages 78 and 82.

So among the questions people should ask is, what is their likely longevity in terms of health and longevity in their family history? For people with less-than-perfect health and parents who died before age 85, turning on benefits early might make sense.

Equally important are what other retirement assets the person has accumulated and what the person’s retirement plans are.

Another question is whether or not you plan to continue working. If you turn on benefits early, you face an “earned income penalty” if you earn over a certain amount, set by the SSA.

In determining whether or not to defer benefits past the full retirement age, or to increase the benefit amount, similar questions should be asked.

How to File for Social Security

Follow these simple steps to apply for Social Security retirement benefits.

  1. Make sure you want to apply at your current age.
  2. Check to make sure you are eligible.
  3. Collect the required documents.
  4. Complete the application.
  5. Monitor your status.

You can get all this started by calling the Social Security Administration at 1-800-772-1213 or by filing online atwww.ssa.gov.

Social Security Planning

It is never too early to begin planning a Social Security strategy. In fact, delaying can be costly, a price that retirees will be stuck with for the rest of their lives. To navigate the complexities of retirement and Social Security, it’s best to consult an accounting professional.

Social Security FAQs

  1. What are Social Security credits and how are they calculated?

The Social Security Administration uses a credit system to determine eligibility for Social Security benefits. For 2023, a person gets one credit for each $1,640 in earnings, up to a maximum of four credits, or $6,560.

To become eligible a person must have earned 40 credits. Thus a person must work for at least ten years to become eligible for retirement benefits.

  1. Can I receive Social Security benefits while I’m still working?

Yes, you can receive Social Security retirement benefits and work at the same time. However, your benefit amount may be reduced if you earn above a limit set by the Social Security Administration.

  1. What is the payout percentage difference between filing at full retirement age and minimum filing age?

The minimum filing age is 62, but the benefit amount is reduced by about 7 percent per year for each year prior to the full retirement age. The chart below lists the percentages of full retirement benefits by age of retirement, with the full retirement age at 66.

62 75%
63 80%
64 86.7%
65 93.3%
66 100%
67 108%
68 116%
69 124%
70 132%

 

  1. Do I have to pay taxes on my social security benefit?

Possibly. You must pay taxes on up to 85 percent of your benefit if (a) you file your federal tax as an individual and your combined income is above $25,000, or (b) you file jointly with a spouse and your combined income exceeds $32,000.

Categories
Investment Decisions Retirement Solutions Tax Efficiency

401(k)s and Pension Plans: What’s the Difference?

By Jon Powell, CFP®

With many kinds of retirement plans out there, it can be hard to tell the differences among them at first glance. Two of the most popular types of retirement plans offered by employers are the 401(k) plan and the pension plan. An employer typically provides one or the other, but not both. While it’s unlikely that you’ll have a choice between the two, you’ll probably come across one of these plans throughout your working years, so it’s essential to understand how they work and what they mean for your retirement. 

What Is a 401(k)?

A 401(k), or defined-contribution plan, is a common retirement plan offered by employers. With a 401(k), you elect to contribute part of your salary into a retirement account. You can choose from a range of investments such as index funds, mutual funds, and target-date funds. You also have the ability to change your investments, however, they are limited to the investments your employer offers. You can contribute up to $20,500 (as of 2022) each year, and if you are 50 years of age or older, an additional $6,500 catch-up contribution. (1) Your employer may also choose to match your contributions up to a certain amount. The total limit for employee and employer contributions is $61,000.

There are two types of 401(k) plans: a traditional 401(k) and a Roth 401(k). In a traditional 401(k), your contribution is taken from your salary pre-tax. Your traditional 401(k) grows tax-deferred, and you only pay taxes when you withdraw from the account in retirement. Because these contributions are tax-deferred, contributing to a traditional 401(k) means you lower your taxable income at the time you contribute. 

A Roth 401(k) is funded with money after you’ve already paid taxes on it. The money in your Roth 401(k) grows tax-free in your account, and since you’ve already paid taxes on your contributions, when you withdraw funds, you withdraw them tax-free. Thus, the key difference between the two boils down to when you pay taxes. If your employer offers both, you need to decide whether it makes sense for you to pay taxes now or when you retire. 401(k) plans are also generally subject to required minimum distributions, meaning you will need to begin withdrawing from your plan when you reach age 72. (2)

What Is a Pension Plan?

A pension plan, or a defined-benefit plan, is an employer-sponsored plan that guarantees an amount of income in retirement. The amount you receive in retirement is determined by a few factors, such as your length of employment, your salary, your age at retirement, and any other specifications set by the employer. 

Your employer is responsible for contributing to the plan and all the investment risk is on them as well. However, you may need to work several years at the organization before you are eligible for a pension plan. Additionally, with a pension plan you have no control over how it’s invested. Depending on the plan, you may be allowed to contribute part of your salary as well. You are also guaranteed regular payments for the rest of your life, though the plan might offer you the choice of a lump-sum payment.

Which Plan Is Better: 401(k) or Pension Plan?

Both plans have their advantages and disadvantages. Pension plans have been around longer, however, 401(k) plans are much more common today. In fact, as of March 2021, 52% of employees had access to a defined-contribution plan such as a 401(k), while only 3% had access to only a pension plan (12% had access to both). (3) If you have a 401(k), it is up to you to save for your retirement. You have more control but more responsibility as well. With a pension plan, your employer is responsible for funding the plan. If you like knowing you will have a guaranteed income in retirement and prefer not having to contribute any of your own money, a pension plan will be more attractive to you. If you’d rather have more control over how much you put toward retirement, a 401(k) may be a better fit for you. 

Setting Yourself Up for Success

Planning for retirement can feel daunting—but you don’t have to figure it out all by yourself. Choosing the right partner as you plan for the future can help you set yourself up for success in retirement. And finding a financial advisor that understands your unique situation and goals doesn’t have to be difficult. At Ferguson Johnson Wealth Management, our mission is to simplify navigating the complexities of retirement, helping you plan wisely so you can live fully. We understand that retirement plans are not one size fits all. That’s why we work with you to develop a plan tailored to your needs. Reach out to us at 301-670-0994 or by email at djohnson@fjwealthmanagement.com to set up an appointment today.

About Jon

Jon Powell is a financial planner and portfolio manager at Ferguson Johnson Wealth Management, an independent, fee-only fiduciary firm that has been helping clients plan for and enjoy retirement for more than 40 years. With more than 10 years of experience, Jon is passionate about providing unbiased advice that puts his clients first. He considers it a privilege to carry some of the financial burden for his clients and educate them so they can make empowered decisions for their futures. Jon is also the primary author and curator of the Ferguson-Johnson Wealth Management blog. 

Jon graduated from Virginia Polytechnic Institute and State University with a bachelor’s degree in financial planning and holds the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not serving his clients, you can find Jon spending time with his wife, Erica, and their pets, a black lab named Nugget and an orange tabby cat named Kiwi. He loves to play tennis and golf and won’t turn down a good board game. Jon is a diehard fan of D.C.-area sports teams; you might see him at a Washington Nationals game. To learn more about Jon, connect with him on LinkedIn.

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(1) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

(2) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

(3) https://www.bls.gov/opub/ted/2021/67-percent-of-private-industry-workers-had-access-to-retirement-plans-in-2020.htm#:~:text=Bureau%20of%20Labor%20Statistics,-The%20Economics%20Daily&text=Sixty%2Dseven%20percent%20of%20private,to%20defined%20contribution%20retirement%20plans.

Categories
Investment Decisions Retirement Solutions Tax Efficiency

Annual Enrollment for Government Employees

By Jon Powell, CFP®

It’s that time of year again when you start getting notices about open season and all the changes coming to your employee benefits. Even though you’d probably rather turn a blind eye and keep going on with your life, too many people set their benefits and forget them and miss out on opportunities to update their coverage. 

The open enrollment period for your 2022 coverage is fast approaching, beginning on November 8th and going until December 13th. This is your chance to review your benefits, learn about any coverage or cost changes, and make some decisions. 

Here’s what you need to know about the 2021 annual enrollment period for government employees.

Does Open Season Apply to Me?

If you are enrolled in the Federal Employees Health Benefits (FEHB) program, the Federal Employees Dental and Vision Insurance Program (FEDVIP), or you take advantage of the Federal Flexible Spending Account Program (FSAFEDS), you should pay attention to this annual enrollment period. The life insurance and long-term care insurance programs are not included during this time. 

What Can I Do During Open Season?

For both the FEHB and FEDVIP programs, federal employees can enroll, change their plan, make adjustments to their plan options, update enrollment type if your family’s coverage needs have changed, or cancel your plan. If you choose to do nothing, your plans will automatically continue.

That is not the case with the various federal FSA programs. If you do not re-enroll during open season, your FSA will lapse. Even if you don’t want to contribute for 2022, keep in mind that any unused funds from 2021 will not carry over if you don’t re-enroll.

What’s Changing?

Every year there are typically some increases in premium costs and individual plans may change their option. The U.S. Office of Personnel Management (OPM) will announce specific details and the new 2022 premium rates on their website closer to the start of open season. You will also be able to compare plans and find information applicable to your job or status (active employee or retired).

Start preparing now by thinking about the health needs you experienced this year and whether or not your health insurance met those needs. Then think ahead to next year. Are there any life changes coming your way? Will you be getting married? Adding to your family? Do you take new medications now? If so, consider increasing your coverage or adding coverage for your spouse.

The Takeaway 

In the midst of what sometimes feels like a world gone mad, take some time to prioritize your employee benefits. The government provides these as a thank-you for your hard work, so make sure you maximize them and use your open enrollment period to make decisions that align with your life. 

And if you haven’t heard anything about open enrollment, reach out to the human resources department at your work to find out if there is a scheduled meeting or webinar to highlight this year’s benefits. Remember, your HR department is there to walk you through these decisions and answer any questions. 

At Ferguson Johnson Wealth Management, we specialize in helping government employees manage their finances and prepare for retirement. If you have questions about your government benefits or have yet to start planning for your future, we’d love to help. Please don’t hesitate to call our office at 301-670-0994 or email us at djohnson@fjwealthmanagement.com

About Jon

Jon Powell is a financial planner and portfolio manager at Ferguson Johnson Wealth Management, an independent, fee-only fiduciary firm that has been helping clients plan for and enjoy retirement for more than 40 years. With more than 10 years of experience, Jon is passionate about providing unbiased advice that puts his clients first. He considers it a privilege to carry some of the financial burden for his clients and educate them so they can make empowered decisions for their futures. Jon is also the primary author and curator of the Ferguson-Johnson Wealth Management blog. 

Jon graduated from Virginia Polytechnic Institute and State University with a bachelor’s degree in financial planning and holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation. When he’s not serving his clients, you can find Jon spending time with his wife, Erica, and their pets, a black lab named Nugget and an orange tabby cat named Kiwi. He loves to play tennis and golf and won’t turn down a good board game. Jon is a diehard fan of D.C.-area sports teams; you might see him at a Washington Nationals game. To learn more about Jon, connect with him on LinkedIn.