Social Security guidelines for retirement benefits were established all the way back in the 1930’s and were founded on a traditional family situation1. With marriage patterns and caregiving needs constantly evolving, the modern woman could be at a disadvantage if strategic retirement planning is not properly implemented. While Social Security is gender-neutral and individuals with identical earnings histories are treated equally in terms of benefits, the reality of the matter is that women face greater economic challenges than men do when it comes to retirement for a number of reasons2.
For example, women tend to live longer than men, but have lower lifetime earnings. Because of this, women have a strong likelihood of reaching retirement with significantly smaller pensions and/or assets than their male counterparts3. Because nearly 55 percent of Social Security beneficiaries today are women, it is important to know the details of your benefits that you may not be aware of.
Caregiving and Strategizing
Losing one paycheck is a concern due to women outliving men. Women also have a higher probability of being single and dependent on only one income. Furthermore, women have a tendency to care for multiple people at a time: parents, spouses, and children, etc., and leave the workforce to care for these loved ones. Taking a break from the workforce to care for loved ones may result in less wealth accumulation and a smaller Social Security benefit. Being single with just one income while possibly taking care of multiple different people at a given time is one of the reasons why it is so important for women, the likely caregivers, to strategize their retirement income. Marriage typically helps Social Security beneficiaries, and knowing that you can take a former spouse’s Social Security benefit could be a major advantage depending on your specific situation.
The Facts You Should Know
If you are married or have ever been married, you have options when it comes to your Social Security benefit…options that no one may have told you about. Did you know that divorced women may be able to receive benefits on an ex-spouse? Even if they have remarried! Married women also have the option of claiming benefits on either their work record or 50% their spouse’s benefit6. Women who have been widowed are also eligible to receive a survivor’s benefit. Here are the cold, hard facts:
Married women are eligible to claim half of their spouse’s Social Security benefit instead of their own. This option may be beneficial for couples with large earnings differences. To be qualified, you have to be at least 62 years of age (dependent on your birth year) in order to start receiving your benefit.
If divorced, you may be eligible to claim benefits on a former spouse’s record, even if your ex-spouse is remarried. If your marriage lasted 10 or more years, you are currently unmarried, and you are 62 years or older, you are certainly qualified to receive Social Security benefits. Your ex must also be at least 62 years old, and your benefit has no effect on the benefit amount of your spouse.
And possibly the most important part of all: your ex-spouse never has to know. The Social Security Administration will not notify your ex if you are receiving his benefit7. And even if your ex-spouse is deceased, you still have the option of receiving his benefit. Which leads to the next point…
If widowed, you are eligible to receive your late spouse’s Social Security payment in the form of a survivor benefit, provided that it is a greater amount than your own benefit. (Why would you take your late spouse’s benefit if it is less than your own?) You must be at least 60 years of age—if widowed, you are not required to wait until age 62. If you are disabled, you can receive this benefit at the age of 50.
Know that if you remarry before the age in which you are eligible to receive your late spouse’s benefit, you will be unable to receive their benefit. If you remarry after you start receiving your deceased spouse’s benefit, you can still continue to receive benefit (but if your new spouse is a Social Security recipient and his benefit is larger than your late spouse’s, you may consider applying for your current spouse’s benefit instead). You cannot receive both benefits, you will have to choose one or the other.
Knowledge is power, and the more you know about your Social Security options, the greater you will benefit from your benefit.
If you don’t have significant income in retirement besides Social Security benefits, then you probably won’t owe taxes on your benefits. But if you have large amounts saved up in tax-deferred vehicles like 401(k)s, you could be in for a surprise later.
AGI (Adjusted Gross Income) versus Combined Income.
You are probably familiar with what AGI, or adjusted gross income, means. To find it, you take your gross income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts and other taxable income, like unearned income, that must be reported on tax returns.
(Unearned, taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits, lottery payments, and earnings generated from appreciated assets that have been sold or capitalized during the year.)
From your gross income amount, you make adjustments, subtracting amounts such as qualified student loan interest paid, charitable contributions, or any other allowable deduction. That leaves you with your adjusted gross income, which is used to determine limitations on a number of tax issues, including Social Security.
Combined Income is a formula used after you file for your Social Security benefits.
Whether or not your Social Security benefits are taxable depends on your combined income each year, which is defined as your adjusted gross income (AGI) plus your tax-exempt interest income (like municipal bonds) plus one-half of your Social Security benefits.
If your combined income exceeds the limit, then up to 85% of your benefit may be taxable. But in accordance with Internal Revenue Service (IRS) rules, you won’t pay federal income tax on any more than 85% of your Social Security benefits.
What are the combined income limits?
Social Security benefits are only taxable when your overall combined income exceeds $25,000 for single filers or $32,000 for couples filing joint tax returns.
If you file a federal tax return as an “individual” and your combined income is:
Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits.
More than $34,000 – up to 85% of your benefits may be taxable.
If you file a “joint” return, and you and your spouse have a combined income that is:
Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits.
More than $44,000 – up to 85% of your benefits may be taxable.
RMDs (Required Minimum Distributions) can be an unwelcome surprise.
Starting at age 70-1/2, you are required to start taking money out of your tax-deferred accounts, whether you need the income or not. These accounts include:
Most 401(k) and 403(b) plans
Most small business retirement accounts
There are precise formulas for calculating how much you have to withdraw each year based on the IRS Uniform Lifetime Table. If you miscalculate, or if you or your plan administrator fail to move the money by December 31, you could face a 50% tax penalty; there is no grace period to April 15.
Simplified RMD example for illustrative purposes only:*
Let’s say you are single, age 72, and you have one qualified account—$400,000 was the value of your 401(k) plan as of December 31 last year. You divide $400,000 by your life expectancy factor of 25.6 which give you $15,625.
This is the amount that you have to take out of your 401(k), which will count as part of your AGI.
Simplified Combined Income example for illustrative purposes only:*
To continue with our simplified example, let’s say you, our 72-year-old single person above, receives $2,800 per month in Social Security ($33,600 per year) and you don’t have any other source of income besides the RMD taken from your 401(k) account as illustrated above.
Based on the combined income formula:
AGI = $15,625
+ Non-taxable interest = $0
+ Half of Social Security = $16,800
Your total combined income is = $32,425
Because you are over the combined income limit of $25,000 for an individual, but less than the $34,000 which would require 85%, you would pay taxes on 50% of your Social Security benefit.
At Bulwark Capital Management, we provide retirement planning and Social Security benefit optimization, and we work in conjunction with your CPA or tax professional to help you consider taxes and how to minimize them as part of your overall retirement plan. Call us at 253.509.0395.
* This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or penalties. The information in this article is provided for general education purposes only. Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.
Clear Creek Financial Management, LLC is a Registered Investment Adviser dba Bulwark Capital Management. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Clear Creek Financial Management, LLC unless a client service agreement is in place.