How to Maximize Social Security Benefits
Keith Fevurly* Investment Advisor Integra Financial, Inc. • May 18, 2020
The Social Security Administration in its publication, Social Security Basic Facts (2017), reports that 50 percent of unmarried individuals and 71 percent of married couples rely on Social Security benefits for 50 percent or more of their total retirement income. Some 23 percent of unmarried individuals and 43 percent of married couples rely on such benefits for 90 percent or more of their retirement income! Notwithstanding the fact that Social Security was never intended to constitute such a sizeable portion of a worker’s retirement income, most participants want to ensure that they maximize their retirement benefit from Social Security to the greatest extent possible. Accordingly, other than delaying the start of benefits as long as possible until a maximum age of 70, there are four other methods to maximizing Social Security benefits. They are:
1) Improve the participant’s earnings record with the Social Security Administration
2) Take advantage of any spousal and survivors benefits available under the Social Security program
3) Minimize income taxes on Social Security benefits
4) Consider Social Security as only a part of the participant’s total accumulated savings generating retirement income or retirement income strategy
Earnings Record
There are two methods of improving the participant’s earnings record with the Social Security Administration (SSA) and, thus, maximizing his or her total benefits. These are: 1) work longer and delay benefits; and 2) earn more during the participant’s working years.
If a participant born after 1943 delays the receipt of Social Security retirement benefits until attaining age 70, a maximum amount of monthly benefits will be achieved. Specifically, an annual credit of eight percent (8%) is awarded to the participant for each year delaying the receipt of a benefit beyond his or her full retirement age (FRA). For example, a participant born in 1950 with an FRA of age 66 and with a monthly benefit of $1,500 per month, can increase his or her monthly benefit under Social Security by 32 percent to $1,980 ($1,500 times 1.32) if delaying the receipt of the benefit to age 70. This amount could be increased even further by a cost-of-living-adjustment (COLA) announced by the SSA at the end of each calendar year.
The second method of improving a participant’s earning record is for the worker to earn more money throughout his or her working years when paying into the system. When determining retirement benefits, the SSA first calculates the worker’s “average indexed monthly earnings” (“AIME”) during the 35-year period of the worker’s highest annual earnings. The SSA then applies a formula to those earnings and arrives at a basic benefit, otherwise referred to as the worker’s “primary insurance amount” or “PIA”. (Note: It is this PIA that is indexed for the COLA and increases if the consumer price index of prices also rises.) As a result, if there are a greater amount of worker’s earnings accumulated over the 35-year AIME period, there will be a greater PIA from which to determine the worker’s monthly retirement benefit.
It is important to understand that, currently, only a certain, maximum amount of earnings is accounted for when determining a worker’s AIME and, thus, his or her PIA. This maximum amount of earnings is known in Social Security law as the worker’s “taxable wage base” (TWB) and increases each year based on the rate of inflation. The amount is announced each year, at calendar year-end, by the SSA. The TWB is also the maximum annual amount on which a worker contributes to Social Security or pays a “payroll tax”. Above this amount (TWB), the worker does not qualify for Social Security retirement benefits; thus, a Social Security benefit is not payable for amounts earned above the TWB.
Spousal and Survivor Benefits
A spousal benefit of up to 50 percent of the participant worker’s (other spouse’s) PIA is payable to the spouse at his or her FRA. This is the result even if the electing spouse is not otherwise eligible to receive Social Security retirement benefits on his or her own earnings record. For example, if Jack, the participant worker, has a PIA of $2,000 per month at his FRA of age 66 , and Jill, his spouse, applies for a spousal benefit at her FRA, she will receive a benefit of $1,000 per month or 50 percent of Jack’s PIA. Alternatively, Jill could have elected to retire “early” (at age 62) and apply for spousal benefits using Jack’s earning record, but her benefit may be reduced to as little as 32.5 percent of Jack’s PIA. Finally, if Jill was born before January 2, 1954 and has reached her FRA, she can choose to receive only Jack’s benefit and delay receiving her own retirement benefit until age 70 (commonly referred to as the “suspend and file” strategy).
A survivorship benefit is also payable to the surviving spouse of a deceased participant worker. The surviving spouse, sometimes known as the “widow” or “widower”, may receive the larger of his or her own retirement benefit (PIA) or the deceased worker’s benefit (PIA) when the widow or widower attains FRA. (A reduced benefit from the deceased worker’s PIA is payable when the widow or widower attains age 60.) To maximize the survivor’s benefit that is payable, the deceased worker should delay taking his or her retirement benefit as long as possible since the survivor’s benefit reflects any delayed credit. If the deceased spouse died before his or her FRA, the survivor benefit is based on the amount the deceased spouse would have received at his or her FRA. Alternatively, if the deceased spouse died after his or her FRA and had not yet begun benefits, the survivor is eligible for the deceased spouse’s date-of-death benefit, including delayed-retirement credits.
Minimize Income Taxation of Benefits
Prior to 1983, there was no Federal income tax imposed on Social Security benefits. However, in 1983, and after Congress introduced a concept known as “provisional income” (“PI”) into the tax law, approximately 40 percent of participants pay tax on receipt of Social Security benefits.
The computation of “PI” is made in three steps:
1) Start with gross income not including any Social Security benefits.
2) Add back any tax-free income, such as municipal bond interest or dividends, and any foreign earned income. This amount is known as the taxpayer’s “modified adjusted gross income” or “MAGI”.
3) Calculate 50% of Social Security benefits and add that amount to steps 1 and 2 total to determine the taxpayer’s PI.
Depending on the total amount of PI and a taxpayer’s filing status, compare the PI to several “hurdle amounts” as follows:
Married Filing Jointly Single Taxpayer
1st Hurdle $32,000 $25,000
2nd Hurdle $44,000 $34,000
Then, apply the following rules:
1) If the taxpayer’s PI is less than the 1st hurdle, there is no tax on the Social Security benefit (it is tax-free).
2) If the taxpayer’s PI is between $25,000 and $34,000 ($32,000 and $44,000 for a married filing jointly taxpayer), up to 50 percent of Social Security benefit is, generally, taxable.
3) If the taxpayer’s PI is more than $34,000 ($44,000 for a married filing jointly taxpayer), up to 85 percent of Social Security benefit is, generally, taxable.
So how does an individual minimize the taxation of Social Security benefits? One alternative is to keep one’s PI below the hurdle amounts. Barring this relatively unfavorable alternative (meaning the taxpayer is living on a relatively small amount of income), a second alternative is to not invest in tax-free investments, such as municipal bonds, or work in another country. Still, a third alternative is to suffer a reduction in Social Security benefits, such as some public-school teachers and federal civil service employees, because of a provision in the Social Security law known as the Windfall Elimination Provision (WEP).
Social Security as Part of Overall Retirement Income Strategy
When the program was implemented in 1935, Social Security was intended only as a supplement to an individual’s total retirement income! Thus, a worker should accumulate as much income as possible from the other two legs of the “three-legged retirement stool”. How? By taking advantage of 1) employer-sponsored retirement plans and 2) personal tax-deferred savings accounts.
An individual preparing for retirement usually supplements Social Security benefits with salary reduction before-tax contributions to an employer-sponsored plan, such as a Section 401(k) plan, and tax-deductible contributions to a traditional IRA and, sometimes, after-tax contributions to a Roth IRA. In such manner, the portion of total retirement income constituting Social Security is reduced, usually to an average of between 35-40 percent for most retirees.
*Excerpts from upcoming book entitled “Planning for the Elderly: A Financial Guide to Aging”, to be published later in year 2020
I hope this letter finds you well. As I sit down to write this, recent events—particularly the tariff announcements—have prompted me to revisit my initial draft. It’s safe to say that the current climate is far from ordinary. The Morningstar Broad Market Index posted a decline of 4.94% for the quarter. As I mentioned in my previous letter, I anticipated some jolts perhaps I should have emphasized the word “JOLTS” a little more! The much-discussed “Trump Rally” from last quarter has vanished. While the short-term picture may be concerning, it’s important to remember that the S&P 500 posted impressive gains of over 20% in both 2023 and 2024. As a result, we’ve seen a market that was overheated due to hype surrounding AI and other speculative factors, which inflated valuations. To put this into perspective, the Price-to-Earnings (PE) ratio for the Growth Index stood at 41.9, while the Value Index was at 18.4. Historically, the market PE ratio has hovered around 16, we are still working our way back toward more reasonable levels. The stated goals to bring key industries such as steel, automobiles, pharmaceuticals, lumber, and semiconductors back to the U.S. stems from a concerning trend: industrial production in the U.S. has increased by only 4.3% over the past 25 years—an annual growth rate of just 0.2%. Additionally, there’s a broader conversation around our national spending habits: while we collect $4.9 trillion in all taxes, we’re currently spending $6.75 trillion. These economic actions are intended to address these fundamental issues, with efforts aimed at reviving domestic manufacturing and resolving our spending imbalance. While these changes have immediate effects, the hope is that we avoid prolonged negative consequences. Some economists believe that the short-term pain will lead to long-term gain, while others question the wisdom of these actions. Remember Paul Volcker’s actions in the Reagan era of sky-high interest rates crushing the economy but ultimately set the stage for stronger, more sustainable growth. As history has often shown, economic cycles tend to repeat themselves, and I am hopeful that history can repeat itself and we’ll see positive results in the long run. I don’t think anyone can predict the long-term impact. We are comfortable with what we have paid for our positions and while the market may currently disagree with us, our long-term focus has historically paid off. The experiences of 2008 and 2009 serve as a recent reminder that sticking to a disciplined focus can ultimately yield positive results. As Warren Buffett famously said, “Stocks climb a wall of worry.” When fear drives others to the exits, it often creates opportunities for those who stay focused on the bigger picture. On a different note, we’ve recently encountered some technical issues with our email system. If you’ve reached out to us and haven’t received a response within a couple of days, please feel free to call us directly. Some emails are unexpectedly ending up in our enhanced security filters, and we are working diligently to resolve the issue. Lastly, I want to remind you to stay vigilant against online scams. These fraudulent schemes are becoming increasingly sophisticated, and even the most cautious individuals can fall victim. It’s more important than ever to be cautious when navigating the digital landscape. We truly appreciate the trust you place in us, and we’re always here to answer any questions or address any concerns you may have. Yours Truly Willis Ashby, CFP President Morningstar, WSJ, First Trust, MSNBC, BMO, ZACKS
Happy New Year! We hope you had a wonderful holiday season and wish you prosperity, good friends, and good health for 2025 and beyond. We are pleased to report that the broad Morningstar index increased by 24.09% for the year and 2.57% in the fourth quarter. The "growth" segment of the market, particularly companies like Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, and Tesla, has been a major contributor to this performance. Together, these seven companies are valued at approximately $17.92 trillion, which represents around 44.80% of the S&P 500. Their performance remains a significant driver of broader market trends. Several key events have recently influenced the financial landscape: The post-election “Trump Rally.” Bitcoin's significant rise, recently reaching around $100,000. Potential tariffs and their uncertain effects. Government debt interest payments surpassing defense spending, ~$1 trillion vs ~800 billion respectively. A notable increase in government employment in 2023, with 709,000 jobs added, a jump from 299,000 in 2022 and 392,000 in 2021 (source: www.bls.gov). The establishment of the Department of Government Efficiency (DOGE). The full impact of these events is still unfolding, but potential risks to market stability include tariffs, government debt, and the new DOGE department. While tariffs could have far-reaching effects, it is important to recognize that the policies discussed during campaigns may not align with actual implementation. Government debt may not pose an immediate concern, but over time, the bond market may react to the growing debt load, leading to necessary spending cuts. Though such measures could be painful in the short term, they may be necessary for long-term economic stability. The potential impact of the Department of Government Efficiency remains unclear. Elon Musk’s restructuring of Twitter (now X), which resulted in the elimination of thousands of jobs, has been seen as an effort to increase efficiency. Historically, the closure of government departments has been rare; the only significant example occurred during the Carter administration, when Alfred Kahn successfully dismantled the Civil Aeronautics Board (CAB), leading to lower airline prices and more travel options. Overall, we expect the companies we monitor and invest in to remain profitable. Despite potential disruptions, 2025 is likely to be another positive year for the market, though some volatility or "jolts" along the way should be anticipated. Enclosed is our annual privacy notice (mailed letters). Additionally, if you would like a copy of our ADV, it is available on our website or can be sent upon request. Lastly, I want to express my gratitude to Kathy, Nick, Keith, and Alison for their excellent work. Please feel free to contact us with any questions or concerns. We remain committed to providing the best financial advice to support your well-being. Sincerely, Willis Ashby, President Integra Financial, Inc. 5105 DTC Parkway, Suite 316 Greenwood Village, CO 80111 303-220-5525 / 303-689-0973 FAX Bureau of Labor Statics, Wall Street Journal, 1 st Trust, Morningstar, Zacks Research, Co-pilot &/or ChatGPT
I hope you had a wonderful summer and are enjoying weather similar to what we have in Colorado. The Morningstar broad index rose by 3.59% this quarter and is up 19.65% for the year. In a long-anticipated shift, value stocks—such as Costco, Comcast, and Home Depot—have outperformed growth stocks like Google and Amazon. The growth sector, which has led the market for so long, is now seeing stretched valuations and limits to growth, making the value side increasingly appealing for investment. As we focus more on value investing, it’s rewarding to maintain a diversified portfolio that includes both value and growth stocks. Reflecting on the past year and beyond, I’ve been reminded that “the market climbs a wall of worry.” It can be challenging to invest when headline news seems discouraging, but I’ve witnessed this pattern often enough to firmly believe that the best strategy is to enter the market and stay invested. Many of you who have been with us for a decade or more can attest to the benefits of this approach. Viewing investments through a long-term lens—thinking in decades rather than years—helps manage the inevitable market fluctuations. I don’t want to come across as overly optimistic, but there are positive signs: inflation is declining, incomes are rising, and personal savings rates are up. Gross Domestic Product (GDP) is also on the rise, with many corporations exceeding their earnings expectations. Historically, during periods of high inflation, like the Carter years, the stock market has proven to be an effective hedge against rising costs. As expenses—wages, goods, and taxes—increase, the value of stocks tends to follow suit, as corporations pass these costs onto consumers while striving to maintain their profit margins. Nick, Keith, Alison, and I are closely monitoring various factors that could impact the market and your portfolios. As always, we’re keeping an eye on the overall economy, particularly monthly employment numbers. Currently, over 60% of new jobs are in government or government-related sectors, which is less favorable than if the majority were in the private sector. The Federal Reserve has recently lowered the Fed Funds Rate by half a percent, a move prompted by falling inflation that appears to be trending toward the target rate of 2%. This reduction has been celebrated on Wall Street, as it lowers the cost of borrowing, benefiting both businesses and the government. Another trend we’re addressing is the stock-to-bond ratio in your portfolios. The stock side has grown much faster than bonds, for example, an initial 50/50 allocation is now closer to 60% stocks and 40% bonds. To rebalance your portfolio, we will sell some stocks and buy bonds to return to the desired ratio that best suits your investment strategy. In closing, I want to emphasize the importance of being vigilant with your online activities. The number of malicious actors attempting to hack personal information is increasing daily, so please take precautions. If you have any questions or if your financial situation changes, don’t hesitate to reach out. Alison, Keith, Nick, Kathy, and I appreciate your trust and are here to support you. Willis Willis Ashby, President Integra Financial, Inc. 5105 DTC Parkway, Suite 316 Greenwood Village, CO 80111 303-220-5525 / 303-689-0973 FAX
Salary-reduction-type retirement plans have, for some time, permitted so-called “hardship distributions” or “hardship withdrawals” prior to a participant’s retirement date. Salary-reduction-type plans include Section 401(k) plans available to for-profit employees, 403(b) plans for not-for-profit employees, and 457(b) plans for State and local government employees. Generally, such distributions are includible in a participant’s income and are subject to an “early distribution 10 percent penalty”, unless an exception applies.
Inheriting Traditional or Roth IRA Proceeds:
Some points to consider: 1) Likely the biggest distribution question that a 401(k) participant asks is: should I rollover the proceeds to an IRA or retain it within the 401(k), assuming the plan sponsor allows that? There is no certain answer to this question, although in the majority of situations, it is preferable to roll the proceeds because of participant control of the account. See Willis, Nick, or Keith to begin the paperwork for a Rollover IRA.
Greetings! We hope this letter finds you well. As you head into the heart of summer, we hope you're ready to make the most of the season. Whether you're planning a relaxing vacation, enjoying outdoor activities, or simply basking in the summer sun, we wish you a season filled with joy and memorable moments. Let's dive into the latest updates from the financial world.
As usual I hope this finds you well. As we welcome spring and having just finished the first quarter, things look good. The broad Morningstar index was up 10.24% through 03-31-24. The large cap companies led the way up 11.08% and the small caps up 5.69%. The S&P 500 experienced 22 “all-time highs” with less than 2% drops in-between. Amazing!
I hope you had a safe and enjoyable holiday season. For the first time since COVID we were able to have our entire family together, including the Australians, it was very nice. I hope yours was as enjoyable. The top news stories of the year were the rapid rise of interest rates effectively slowing inflation without crashing the economy:
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