SHOW NOTES: 2020-11-05 MiM

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Last Week’s Question of the Week: How many financial advisers were practicing in the United States as of 2018? Is it 100,000 or 300,000?

ANSWER: Over 300,000 was the correct answer!

HOST: One of your more popular topics on this show from time to time is our future Social Security benefits. Today you are going to enlighten us on how our benefit is calculated and what to expect in terms of a future monthly benefit in retirement.

KLAAS FINANCIAL: Yes, we always come back to this topic because for many people planning for retirement, Social Security will likely play an important part in their income.

So let’s review some facts about Social Security:

  • Set up a login to view your Social Security account at any time by going to It’s a wonderful resource for people regarding Social Security.
  • You qualify for Social Security benefits by earning Social Security credits when you work in a job and pay Social Security taxes. If you are self-employed, you earn Social Security credits the same way employees do. You must earn 40 credits which equals 10 years of work to qualify for retirement benefits through Social Security. You earn a maximum of four credits per year. The amount needed for each credit in 2020 is $1,410 and the amount needed to earn one credit automatically increases each year when average wages increase. If you earn at least $5640 this year, you will max out your credits. These are also referred to as QC’s (quarters of coverage). No matter how high your earnings may be, you cannot earn more than 4 QC’s in one year.
  • It is important to understand that Social Security will use your earnings and work history to determine your eligibility not only for retirement benefits but also for disability benefits or your family’s eligibility for survivors benefits when you die. The credits you earn remain on your Social Security record even if you change jobs, have no earnings for a period of time, or even pass away.
  • How does Social Security determine your benefit? Social Security looks at your lifetime earnings, adjusting them for inflation, and then calculates your average indexed monthly earnings during the highest 35 years of employment to determine your benefit.
  • Another interesting thing to note is that you are eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70.

HOST: What happens to my benefit if I take it early? Or if I delay it?

KLAAS FINANCIAL: Everyone wants to know when they can first take their benefit and what that means in terms of dollars. First understand that there is a difference between when you can first take it versus when it is your full retirement age (FRA). For anyone born between 1943-1954, your full retirement age is age 66, for those born between 1955 and 1959 your full retirement age is 66 plus some months. If you are born after 1960, your FRA is age 67. You can choose to take your benefit as early as 62, but you need to remember that your benefit will be reduced. An easy example of this is:

If your full retirement age is 66 and if you start receiving retirement benefits at:
age 62 You will get 75% of the monthly benefit because you will be getting benefits for an additional 48 months.
age 65 You will get 93.3% of the monthly benefit because you will be getting benefits for an additional 12 months.
DRCs When you delay your retirement past your full retirement age, Social Security benefits are increased a certain percentage (depending on your date of birth) and these are known as Delayed Retirement Credits or DRCs. Your benefit can increase up to 8% per year until you start taking benefits, or until you reach age 70. Therefore, there’s almost no reason to not pull once one reaches age 70.

HOST: What happens if I have not earned enough credits to collect a Social Security benefit?

KLAAS FINANCIAL: If you have not worked or do not have enough Social Security credits to qualify for your own Social Security benefits, you may be able to receive your spouse’s benefits. To qualify for spouse’s benefits, you must be at least 62 years of age or any age and caring for a child entitled to receive benefits on your spouse’s record who is younger than age 16 or disabled.

If you start receiving benefits as a spouse at your full retirement age, you will get 50% of the monthly benefit your spouse would receive if their benefits started at full retirement age. Your benefit will be permanently reduced just as if it were your own benefit if you begin your benefits before your full retirement age.

If you do have enough credits to qualify for your own Social Security benefits and you apply for your own retirement benefits and for benefits as a spouse, your benefits are paid first. If your benefits as a spouse are higher than your own retirement benefits, you will get a combination of benefits equaling the higher spouse benefit.

Example: If your spouse qualifies for $2500 as a benefit per month, and you never worked outside the home, you may be eligible to receive $1250 per month from your spouse’s record.

  • If you are married for at least a year, and have no Social Security benefit coming from your own record.
  • Or know that you are entitled to all of your benefit (assuming you do have enough credits) or half of your spouse’s benefit, whichever is greater (be aware of age discounting).

HOST: What about divorce and Social Security?

KLAAS FINANCIAL: Great question, if you were married you may have some options:
If you are currently still un-married and your marriage lasted at least 10 years, you may be able to get benefits on your former spouse’s record, even if they have re-married. The amount can be up to 50% of the worker’s benefit at his or her full retirement age. If you remarry, however, the divorced spouse benefit stops. You must be at least 62 to get spousal benefits.

Important Tip: Your ex must be at least 62 for you to receive a divorced spousal benefit but does not need to be receiving his or her own benefit. (That’s different from regular spousal benefits, which typically require the primary worker to apply before the spouse can receive anything.)

If your ex has died and the marriage lasted at least 10 years, you could qualify for survivor benefits of up to 100% of your ex’s benefit. You can remarry at 60 or older (or 50 and older if disabled) and still receive divorced survivor benefits. Survivor and divorced survivor benefits can begin at age 60, or at age 50 if the survivor is disabled, or at any age if you’re caring for your ex’s child who is under 16 or disabled (and in that case, the 10-year marriage requirement is waived).

People receiving survivor benefits can switch to their own benefit later if that’s larger, and vice versa. Survivor benefits are based on what your ex was receiving or would have received at full retirement age. (If your ex delayed starting benefits past full retirement age, the survivor benefit is increased by those delayed retirement credits.) If you start benefits before your own full retirement age, however, the amount you get will be reduced.

HOST: What is the break-even point for taking Social Security really mean?

KLAAS FINANCIAL: Break-even age is an important consideration, but that information alone cannot be the deciding factor when choosing the best filing age. The basic premise of a break-even is based on the way Social Security benefits are calculated, where the earlier you file the lower your benefit will be. Waiting longer can get you a higher benefit amount but by filing at a younger age, you’ll receive more benefit checks in total. The age at which filing early versus filing later results in the same amount of cumulative payments is your break-even age. 

Using a very basic benefit amount that doesn’t include any cost of living adjustments, let’s assume that your full retirement age benefit (at 67) is $2,000:
If you file at 62 you would receive $1,400
If you wait until age 70 you would receive $2,480

Using simple math, you can see that the total benefits you would receive in each scenario would be equal, or break even, at 80 years and 4 months. For every year you live beyond this age, the choice to file later is the “winner” as you’ll have more money by waiting to claim benefits than you would have if you filed early. But what if you don’t expect to live until (or longer than) 80 years and 4 months? You would actually be better off by filing for benefits sooner.

HOST: Jeremy from our Money in Motion Listener Corner asks: Since I have a 401k at work, is it better to concentrate on putting away retirement funds there first, or should I be adding money to my IRA that set up a few years ago?

KLAAS FINANCIAL: Thanks, Jeremy for the great question. We would suggest that the path of least resistance is actually putting money into your 401k first, especially if you are getting a match there. Also, keeping in mind that when you are paid, the money goes in without you being conscious of it doing so, which can really add up over time. If you are able to maximize the contribution for the year 2020 ($19,500 under 50, or $26,000 over 50 years old) then depending on your income level, you may also contribute to an existing IRA.

If you want to also contribute to a traditional IRA, deductibility may be an issue. If you are single or Head of Household, and make $65k or less, you can get a full deduction; partial deduction for $65k-75k. If you are married filing jointly, and make $104k or less, you can get a full deduction; partial deduction between $104k-$124k.

This Week’s Question of the Week: According to Social Security, if you were born after 1960, your full retirement age is what? Is it age 62, 67, or 72?

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.