Franklin Roosevelt signed the Federal Insurance Contribution Act (FICA) in 1935

Social Security is a social insurance, providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment, and others. This is funded through premiums or taxes paid by or on behalf of participants.

• Nine out of ten people, age 65 and older, receive social security and for 32% of these people, it is 90% or more of their income.
  • Social Security is funded through dedicated payroll taxes called Federal Insurance Contributions Act (FICA).
  • Everyone gets the same insurance against the same risks; however, not everyone gets the same benefits.
  • The debate today is will there be enough money in this fund in future years. By 2037, the Social Security trust fund is expected to be depleted so congress has to make some changes and soon.
  • The earliest age to qualify for Social Security is 62, however, full retirement benefits depend on a retiree’s date of birth but the normal retirement age is 65.
  • For Majority of Baby Boomers, age 67 is the earliest time to begin to receive “full benefit” but I think we should consider waiting to at least age 70 be the target age to receive SSI.

Initially the top tax rate for SSI was just 2%… today it exceed 12%… very expensive tax for most Americans.  The act originally promised that the income tax for SSI would never be any higher than 3%

“And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.”

And we may not receive 100% of the benefits we believed were going to paid back to us.  But, hoping that it will survive, there are a few, obscure but extremely helpful ways to maximize your benefits from SSI.  And SSI website states;

“Social Security is the largest source of income for most elderly Americans today, but Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”

But as of 2008, Social Security is paying an average of $12,948/year to individual retired workers receiving old age benefits. The poverty level for an individual is $10,400.  And consider that in 1945, there were 42 people working for every single person receiving retirement benefits… today that number is almost 3 people working to every one person receiving benefits! 

Might be a math problem ahead… but let’s stay on track and figure out the best time or strategy for you to take a retirement income from SSI.

Knowing the “secrets” to SSI can be a great tool in your personal financial planning.  Selecting the correct strategy can “significantly” boost the annual retirement income of a Baby Boomer.  As I mentioned above, the simplest strategy is to delay collecting SSI until age 70.  WHY?  Because every year you wait after age 62, the amount you will receive increases by as much as 8%!  So, in this economy, where else could you earn an 8% increase on your money every year, guaranteed by the US Treasury (whatever that may be worth)?

After 8 years at 8% per year, the hypothetical $1,000 a month one could receive at age 62 would be about $1,900 per month at age 70!  And we are living much longer these days… so if you are pretty healthy, at least considering waiting to collect SSI is prudent.  Another critical strategy may be taken away soon, but for now it is an excellent idea… and that is a SSI “Do Over.”  Yes, you read that correctly, a do over.  If you begin collecting SSI at age 62 and then find yourself in good health, maybe working another job or just not needing as much money today as you will need in the future (long term care is a topic I will write about shortly) then a do over is perfect for your consideration.

Simply put, you pay back all of the money you have received since beginning SSI payments (which could be a large amount) and that will reset your SSI “clock” back to the table of income you would receive at a later date.  In other words, you pay back your SSI and then restart taking it again but a later age/date.  And the money you pay back is not charged one penny of interest or any penalties!  In fact, you might even qualify for a lucrative income tax break as well!  I am NOT A CPA but can refer you to a reliable one if you do not have a CPA.  This awesome “do over” rule may change in the near future so get onto finding out the details for your situation ASAP.

Since the rule may change, it is imperative that one research the benefit of the do over now.  Especially since interest rates on guaranteed investments such as CD’s or Treasury bonds are so crazy low… if you have $50,000 in a CD now that is earning just 2% annually, why not use it to pay back the SSI you took the past few years, earn 8% for each year you repaid the SSI and then restart collecting benefits later at a much higher amount?  What annuity or bind will earn 8% per year and pay you a lifetime income stream?  When would this strategy work best, if after receiving SSI for a few years, you went back to work and do not need the extra income, or you inherited money, sold an asset for a gain, won the lottery, married a wealthy or higher income earning spouse, or just learned how to live on a smaller amount each month.

Another idea with the do over or in simply delaying taking SSI, is that the best 35 years of your earnings, not the most recent 35 years are used to calculate your monthly income benefit.  The early years in your career were likely the least paying ones, and every year you continue to work, it could easily replace one of those much lower earning years in your life.  This is a huge potential income increase. It is likely that even a 30 hour per week job now pays more than your full time job back in 1970… and every year used in the top 35 years will equate to a higher amount of income for you!  Sucks to not retire but it sucks more to be forced to retire AND have not enough money each month to eat.

Another strategy is the “file and suspend” idea.  In this strategy, the husband (or higher income earner) files for his SSI once he reached FULL RETIREMENT AGE (remember age 65 – 67) and then immediately his (or her) spouse files for “spousal benefits.”  Then the husband (higher income earner) files to suspend his benefits… (Confusing, I know).  Now the spouse will continue to receive her spousal benefit for the remaining lifetime of her husband, and the benefit of the husband will grow by the 8% increasing amount each year… and the wife spousal benefit will grow too if there is a cost of living adjustment increase (COLA)!  Too good to be true???  Nope, perfectly true and legal.

This is also a good protection strategy for the wife because if the husband dies prematurely then her benefit would be increased to that of her deceased husband… more or less.  It can also work in the reverse… assuming the wife is at least age 62 and full retirement age for the husband, it is an amazing strategy.

In this case, the wife (lower wage earner) stops working and begins receiving her SSI retirement income benefit.   The husband continues to work and DELAY receiving any of his SSI benefit.  Thus, his SSI retirement income continues its 8% annual increase (great return in this market) AND he collects half his wife’s SSI benefit, immediately!  Plus, the husband is earning an income that does NOT jeopardize or penalize his SSI benefit or reduce his after tax income.  At age 70, the husband would hypothetically stop receiving half his wife’s benefit and then begin collecting his now much higher monthly income benefit.

Complex and confusing but could be extremely profitable to research more into the strategies and timing of receiving SSI benefit.  Call me to discuss or schedule an appointment.  Oh and Medicare is another big question mark but just know that whether you retire at age 65 or not, you need to sign up and pay premiums… or it will cost you dearly later.  But that is for another blog!