Klitzman Law Group, PLLC

Social Security Updates You’ll Want to Know

Navigating Social Security isn’t always easy, largely because things keep changing. Not being aware of the changes can put a dent in retirement finances, according to a recent article, “3 Social Security Changes Retirees Need to Know About in 2024,” from Nasdaq.com. Anyone receiving benefits in 2024 should be aware of these changes.

 

Monthly benefits are higher due to inflation. After a long period when inflation was seemingly gone, we’re now experiencing both inflation and shrinkflation (packages becoming smaller while prices increase). The Social Security Administration has a built-in tool to respond to inflation: the Cost of Living Adjustment, or COLA.

Every year, Social Security benefits are adjusted to account for inflation. The increase is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation monitoring costs of necessities: food, housing, and transportation. The average of the CPI-W for July, August, and September are compared to the prior year’s average inflation to arrive at the rate. Estimates for 2025 aren’t released until October, but early estimates expect it to be 2.6%. In 2024, the COLA was 3.2%.

Adjustments in 2024 increased the amount you can earn if you take benefits early. Some of your benefits may be withheld if you take Social Security benefits before reaching Full Retirement Age (FRA). If you don’t reach FRA this year, the earnings limit is $22,320. Your monthly benefit will be reduced by $1.00 for every $2.00 earned over the limit. However, if you reach FRA this year, the earnings limit is $59,520, with benefits reduced by $1.00 for every $3.00 above the threshold.

Note that these benefits aren’t permanently lost. Once you hit FRA, the SSA recalculates your benefits and adds back the amount that had been withheld.

It’s become harder to reach Social Security’s maximum monthly benefit. The core formula is based on your top 35 earning years. To qualify for the maximum benefit, taxpayers need to do two things: delay benefits until they turn 70 and earn more than the wage base limit for the 35 years used in the calculations. In 2024, the wage-based limit will be $168,000, the highest income subject to Social Security taxes. After this much income has been earned, there are no Social Security taxes.

Wage base limits change often, so if you want to reach the maximum monthly benefit, keep track of these changes and your income.

Reference: Nasdaq.com (July 29, 2024) “3 Social Security Changes Retirees Need to Know About in 2024”

Good News about Social Security

The simplest explanation is that Social Security is paying out more than is being collected and going into the trust funds to make up the difference. If this were to continue, the trust funds would be exhausted at some point, and the only money for benefits would be revenue being collected at the present time. However, there is no need to worry, says this article “Social Security Retirees Just Got Some Good news About Future Benefit Cuts” from yahoo! finance.

While future cuts are a possibility, there’s also good news, according to the 2024 Social Security Trustees Report. The Old-Age and Survivors Insurance (OASI) Fund will be able to continue to pay full benefits until 2033. If nothing changes, there must be a 21% benefit cut. The Disability Insurance (DI) Trust Fund is anticipated to be able to pay benefits until at least 2098.

What would happen if the OASI Fund were emptied? A few things could happen. A law change could combine the OASI and DI funds. Because this is a real possibility, the trustees share data on when the combined funds might be emptied.

In 2023, the Trustees Report said the combined funds would pay full benefits until 2034, but this year’s report shows there’s enough money to pay full benefits until 2035. It also notes that if any cuts were to go into effect, the money coming into Social Security from the combined funds would be able to pay 83% of promised benefits, up from 80% in 2023.

These may sound like small improvements but indicate a trend in the right direction. Much of this is due to stronger-than-expected economic growth, which has led to improved labor productivity and lower projections for long-term disability insurance benefits. Taken together, Social Security’s long-term stability is looking good.

The additional year means any benefit cuts will be smaller than previously anticipated. If needed, Congress could also act to fund the trust funds. There’s still reason to worry about what might happen in 2035, since many seniors count on Social Security to fund most of their retirement.

Lawmakers will unlikely allow this program to be defunded, since seniors continue to be a major voting bloc. Similar situations occurred in the early 1980s, and Congress passed amendments to protect the program.

The new issue? Those amendments from forty years ago included a change to Full Retirement Age, when a person may collect an unreduced benefit. They also imposed a tax on some benefits for high-wage earners. As a result, there may be changes in the future.

Overall, though, the news is good. Hopefully, the good economic news will keep coming to protect Social Security, giving lawmakers more time to figure out ways to fund this vital program.

Reference: yahoo! finance (May 16, 2024) “Social Security Retirees Just Got Some Good news About Future Benefit Cuts”

What Is Expected from Social Security?

More than a third of Americans rely on Social Security for all or part of their monthly income. When created, Social Security was intended to serve as a safety net for the sick and indigent. However, it has become part of most American’s retirement budget. An article appearing in The Motley Fool asks the key question: “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?

Social Security was meant to provide 40% of pre-retirement earnings for the average American wage earner. Some people get more based on their years of earnings, and others receive less. Figuring out how much you’ll get isn’t as complicated as you might think.

How does the Social Security Administration calculate your benefits? There are three key numbers used to calculate a worker’s benefits. First, how many years did you work to earn income? Income from other sources, like rental properties or investment accounts, doesn’t factor into the Social Security equation. It’s all about earnings.

The SSA looks at your 35 highest-income years. The lowest earning years are ignored if you worked more than 35 years. However, if you worked for less than 35 years, those years are treated as “zero-income” years and added to your benefit calculation.

The next number is how much money you earned during those 35 highest-income years.

Remember, you pay Social Security payroll taxes on the first $168,600 in 2024, so only this amount counts towards benefits. Every year has a ceiling at which point your income isn’t counted, and in past years, this number was lower.

Increasing your earned income increases your monthly benefits. It’s that simple.

The last of the three factors concerns when you begin receiving benefits. You’ll need to wait until your official “Full Retirement Age” or FRA to receive the full benefits determined by your birth date. Taking benefits too early could reduce them by as much as 30%. Delaying benefits is good if you can. However, it’s simply not a possibility for some people. Consider your health and financial situation to determine the best time to start taking benefits.

The government has a robust website called My Social Security Account that helps you fully understand your benefits. Simply create an account, and you’ll be able to see how much you have paid into the system and what you can expect to receive.

Why should you spend the time getting familiar with this information? One is obvious; you’ll want to plan your retirement budget with this information. However, another reason concerns your estate plan. How much money you’ll have to live on during retirement impacts how your estate planning attorney structures your estate plan. Will you leave anything to heirs based on your Social Security benefits? Will you need to have a trust created to protect assets?

Creating a holistic estate plan with an experienced estate planning attorney will address Social Security income and other retirement income sources, so you’ll know what you’ll have during retirement and what kind of a legacy you might leave to your family. Remember, legacies aren’t just about money.

Reference: The Motley Fool (April 19, 2024) “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?

What You Need to Know about Social Security

For millions of Americans, a monthly Social Security deposit into their bank accounts is a crucial source of retirement income. For those who have just started receiving benefits, there are a few basics to know, according to a recent article from NASDAQ: “New to Social Security? 3 Things You Need to Know.”

Social Security knows inflation is a problem for seniors living on fixed incomes. If you’re receiving $1,800 a month right now, in five years, the same amount of money won’t have the same purchase power as it does today. Every year, Social Security examines inflation and adjusts benefits, known as the Cost Of Living Adjustment, or COLA.

COLA’s goal is to ensure that your buying power stays the same over time. It’s not a pre-set amount but is based on inflation data. Unlike an annuity, which increases at a certain rate, Social Security COLA rates are reviewed and increased depending on inflation data. There may be one year when benefits increase a lot, but there will also be years when increases are practically nil if inflation is low.

You may continue to work and receive Social Security benefits, but if you haven’t reached Full Retirement Age, your benefits will have an earnings test limit. Full Retirement Age is when you can collect your monthly benefit in full based on your past earnings history. After this date, based on your birthday date, you can earn as much as possible without any benefits being withheld.

If you’ve started taking benefits before that time, an earnings-test limit will deduct a certain amount from your benefits. The limit, like the COLA, changes every year. In 2024, it’s $22,320 or $59,520 for wage earners who will reach their FRA in 2024 but haven’t gotten there yet.

The funds are not lost forever if you earn more than the limit. When you reach FRA, the money will be returned to your monthly benefit. But you must consider the deduction if you’re creating a household budget.

Social Security does have serious challenges that may impact your benefits. The dramatic headlines about Social Security trust funds running out of money come in waves, but there are some real problems ahead to be aware of. The trust funds are expected to run dry in 2034. While a lot can happen in ten years, seniors would be wise to try to bank some of their benefits in case they shrink. The more saved, the easier it may be to manage if and when these cuts occur.

While Congress may always act to fund the trusts, working a part-time job or as a consultant in your field may be an excellent way for many retirees to prepare for any future cuts and reduce their dependency on Social Security benefits.

Reference: NASDAQ (March 18, 2024) “New to Social Security? 3 Things You Need to Know”

Does It Pay to Wait Until 70 to Claim Social Security Benefits?

There’s no lack of advice about when retirees should start claiming their Social Security benefits. Much of it repeats the adage to wait until age 70 if possible, and the reasoning’s not wrong. The longer you delay taking benefits, the higher your monthly benefits will be. The odds are good you’ll maximize your lifetime benefits, explains a recent article from The Motley Fool, “The Unfortunate Truth About Claiming Society Security at Age 70.”

However, there are some downsides to waiting until age 70.

Waiting to take benefits until age 70 means you’re not claiming earlier, which means you’re forgoing as many as eight years of benefits. The CDC says the average 62-year-old will live long enough to take home more lifetime benefits if they delay. However, this is just an average.

A 2019 study from United Income found that 57% of retirees would have maxed out their retirement wealth by waiting to claim until age 70, but this also means 43%—nearly half—would not.

There’s no way to know if you would fall into the 57% or 43% categories. You may not want to wait if you have a health condition and a lowered life expectancy. However, at some point, you’ll need to make a decision.

If your spouse earned far less than you, they might be able to claim a higher benefit on your earnings record than if they claim on their own. Social Security spousal benefits allow spouses to collect up to half the amount their partner will receive at their full retirement age. This could add a significant boost to your household income in retirement. However, there is a catch: both spouses must actively collect Social Security benefits.

Unlike personal retirement benefits, spousal benefits max out at full retirement age. If you’re waiting to claim your benefits but your spouse has already reached full retirement age, they may be collecting a smaller benefit than they could if you were also taking them.

Coordinating Social Security claiming strategies with your spouse can be tricky and require complex calculations. Including this discussion with your estate planning attorney will be helpful when discussing creating an estate plan, planning for taxes and passing wealth to the next generation.

When you delay taking Social Security benefits, you may rely more heavily on retirement accounts to support your lifestyle in your 60s. Yes, your Social Security annuity will increase while you delay. However, it has no residual value after you pass. In other words, once you die, the value of your Social Security is zero, with the potential exception of survivor benefits for your spouse.

You might decide to collect early instead, hoping your investments will grow faster than the Social Security increase. Collecting early may help you delay taking money from your retirement accounts before turning 70.

Social Security offers a guaranteed inflation-adjusted increase in your monthly benefit when you delay taking benefits. Collecting earlier and keeping more money in markets is an option. However, it may not always work to your advantage. If you’re concerned about not having enough money for your later years, deciding when to take your benefits needs serious consideration.

Reference: The Motley Fool (Feb. 10, 2024) “The Unfortunate Truth About Claiming Society Security at Age 70”

How to Earn the Maximum Social Security Benefit in 2024

The amount received in Social Security benefits impacts most retiree’s budgets, says a recent article from U.S. News & World Report, “The Maximum Social Security Benefit in 2024—and How to Earn It.” In 2024, the maximum Social Security benefit is $4,873 per month. However, reaching this number depends on many factors, including the number of wage-earning years, income levels and age when claiming benefits.

The Social Security Administration uses a formula to determine how much you’ll receive each month based on the 35 highest earning years. Working and paying taxes for at least ten years is necessary to qualify for Social Security. In addition, earnings are adjusted or “indexed” to reflect the general rise in the cost of living during the person’s working life.

If your working years include low-income figures, the average will decline, and Social Security benefits may be dramatically less for the full span of your retirement. If you can, working for a few more years may be helpful. Every year you work at a higher income level replaces a lower income level in the calculation.

For those married to a spouse with a long record of high income, it may make sense to take a spousal benefit, which is 50% of the spouse’s benefit. If you were out of the workforce raising a family for many years, you may not have had the opportunity to build 35 years of earnings. Compare your benefit with your spouse to see if a spousal benefit would give you a higher monthly payment.

Wage earners pay Social Security tax based on their income. Employees working for a company generally have a tax rate of 6.2%, withheld from paychecks, and employers pay a matching 6.2% for a combined contribution of 12.4%. Self-employed people pay the entire Social Security tax rate of 12.4% on their income.

Once you reach a certain income level for the year, you’ve maxed out on your Social Security taxes. In 2024, the taxable income limit is $168,600. People who earn this much a year are eligible for the maximum benefit, and someone who earns more gets the same benefit. To attain the highest benefit when claiming Social Security, you’ll need to earn up to this limit or more for at least 35 years.

When you claim benefits matters also. If you start claiming benefits earlier than your Full Retirement Age (FRA), the benefit will be reduced by about 8% each year. The earliest you can apply for benefits is at age 62. Every year you wait after reaching your FRA, your benefits will increase by 8% until you reach 70. If you can wait until age 70 to apply for Social Security benefits, you’ll get the maximum benefit.

Filing at age 70 usually requires an “income bridge”, unless you can cover living expenses and medical costs while you wait to file for Social Security. Some people choose to continue working or use earnings from their retirement accounts.

Reference: U.S. News & World Report (Jan. 12, 2024) “The Maximum Social Security Benefit in 2024—and How to Earn It”

When Should You Take Social Security Benefits?

The age you file for Social Security directly impacts your benefit. While some ages are better than others, there are important caveats to consider. A recent article from The Motley Fool, “Social Security: These Are the 2 Worst Ages to Take benefits, According to Experts,” explains it all.

You may file for benefits as early as age 62 or after that. For each month you can delay claiming benefits up to the age of 70, the monthly benefit increases. File at age 70, and you’ll get your full monthly benefit amount, plus a bonus of at least 24%.

Everyone’s situation is different, so there is no right or wrong time to claim. It depends on your financial, employment and health situation. However, research has shown some ages are better to start taking Social Security benefits than others. Two ages, in particular, are the worst times to file, but even they come with a caveat.

Researchers at United Income began studying retirees’ claiming decisions before examining how much they earned in benefits over a lifetime. Using the data from the study, which began in 2019, they determined how many claimed the best age to maximize lifetime benefits.

Only 4% of retirees made the optimal decision to earn as much as possible. According to the research, the average retired household will miss out on around $100,000 worth of lifetime Social Security income. A little more than half of all retirees could have earned more by waiting to age 70. Claiming at age 62 or 63 was the only optimal choice for 6.5% of retirees.

From a strictly financial viewpoint, 62 and 63 are the worst ages to begin taking benefits, as retirees who claimed at those ages were the least likely to maximize income. Nevertheless, there’s more to the decision than finances, and there are many situations when claiming early makes sense.

When filing for Social Security benefits at age 62, benefits are permanently reduced by up to 30%. The reductions could be brutal for those who depend on these benefits for most of their retirement finances.

If you have a robust retirement fund and don’t need the money from Social Security, claiming early could allow you to retire a few years sooner. However, many people don’t have the luxury of choosing when to retire. Social Security benefits can make retirement more affordable if you lose your job or health issues prevent you from working. It’s possible to retire in your 60s and delay filing for benefits, but this may mean taking more money from retirement accounts and depleting savings too quickly.

There’s no single right time, since everyone’s circumstances are different. If you can defer claiming until age 70, that’s great. However, consider the big picture when making this decision because there are many instances where claiming early makes the most sense.

Reference: The Motley Fool (Nov. 15, 2023) “Social Security: These Are the 2 Worst Ages to Take benefits, According to Experts”

Is a Power of Attorney Really Necessary?

A power of attorney is a document to be signed and notarized and allows one person, known as the “principal,” to appoint another person, known as the “agent,” to act on the principal’s behalf within the scope of authority described in the document. According to a recent article from The Gazette, “Money & the Law: Powers of attorney more complex than they might seem,” the power of attorney can be very broad or limited to a particular transaction.

You may want someone to be able to pay your bills if you are temporarily incapacitated, for instance, but not to sell your home. A personalized power of attorney document can set specific limits for your unique situation.

As part of an estate plan, the POA is likely to be “general,” granting broad authority to the agent. This may be especially useful to someone who regularly travels and can’t always be physically present to conduct transactions. It also benefits someone who faces a risk of cognitive decline or impairment due to age or illness.

With proper language, a power of attorney can be made “durable,” meaning the grant of authority contained in the document survives legal incapacity. The POA does not survive the death of the principal.

If a person doesn’t have a durable financial POA and becomes incapacitated, a conservator must be appointed to handle the person’s financial affairs. This requires a legal proceeding, which can be costly, time-consuming and divisive among family members.

A POA should be created with careful thought and planning. The agent could turn rogue. For instance, a child appointed as the POA watching their inheritance shrink because of their ill parent’s medical expenses might skimp on an elderly parent’s health needs.

Financial powers of attorney can also create risks for agents. The agent’s job is simple when the person has full capacity—most of what the agent will do is carry out directions given by the principal. However, when the person becomes incapacitated, they are responsible to act as a fiduciary, in the same way a trustee or conservator would.

What duties does the POA entail once the principal becomes incapacitated? They must round up information and become responsible for managing whatever is delineated in the POA document. This may include financial affairs, investment accounts, tax obligations, pet care, etc.

Determining when incapacity has arrived can be difficult. In some elderly people, capacity comes and goes. When should the agent begin making discretionary decisions?

There are also questions about the standard of care applicable to agents named as POA. In most states, the standard of care is more than good faith, requiring diligence, competence, and prudence.

A power of attorney is more complex than it appears, requiring serious attention by estate planning attorneys and their clients as part of the estate planning process. They should be updated, just as an estate plan is updated, every three to five years or when circumstances warrant.

Reference: The Gazette (Sep. 3, 2023) “Money & the Law: Powers of attorney more complex than they might seem”

A Roth Conversion Can Benefit Retirement Plan

Before 2020, leaving a traditional IRA to younger beneficiaries created dual tax breaks. The original owner reduced taxable income by making pretax contributions during their lifetime, and beneficiaries could stretch the benefits of tax deferral over their lifetime. All that ended with the SECURE Act, but there are some options, as explained in the article “Why a Roth Conversion is a Powerful Estate Planning Tool” from Think Advisor.

After the SECURE Act, beneficiaries who don’t qualify as “eligible designated beneficiaries” or EDBs must empty the inherited IRA account within ten years. If the original owner had already begun taking minimum required distributions, the beneficiary must also take annual RMDs during the ten-year distribution period.

Someone who inherits a traditional IRA must now pay taxes on the entire account balance within ten years of the original account owner’s death. This can be a sizable tax burden, especially if the beneficiary is in their peak earning years.

Roth beneficiaries who don’t qualify as EBDs must empty the account within the same ten-year distribution period applying to traditional IRA accounts. However, Roths have a decisive advantage during the original owner’s lifetime: no RMD rules.

The original owner will always be deemed to have died before their required beginning date because a Roth account can never go into pay status since there is no required beginning date for distributions. Therefore, the Roth IRA beneficiary can wait until the tenth year to empty the account, allowing the funds to grow tax-free without worrying about the tax hit in Year 10.

When the beneficiary eventually takes distributions, the original contributions are nontaxable because the original owner paid taxes on Roth contributions during their lifetime. If the five-year rule is satisfied—at least five years have passed since the original owner made their first contribution or conversion to the account—earnings will also be tax and penalty-free to beneficiaries.

Roth accounts benefit the original owner because they offer a tax-free source of income during retirement. However, they’re also a valuable tax-free gift for account beneficiaries.

Reference: Think Advisor (Sep. 1, 2023) “Why a Roth Conversion is a Powerful Estate Planning Tool”

Tasks to Be Done After a Loved One Passes

If you haven’t dealt with losing a loved one, the days and weeks after a death can be overwhelming. Pain and grief are paired with important tasks that must be done, or unnecessary stress will result, explains a recent article, “11 Financial Steps to Follow After the Loss of a Loved One,” from U.S. News & World Report.

An official declaration of death. If the death occurs in a hospital, the hospital will issue it. If the death occurred at home, a medical professional or first responder would make the declaration.

Obtain a death certificate. This usually comes from the funeral home. You’ll want to get five to ten original certificates, which will be used for various legal and financial matters.

Gather financial documents. This includes estate planning documents, a will, a trust, bank and investment account information, utilities and bills, insurance policies and tax returns.

Reach out to advisors. This includes the estate planning attorney, financial advisor, CPA and other professionals working with the deceased. They will be able to offer guidance as you go through the process of managing the estate.

Contact any government agencies. If your loved one was receiving benefits from Social Security, the Veterans Administration, Medicare, Medicaid, or any other government agency, you must notify them of the death. The funeral home may have already sent the SSA a notification. You may still want to confirm if it has been sent, as the ultimate responsibility for notification is the surviving spouse or adult child.

Contact financial institutions. The financial institutions, including commercial banks, brokerage accounts and insurance companies, will all need to receive an original death certificate. If there is a POD (Payment on Death) order, the balance on accounts will be transferred to the designated beneficiary. If there are life insurance policies, you’ll need to find the policy and identify the designated beneficiary.

Avoid identity theft. Contact credit agencies, including Experian, Equifax and TransUnion, to notify them of the death. You may need to contact one for the others to become aware. You should also close the social media accounts of the deceased. Depending on the platform, you may only be able to memorialize the account instead of deleting it.

Other important institutions to contact. The post office will need to be notified, although you may first want to have the person’s mail sent to your home directly. The motor vehicle department needs a notification of death to stop renewing licenses. Unions and professional, service, or fraternal organizations should be notified. There may be survivor’s benefits.

Voter registration. You’ll want to notify the deceased’s voter registration agency, so they can remove their name from voting rolls.

Prepare the final tax return. There are two tax returns to be aware of—the final income tax returns and the estate tax returns. Your estate planning attorney will know the deadlines for both.

Filing the will with the probate court. Once the will goes through probate and is approved by the court, the executor will be able to distribute the deceased’s assets in accordance with the will. If there is no will, the distribution will be overseen by the court and follow the state’s intestacy laws.

Settle any remaining debts. In most cases, the remaining liability on a mortgage or car loan will be payable by the person inheriting them. All other forms of debt, like student loans, credit cards and medical loans, will be charged against the decedent’s estate.

Carrying out these tasks during a difficult time is not easy. An experienced estate planning attorney can help make the process easier for all concerned.

Reference: U.S. News & World Report (Sep. 1, 2023) “11 Financial Steps to Follow After the Loss of a Loved One”