Retirement Planning and Social Security

It is no secret that the social security trust fund is spending more than it is collecting.  While there is no immediate crisis, it is important that investment advisors and financial planners consider the possible impact that this will have on your retirement now and in the future.

After reviewing a number of the many proposals or trial balloons put forth by the President and Congress, there are three that I think you and your advisor should be most worried about.  These include:

Increased taxes on your social security

Anyone on social security knows that the benefit is taxed up to 85% of your total benefit.  But we should all remember that when Social Security started, it was intended to be a tax-free benefit.  The money (your money) that you contributed to the social security trust fund was taxed on the way in, and now it is also taxed on the way out.

Financial planners and their clients should consider how easy it is for Congress to adjust the tax schedule – and instead of just  85% of your benefit being taxed, all of your benefit would be taxed.

Reduced Cost of Living Adjustment (COLA)

The COLA is the percentage increase of your social security benefit on an annual basis to keep up with inflation.  Your COLA is calculated using something called the CPI consumer price index.  There is a lot of talk about changing how the CPI is calculated, which would reduce or eliminate the COLA increase.  Some of you might remember in 2008 and 2009 when there was a 0% increase in your social security benefit.  It happened once and it can certainly happen again.

Increased charge for Medicare

The cost of Medicare is deducted directly from your social security check.  This deduction has steadily increased over the years.  A modified version of a means test has also been implemented.  This means that the more you make, the more Medicare will cost you.

It is expected that the number of families affected by this increased premium will double over the next 5 years.  The increased premiums range from $209 to $334 per month.   Who could have imagined that we would be talking about the manipulation of the social security system in order to reduce your benefit?

What can you do about it?

Well from a planning perspective, I believe that it is no longer wise to include the COLA adjustment or use the 85% tax rate when calculating your retirement benefit.  At TFG Wealth Management, we have changed our planning strategy to look at what would happen if there was no COLA and 100% of your social security benefit was taxed.

This makes it even more important to choose the right strategy for collecting social security.  There are over 700 different strategies for collecting your social security benefit.  In order to determine which one is right for you, we use a sophisticated proprietary computer program that analyzes all possible strategies for your situation.  After we have identified the top three, it is then time to take into consideration other issues like longevity, how much you need to live on, what tax rate you will pay during retirement, how much of your income will be generated through taxable accounts like an IRA or 401(k) and how much will be generated by tax-free accounts.  Combining the science of the computer program and these other factors, we help our clients determine the best strategy for their circumstances.

If you are interested in learning more about your social security options, please give me a call at 215-968-1755 or contact me by filling out the contact form on this site and I will get back to you.