Can Social Security help you be Work Optional?

Social security can play an important role in the pursuit of a work optional lifestyle.

How can that be? Don’t you need to have lots of wealth to make the decision to have work be an option? Well, not exactly. When carefully planned and integrated, social security can a play a pivotal role as to when you can declare yourself free from having to work. I will share below with you some insight into how social security works and how it can be a part of your overall work optional plan.

First, let’s examine some of the basics of social security. You are normally eligible to collect social security at age 62 if you have contributed 40 credits (1 credit = 1 quarter of a year, 40 credits = 10 years) via payroll FICA taxes. If you do not have 40 credits, you may be eligible to collect a benefit based on your spouse’s (or ex-spouse’s) work history. Benefits are based on the highest 35 years of indexed earnings.

The benefit amount you may receive can differ based on when you start it. When you look at your social security statement, which can be obtained at www.ssa.gov, the amount shown on the front page of the statement is based on your FRA (Full Retirement Age). The FRA determines when someone can begin collecting full social security benefits and it varies based on your birthday.

Of course, you can claim social security before your full retirement age. The impact is a smaller check that is permanently reduced for life. On the flip side, if you postpone taking social security beyond your FRA, your benefit increases permanently. This is important to keep in mind as you start to integrate this into an overall income plan to support being work optional.

The question now becomes, when should I take my benefit? There are many factors that go into answering this question. Some basic questions include, how long can you afford to wait before starting social security? Social security benefits may be needed to meet ongoing living expenses. What is your tax situation? Social security is a benefit that can be taxed. Are you still planning on working? Did you know that your social security may be withheld if you are still working? If you choose to receive social security benefits prior to FRA and continue to work, there are thresholds that you need to be mindful of which can determine if your benefits can be withheld.

Further considerations include the aforementioned spousal benefit if you have not accrued more than 40 quarters of credits. A spouse in this position may collect up to 50% of their spouse’s FRA benefit. To receive a spousal benefit, the other spouse must be collecting a benefit. Additionally, a spousal survivor benefit can play a crucial role in maintaining survivor’s ability to remain financially independent and work optional. When a spouse passes, the surviving spouse assumes the highest benefit moving forward.

Got it all so far? Social security can be complex, and I recommend working closely with your advisor to determine the best path forward for your personal situation. How does this slot into the pursuit of being work optional or financially independent? If you are close to achieving those goals, proper social security integration can put you over the top. Let me provide you with a generic example. Pat and Sally both have IRAs, 401Ks, and additional investments in various brokerage accounts. They are both in their early 60s and want to have the option to continue working full/part-time or to stop working if they choose. How does social security fit in with their plan?

It all depends. Can they draw income from their retirement assets first and wait to take social security at their respective FRA? Can they delay taking benefits until age 70? What is family longevity history in their respective families? What strategy will provide the surviving spouse with the most amount of ongoing benefit?

Another important consideration is how social security is taxed in comparison to income from IRAs and pensions. While current income tax rates are relatively low (from a historical perspective), Pat and Sally may want to take income from their portfolio (IRAs, 401K, etc.) and not touch their social security. Thus, allowing the benefits to continue to grow. When time comes to draw social security, the benefits may incur less taxes than other sources of income. This is because up to 85% of social security is taxed as opposed to 100% of distribution from traditional IRAs. Also, California does not impose a tax on your social security benefit. Add it all up together, this may translate to a lower overall tax bill and more funds in Pat and Sally’s pockets later in retirement.

As you can see, there are numerous considerations and thoughtful strategies that can go into setting up various options to help maintain financial independence in the long run for you and your family. Work closely with your retirement income strategist to discover ways that can help bring you closer to having work as an option or move you closer to financial independence.

Any opinions are those of Vivian Investment Partners LLC and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.