With millions of Americans entitled to Social Security retirement benefits, Social Security planning should be the cornerstone of any advisor’s retirement income planning practice. Your clients rely on your expertise to help them access maximum benefits over their lifetimes. Here are three crucial Social Security concepts you need to know to demonstrate the value of your advice.

Earnings Test

If a Social Security recipient is younger than their full retirement age (FRA) and has earnings from work, they may be subject to the earnings test. Earned income includes gross wages for services rendered, plus all net earnings from self-employment, minus any net loss from self-employment.

Retirement income such as 401(k)s, 403(b)s, and pensions are not included as earnings. For 2022, the annual exempt amount is $19,560. For every $2 above the limit, the person’s benefit is reduced by $1.

The Social Security Administration withholds the number of checks necessary to overcome the penalty at the beginning of the year. However, it’s important to note that some people earning more than the limit should claim. They may forfeit a few checks at the beginning of the year, but they will receive checks for the remainder of the year.

The earnings test will be calculated in Social Security Timing® and Income InSight® once you enter historical earnings past the client’s eligibility age (62 for retirement benefits and 60 for survivor benefits) through the year the client reaches full retirement age. The strategy instructions will outline any reductions. 

Widow(er) Limit

Social Security offers two distinct benefits for widow(er)s: a retired worker benefit, which is based on your own earnings record, and a widow(er) benefit, which is based on the earnings of a deceased spouse. Widow(er) benefit claiming decisions are particularly complex because benefit amounts depend on the claim age of the deceased and the claim age of the survivor.

Unique to widow benefits is the concept of the widow limit. The widow limit can impact benefits if the deceased claimed early and received a reduction more significant than 17.5%. Assuming the reduction based on the survivor’s claim age is less than 17.5%. The survivor is entitled to 82.5% of the deceased’s full retirement age benefit or the amount the deceased was receiving (whichever is higher). A perfect example of this interaction is cases where the survivor is younger than the deceased and the deceased elected early benefits. If the deceased claimed benefits early (at age 62) and the surviving spouse reached full retirement age by the time of the deceased’s death, the surviving spouse will receive more than the deceased was receiving.

Anytime you have two benefits available, carefully consider the long-term impact of the timing of each claiming decision. Sometimes the best strategy is to claim one benefit early and switch to the other later. If you select “widow” when adding a client, Social Security Timing will outline the options for switching benefits in the strategy instructions.

How to Calculate Social Security Taxable Income

The Social Security Administration estimates that about 56% of beneficiaries will owe federal income taxes on their benefits. As you probably know, Social Security benefits on their own aren’t subject to federal income tax; however, when you combine Social Security benefits with other sources of income, your total income can fall over the threshold. If you file a federal tax return as an “individual” and your provisional income is between $25,000 and $34,000, you may have to pay income tax on 50 percent of your benefits. If your provisional income is more than $34,000 and you’re filing as an individual, 85 percent of your benefits may be taxable. Those thresholds are a bit higher for married couples.

Tax Clarity® illustrates the taxation of Social Security as an increase in the overall effective marginal rate (gray)—typically starting just before the 10% tax bracket and ending when 85% of all benefits are taxed. After taxing Social Security benefits, the software pulls each bracket forward to represent the additional taxable income generated. You can see the figures for both the client’s provisional income and the taxable Social Security by clicking “details” and looking under the calculated fields subheading. Being able to show clients how much of their benefit is taxable can help them see the value of an advisor who understands the intricacies of Social Security.

Financial Planning Software

Frequently clients think about financial decisions in a vacuum. “What should I do about Social Security?” “How can I reduce my taxes?” “How should I invest my money?” Top advisors recognize that the ability to drill down and add demonstrable value to each question is valuable and marketable. Ultimately, a decision addressing one question could influence or derail an answer for another question. Coordinating the multiple aspects of a client’s retirement income plan should be done in overarching financial planning software. Income InSight® deeply integrates with Social Security Timing and Tax Clarity, allowing you to deliver the granular insights that demonstrate your value while tying them together and back to the client’s overall financial goals.

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