Social Security Archives

Understanding TRS and Social Security

July 24, 2022

The Teacher Retirement System of Texas (TRS) and Social Security are both areas of confusion for many. In this article I hope to clarify how these work together and set the record straight. I have often heard from those in the TRS system that they believe they aren’t eligible for Social Security at all. Most teachers in the TRS system don’t pay in to social security while teaching after all, so this makes sense. Very often, however, social security benefits and spousal benefits are available for teachers. However, there are special provisions that are important to understand if these systems apply to you.

Windfall Elimination Provision

Social security works on a tiered system, where workers with lower incomes have higher percentages of their income replaced and workers with higher incomes have lower percentages of their income replaced. In 1983, Congress passed the Windfall Elimination Provision which would reduce, but not eliminate, social security benefits for many teachers. The WEP changes the first social security “bend point” by lowering the percentage of income that social security replaces for the first $1,024 in monthly earnings for teachers. While I don’t agree that this was a fair shake to reduce benefits for a profession that is already underpaid and overworked, I wasn’t consulted in the decision (I also wasn’t born yet). For teachers, it is important to note that your Social Security statement may not reflect what you will actually receive when you file for benefits due to the WEP. The social security website offers a calculator so you can see how the WEP will affect you. Social Security will never reduce your benefits by more than half of your TRS pension, and the maximum reduction of Social Security benefits due to WEP in 2022 is $512.

Government Pension Offset

There is one additional provision to be aware of called the “Government Pension Offset”, or GPO. The GPO can reduce the social security spousal benefits a teacher could receive by up to two thirds of their TRS pension amount. For example, a teacher with a TRS pension of $600 will result in a $400 reduction of the Social Security spousal benefit (2/3 of $600=$400). The GPO only affects spousal benefits, not a worker’s primary benefit.

No work and no spouse

In the worst case scenario, a teacher and their spouse may have never paid into social security. In this case, they would not be eligible for social security benefits. However, there are options available to supplement retirement if this is the case. One option is by saving in an IRA or Roth IRA. In 2022, the contribution limit is $6,000 with a $1,000 catch up for those over age 50. Additionally, many teachers have a 403(b) available where they can save up to $20,500 per year for retirement.

Conclusion

For most teachers, social security benefits will be reduced due to the WEP and GPO. The benefit amount will usually not be reduced to zero, but planning for the reductions that may apply is important. Don’t leave social security benefits on the table that you worked hard for. Consult a CERTIFIED FINANCIAL PLANNER® professional today to talk about how you can maximize both your TRS benefits and Social Security benefits, and plan for a successful and secure retirement today.

Published in the Victoria Advocate

David Faskas is a CFA and CFP® professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management. He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.

Social Security – The Forty Year Decision

May 22, 2022

If you find yourself reading the business section of the Advocate every Sunday, specifically every other Sunday when our firm’s articles are published, you may have noticed a trend in our firm’s recent articles. We have been covering Social Security as a way to add insight from different perspectives within our firm. Our staff is made up of diverse backgrounds with different personal and professional experiences, but how many different ways can you really talk about Social Security? How much advance planning should you really do for a filing decision that doesn’t have to be made until your mid-60s?

Would you be shocked if I told you that I believe the answer could be somewhere around 40 years in advance? Like so many other things in life, the decisions that you make throughout your career, or maybe lack thereof, cause a ripple effect when it comes to your financial well-being, specifically your Social Security benefits, in retirement. I’ll walk you through a few examples and how to plan for them:

Breaks from the workplace: When analyzing clients’ Social Security statements, it is not uncommon to see that one spouse had left the workplace altogether or took a cut in income to accommodate for parenthood and the admirable job of raising children. Since Social Security looks at your earnings history for 35 years, any year that there is not income will draw down your potential benefit amount in retirement. This was part of the reasoning behind the creation of spousal benefits in 1939; to allow non-working spouses to receive 50% of the working spouses benefit amount. When planning for retirement and a lower Social Security benefit, it could be advantageous for individuals taking a break from the workplace to maximize a retirement account like a spousal IRA.

Self-employment: When owning your own business, it’s logical to think about and plan for ways to maximize your tax deductions. While as a self-employed individual you’ll be paying more out of your own pocket in Social Security taxes (15.3% when you combine the employee and employer tax), you’ll most likely see a smaller Social Security benefit. In order to offset a potentially lower Social Security benefit in retirement, self-employed individuals should plan to take advantage of retirement vehicles at their disposal, like a SEP IRA, solo 401(k), or even an HSA if you or your spouse have a high deductible health insurance policy.

Work in the public sector: If you or a family member have ever worked in the public sector in any form, you are probably familiar with the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These two provisions can affect how much, if any, benefits you may receive from Social Security. While some employers or professions in this sector may allow you to decide if you will have money withheld, others may not. If you fall into this group, it is crucial that you working with a professional to guide you down the right path. In two separate cases, I have worked with a pastor and a school administrator to decide what the correct answer was for their financial plan. Both had different outcomes, but both moved forward with confidence knowing that they had made the right decisions based on their personal financial situations.

When it comes time to draw your Social Security benefits, don’t look back wishing you had known how your choices over the last forty years would affect your retirement. This income source that you can’t outlive is too important to wait until age 62 to know the answer. Work with a CERTIFIED FINANCIAL PLANNER™ professional, to ensure that you’re making the right decisions for YOU and your financial future.

Published in the Victoria Advocate

Sara Potts is a CFP® Professional and Operations Manager with KMH Wealth Management, LLC

Social Security Considerations for the Self-Employed

April 24, 2022

This month my husband and I are celebrating one year of his self-employment. Last April he stepped away from the security of regular paychecks and employee benefits to start his own construction company. As his supportive wife and his financial advisor (package deal if you ask me), I’ve had my pen to paper for the better half of a decade financially preparing to bring his dreams to fruition. If he was going to take the plunge into self-employment, I had to make sure we did it right – which meant planning for every known variable within our control. One such variable which I didn’t expect to consider while planning for the launch of a business in our twenties is Social Security. Specifically, how the taxes we pay in and the benefits we will claim later would impact the business and our eventual retirement. If self-employment is relevant to you, here are some social security considerations you need to write into your financial plan:

Social Security Taxes: When you work for an employer, you and your employer equally share the burden of the Social Security tax. The employer deducts 7.65% of your earnings from your paycheck, matches your 7.65%, and reports your wages to the IRS. When you are self-employed, you pay the combined employee and employer amount of 15.3%, also referred to as the Self Employment (SE) tax. You will report your earnings directly to the IRS when you file your federal income tax return. Net earnings for social security are your gross earnings from your business, less your allowable business deductions. For many new businesses, slim profit margins are expected in the early years, so the extra 7.65% tax is important to account for. Fortunately, the self-employed get two income tax deductions to lessen the blow of the SE tax: (1) net earnings from self-employment are reduced by half the amount of your Social Security tax, and (2) half of the Social Security tax can be deducted from gross income on your Form 1040, reducing your adjusted gross income.

Social Security Benefits: The Social Security taxes you pay in over the years determine your eligibility for benefits later. Your benefits are based on your 35 best-paid years. So, if you were self-employed for the greater part of your career and successfully maximized allowable deductions over those years to reduce your SE tax, then it’s reasonable to expect less in Social Security benefits. Your benefits will likely make up a smaller portion of your retirement funding than your W-2 employed counterparts. Fortunately however, self-employment opens the door to robust retirement planning strategies, such as higher annual contribution limits and tax deductions that come along with those contributions.

Financial planning in the formative years of self-employment can set the cornerstone of a successful business and eventual retirement, but don’t go it alone. Plan for the variables that are within your control by having your CFP® professional and CPA work closely together throughout the year to take advantage of strategies as they arise, rather than waiting until you file your taxes and being surprised with missed opportunities.

Published in the Victoria Advocate

Hannah Gohmert is a CFP® professional and Chief Compliance Officer with KMH Wealth Management, LLC.

Social Security – Low Hanging Fruit

April 10, 2022

Claiming a correct social security filing strategy can be low hanging fruit – meaning that it’s an easy decision to make and can have an enormous positive impact on retirement if done correctly. However, be careful to navigate common pitfalls like filing too early (or too late), or else that low hanging fruit could turn out to be rotten.

I have one client we can call Susan, who I recently helped achieve an opportune social security filing strategy. Susan had an ex-spouse from many years ago that subsequently passed away. Susan is 62 and just became eligible for early Social Security benefits. While she thought that her deceased ex-husband didn’t have any benefits, I still encouraged her to call the Social Security office to confirm, as even a small benefit could be better than none. After reminding her of this, she found her ex’s Social Security number and gave the Social Security office a call. Thirty minutes later she called me with the exciting news – she was eligible for almost $1,000 per month in benefits that she didn’t know she had from her deceased ex-husband! With this low hanging fruit, we discovered almost $100,000 in unknown benefits (plus the compounded interest on these benefits over a lifetime), while also letting her maximize her own benefits – talk about a win-win! While not every case is this dramatic, it is not uncommon to have one benefit strategy lead to over $100,000 in additional lifetime benefits vs. suboptimal strategies. With that in mind, here are a few factors to consider regarding your social security filing strategies.

Early Benefits: Individuals can file as early as 62 for their own social security benefits. This can result in a 20-30% reduction in monthly benefits, depending on when you were born. Often that lifetime reduction in benefits isn’t worth the tradeoff in the extra early payments, but in some cases like Susan’s it makes sense to file early.

Delayed benefits: Today’s retirees typically have a full retirement age close to 67. However, they can delay benefits until up to age 70. This produces Delayed Retirement Credits, or DRCs, which increase a person’s social security benefits by 8% per year. So if delaying from 67 to 70, you would have a 24% higher benefit for life!

Benefits for Couples: Whenever a couple has benefits to consider, the equation gets trickier. Competing factors make the math more complex, so it is very important to seek professional guidance when choosing a filing strategy.

All else equal, here are some reasons for filing early or later:

• If you expect to live longer, that is more reason to file later. If you expect to have a short lifespan, that is more reason to file early.
• If you expect high inflation, that is more reason to delay benefits. If you expect low inflation, that contributes to the decision to file early.
• If you expect high investment returns, filing early is more attractive; lower investment returns make delaying more attractive.

Any time there are financial decisions that are made once, but have a lifetime impact, it is important to review, understand, and seek professional guidance to make sure that you obtain the best result. Social Security is one of those pivotal decisions to seek professional advice. These benefits can be highly unique to individuals and couples –seek a CERTIFIED FINANCIAL PLANNER™ professional for advice on how to best proceed with an optimized filing strategy.

Published in the Victoria Advocate

David Faskas is a CFA and CFP® professional with KMH Wealth Management, LLC.

Strategies for Success in Retirement

November 28, 2021

This is part 2 of a 2 part article series discussing retiring more successfully.

One of the most important things that you can do to set yourself up for success in retirement is to develop a solid financial plan. There are many planning strategies that a CERTIFIED FINANCIAL PLANNER™ professional can assist you with. Here are a few that I consider to maximize a client’s retirement success.

One retirement strategy that resonates with most is to plan to pay less in taxes, by paying the lowest tax rate possible. This is often easier said than done, and requires careful planning over a number of years. Do you have a year of low income? Perhaps you expect to make more money in the future from raises or required minimum distributions from an IRA, or perhaps you just expect that taxes will be raised in the future to pay for the massive spending packages being proposed and government debt already incurred.

If you are in a lower tax bracket now compared to where you expect to be in the future, a Roth Conversion can be a great strategy. With a Roth conversion, you pay tax at your current rate and are able to allow your Roth IRA to grow, with all earnings tax free if the rules are followed. There are added benefits as well, such as no distributions being required during the original account holder’s life.

Social Security is a significant fixed income source for many retirees. You paid into Social Security for many years, so it is important to maximize your hard earned benefits when you finally begin drawing. Unfortunately, 34% of people claim Social Security benefits early at age 62, locking in a lifetime of reduced benefits. Waiting until full retirement age increases benefits by 30%, and for every year you delay past full retirement age until age 70, your monthly benefit increases by 8%. The decision gets more complicated when you have an ex-spouse or deceased spouse record that you may file on, or other factors like pensions from jobs you did not withhold Social Security from. Discussing the risks and opportunities of different filing strategies with a financial advisor can help you maximize your hard earned benefits.

For those fortunate enough to still have a pension, you may have some critical choices to make at retirement, such as a lump sum payout versus pension for life, and further choices of single life or joint and survivor annuity options. With so many decisions, it is important to analyze your options. A single decision can make tens of thousands of dollars of difference, and there is no single best option for each retiree. Be sure to seek assistance as the right choice can easily pay for itself several times over.

Annuities have long been a popular strategy, but often come with concerns of high commissions and conflicts of interest. More recently, commission-free annuities are becoming more popular. A fee only advisor will recommend these, and not “sell” them. A broker typically sells annuities. By stripping out commissions, these products often have more advantageous rates, which can result in better returns to annuity holders. With low interest rates on bonds, commission-free annuities can be attractive alternatives. Annuities may provide you income for life and allow participation in market growth depending on the annuity’s structure. Annuity products are extremely diverse, so it is paramount to fully understand any annuity before adding it to your portfolio.

There are many more planning strategies that may be available to you in your particular situation, and it is important to talk to a CERTIFIED FINANCIAL PLANNER™ professional that has experience in these areas to facilitate your path toward a successful retirement!

Published in the Victoria Advocate

David Faskas is a CFA and CFP® Professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management. He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.

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