 Personal Finance PowerPoint Presentation, Social Security Benefits and Income. Prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. In prior sections we talked about investment goals, strategies, tools. Now we're honing down on the specific goal of retirement planning, recapping the major sources of income that might be available in retirement including employer pension plans. We're going to include the 401k plans here as well. We talked about them in a prior presentation. The public pension plans, we're going to include the 403b plans here too. We can think of in general the public pension plans being similar to the employer pension plans except for people working in the public sector, people working for the government for example. In this public area we're also going to include benefit programs, government benefit programs such as social security that we're focusing in on here. Personal retirement plans like IRAs and other savings plans specific for retirement and then annuity is a tool that we might use for retirement planning as well. Most of this information comes from investopedia. How are social security benefits affected by your income which you can find online? Take a look at the references resources continue your research from there this by the investopedia team updated October 26, 2021. So how are social security benefits affected by your income? When we're thinking about social security there's two sides that we typically think about. One being when we're putting money into social security when we're being charged taxes which are usually the payroll taxes or self-employment tax and then two when we get the benefit side of things how much are we going to get on the benefit there is of course a connection between the two because how much we pay into the social security will have an impact on how much benefit we get in general. Social security benefits are often synonymous with retirement so note that more and more these days we think of social security as not just a welfare or safety net program but as something that we should be able to depend on although I would be skeptical to be dependent upon it if you're further away from that retirement age because the law could change so I would like to have it as something that would be great if I get it but if I don't it's not the end of the world if you're closer to retirement then I would think it would be more and more of a guaranteed thing at this point. In fact social security administration SSA estimated more than 65 million Americans received a monthly benefit check as of March 2022 but this federal program is more than just a source of monthly income relied on by people who leave the workforce it also provides payments to surviving spouses and children just like life insurance payments to disabled individuals along along with supplemental income for qualifying individuals. Payments are determined by a number of factors including the number of years spent in the workforce so it's going to be calculated in part on how many years you've been in the workforce and your earnings and if you're claiming disability benefits you must also have a qualifying medical condition. One thing most individuals don't consider is your earned income which of course is going to be an important factor if we think about the social security as kind of a retirement plan that everyone should be dependent upon you would think the more money you put into it the more benefit you should get from it. So if you think of it as a welfare program you would think that it doesn't matter how much money you put into it that it's a needs-based kind of thing and the social security for people in retirement is kind of in between it's like a progressive kind of benefit program at this point. So this is the amount of money you make over the course of your working life and it happens to be the most important factor so the more you earn the better it is for you in the long run but is social security considered earned income? The answer is no. So when you get the social security benefit then is that basically earned income which is kind of a term we often use for taxes because that's income that you you actively earned by working or being self-employed the benefit program if you're getting social security benefits typically isn't considered earned income although may still be subject to taxation. How social security benefits are calculated? The SSA Social Security Administration keeps a record of your earned income every year along with the portion subject to social security taxes and used to calculate your retirement benefits. The more you earn while working the more you pay into the social security system through payroll and self-employment taxes the higher your monthly benefit will be up to a certain maximum. So the more money you pay into the system the more benefits you get however the benefits you get as your income gets higher will have lesser and lesser of an increase in the benefit that you will be receiving that's part of the progressiveness more the welfare kind of system program than a retirement program where you would think the more you put in then you should get a higher and higher benefit. So for 2022 the maximum is $4,194 a month up from $3,895 a month in 2021. If you paid into the system for more than 35 years the SSA Social Security Administration only uses your 35 highest earning years and does not include any others in its formula. So when you're calculating how much you're going to get you're going to pick your highest years because those are going to be the ones they're going to come up with the biggest benefit and you're going to be picking 35 of them so that's a fairly significant chunk of the working years. So if you did not pay into the system for at least 35 years then a value of zero is substituted for any missing years. So obviously that's going to drag down the average of how much you paid into the system over the 35 years if you don't have 35 years of working years after you apply for benefits. These earnings are adjusted or indexed to account for past wage inflation and used to calculate your primary insurance amount that's the PIA. The PIA reflects the benefit that you are eligible to receive once you reach what Social Security calls your full retirement age FRA. So for anyone born from 1943 to 1954 the FRA full retirement age is 66. For people born after 1954 the age rises by two months annually until it hits 67 for anyone born in 1960 or later. The age at which you start collecting your Social Security benefits is another important factor. You can begin receiving benefits as early as age 62 but your benefits are permanently reduced unless you wait until your full retirement age. Conversely your monthly benefit increases by 8% annually if you postpone collecting past your full retirement age up to age 70. So we've talked about this in more detail on prior presentations in terms of what would be the optimal age for you to opt take Social Security. That's when benefits max out and there's no further incentive to delay. So what income reduces Social Security benefits? So what if you don't have enough money to live on between your Social Security benefits and investment income? So if you're in a situation now that you're in retirement you're getting the Social Security benefits and investment income you of course want to have that to be sufficient to be living on at that point in time. So you may find it necessary to find other sources of income perhaps through a part-time job or freelance gig. So now you might be thinking at that point well I'll pick up some work at that point in time take on some gig work take on a job at that point in time. The question then is now that you're getting government program money is that going to have an impact on your benefits right that's always kind of an issue whenever we have these government kind of programs income can sometimes become bad because it can reduce the amount of benefits that we get. So if you decide to work during retirements it's important to know that your Social Security benefits will be affected. So some of your benefits maybe temporarily withheld based on your income. This is based on which stage you're at when it comes to your FRA. So for instance your benefits are reduced by one dollar for every two dollars you earn in excess of nineteen thousand dollars nineteen thousand five hundred and sixty dollars for two thousand twenty two and eighteen thousand nine hundred and sixty dollars for two thousand twenty one until you reach your full retirement age. So this is if you were taking the Social Security before your retirement age and then you're thinking I'm going to continue working well then you could have an impact on your your benefits at that point. So your benefits are reduced by one dollars for every three dollars that you earn above fifty one thousand five hundred and sixty dollars for two thousand twenty two or fifty thousand five twenty for two thousand twenty one. Your benefits are long your benefits are longer be reduced beginning with the month when you attain your full retirement age. So we're talking about the period you know before you hit the full retirement age if you chose to take the benefits before the full retirement age. Note that these dollars are not lost forever. Your Social Security benefit increases to account for them after you reach your full retirement age. So you want to take that into consideration with your decision making process. The unemployment and disability benefits impact Social Security. The SSA Social Security Administration does not count any unemployment you collect as earned income. So note we often have these questions that you'll get when you start getting benefit programs. Is it earned income and there's fear in people's eyes. I don't want to be earned income because then it's going to lower some of the benefit programs we may get. So the SSA does not count any unemployment you collect as earned income. So that could be good because it may not reduce the dollar dollar amount if you get the Social Security before the full retirement age. This means it doesn't impact your retirement benefits. So you may be able to collect both. Keep in mind though that the Social Security checks you receive may have an effect on the unemployment benefits you're entitled to get. It's always a good idea to check with the unemployment office in your state about the rules for collecting both types of benefits. So if you've got multiple overlapping benefits you always want to see is there any kind of problem between the two of them to collect both of them. You cannot however collect federal disability benefits and Social Security. Once you reach your FRA full retirement age any disability benefits you receive are automatically converted to retirement benefits. The amount isn't adjusted which means your monthly benefit check remains the same. Is Social Security taxable? That depends. Your income from Social Security may be partially taxable if your combined income exceeds certain amount. We talked about this in more detail in prior presentation. General rule if your income is fairly decent income up to 85% will typically be taxable. If you have a lower income you might have some of it not subject to taxation. In other words you're getting money. Is it something you have to include in income taxes which is bad because an income tax system income is bad because it's subject to taxes. So do I have to include it in income because it's a benefit kind of program and it's got a phase out kind of system in terms of whether you do or not. So combined income is defined as your gross income plus any non taxable interest that you earn during the year plus half your Social Security benefits. For example if you're married filing jointly and your combined income ranges from $32,000 to $44,000 then you may have to pay tax on up to 50% of your Social Security benefits. If your combined income is greater than $44,000 then up to 85% of your benefits may be taxable. Those income members are $25,000 and $34,000 and greater than $34,000 for single filers. So bottom line generally if you have a decent income you have to include in income up to 85% of the Social Security. Is Social Security based on income? The amount of your Social Security benefit is calculated using 35 highest earning years of your lifetime. The sum of those earnings is then divided by the number of months to those years. So we're taking like the average of the highest 35 earning years and yes to higher your income on those 35 earning years. The positive benefit you might have increase in your Social Security payments in general. The Social Security administration also factors in the age at which you choose to take benefits. If you retire and take Social Security early your benefits are permanently reduced. So we talked about that a bit more in prior presentations. If you wait until you reach 70 your benefits increase by 8% annually. Is Social Security calculated with gross or net income? Your Social Security benefits are calculated using gross income. So gross income that's reported to the Social Security in any case. How do unemployment benefits impact Social Security benefits? Unemployment benefits don't impact Social Security benefits at all. This means you can still collect both at the same time. But your Social Security may affect the amount of any unemployment you receive. So that if you get unemployment it's not it may not affect your Social Security, but your Social Security may affect the unemployment because that will be dependent upon the state law. So be sure to check with your state agency if you're unsure. So is a pension considered earned income for Social Security? Only earned income is taken into consideration when it comes to your Social Security. This means income earned from wages, salaries and tips from full time part time contract freelance and self employed job. So if you had to pay Social Security taxes through a payroll deduction or on your own that income applies other resources of income such as pensions, annuities, interest dividends and income from other investments don't count. So in other words if you're saying Okay, what if I I'm trying to I take my Social Security early if I have wages that go over a certain threshold that could reduce my Social Security income in those cases? What about other kinds of income? Meaning what if I have like annuities or dividends or interest? Those kind of things are passive income still subject to federal income taxes, but not going to typically not considered earned income. So they're not going to affect your Social Security, you know, reduce the amount of the Social Security if you're if you have that early Social Security earnings. Also, if you take money out of like a pension plan, or if you take money out like a 401k, you might think, Well, I have to pay taxes on that because I got a tax deduction earlier. So maybe that counts as income because I'm paying taxes on it. You do have to pay taxes on it. But it's not earned income at that point in time, you earned it when you when you did the work earlier. So you would think that that might not count as earned income. And generally, the general rule would be well, if you're paying self employed tax on it, like Schedule C, or payroll taxes with W two income, that would be earned income. If you're not paying self employment tax in the form of of if you're not paying Social Security in the form of self employment tax or payroll taxes, possibly not earned income, that would be a general rule of thumb. The bottom line, you've worked hard all your life and are ready to for retirement, and are all set to start collecting the Social Security benefits before you wait for that monthly check to come in. It's important to know the basics so you can maximize your benefits. So these benefits are based on the 35 highest earning years of your lifetime. And there are other factors that help determine the amount you'll receive, including your age and whether or not you continue to work. If you know what to expect, you'll be better off in your leisure years.