Many consider a key component for retirement planning to be including Social Security in your estate plan, but navigating this federal benefit program can be challenging. This blog covers the basics of this federal government retirement benefit in one of a five-piece overview of benefits for seniors. The first blog covered how to identify and incorporate employment benefits into your estate plan. Here, the focus is on Social Security and estate planning, specifically how Social Security benefits fit into your overall retirement plan.
What You Need to Know About Social Security and Estate Planning
The Social Security program began with the passage of the Social Security Act in 1935 as a form of social insurance. The program was and is intended in part to pay retired Americans of a certain age a continuing income following their final exit from the workforce. Although the program has been modified slightly through the years, the overall purpose remains intact: to provide financial security for older Americans. But the program is complex, meaning many of us need help navigating Social Security and estate planning.
Who Pays for Social Security?
Social Security is funded by a tax imposed under the Federal Insurance Contribution Act (FICA). The FICA tax is deducted from most employees' paychecks, creating a sort of pool of funds from which the government pays benefits to those eligible for them. The employee and the employer each pay half of the FICA tax.
What Are Social Security Benefits and Who Gets Them?
If you're reading this blog, you probably consider Social Security as part of your estate plan. But how much about Social Security do you know?
There are three main types of Social Security retirement benefits based on an individual's work record : retirement benefits for the worker, spousal benefits, and survivor benefits.
To be eligible for Social Security retirement benefits, a worker must have a work history of earnings meeting a certain minimal level per year over the course of at least ten years. Under the original Act, a worker was eligible for benefits only if no longer regularly employed. Today, a worker is eligible to draw retirement benefits as early as reaching age 62 or may delay drawing benefits to as late as age 70.
Social Security spousal benefits are benefits that may be available to current spouses, widows, and ex-spouses. In the case of current and former spouses, the parties must have been married for at least ten years and the current or former spouse must not have remarried before age 60. A current spouse cannot receive spousal benefits until the income-earning spouse has filed for his or her own benefit, but a former spouse may apply for spousal benefit as long as the former spouse is at least age 62.
Finally, Social Security survivor benefits may be available for spouses, children, or a parent of a worker who dies. Following a worker's death, a one-time payment may be made to a spouse living with the worker or receiving certain Social Security benefits at the time of the death. If no spouse qualifies, then to a child of the worker eligible to receive benefits in the month of the worker's death. In 2018, the amount of the one-time payment is $255.
In addition, a qualifying spouse or former spouse may be entitled to receive the full amount of the worker's Social Security benefits or his or her own Social Security benefit, whichever is greater.
An unmarried child may be eligible to receive Social Security survivor benefits upon a worker's death if the child meets one of the following criteria:
· The child is younger than 18
· The child is age 18 or 19 but a full-time student in high school or lower.
· The child is age 18 or older and disabled.
Except for disabled children, benefits may continue until the child graduates high school or is two months past age 19.
What Factors Determine the Amount of Your Social Security Benefits?
People navigating Social Security and estate planning need to know how their benefits are calculated. The amount of Social Security retirement benefits paid is based on several factors:
· The age when the worker begins drawing Social Security retirement benefits;
· The number of years the worker paid into Social Security; and
· The total amount the worker has paid into Social Security.
The amount of your monthly Social Security check is directly related to the date you start drawing the benefit. Your Social Security benefit is calculated based on your "Full Retirement Age" (FRA), which is the date you are eligible to begin drawing full retirement benefits. This can vary depending on when you were born:
· For those born before 1938, FRA is age 65.
· For those born between 1938 and 1960, FRA is on a graduated scale up to age 67.
· For those born after 1960, FRA is age 67.
In other words, you are eligible to begin drawing your full benefit the year you reach Full Retirement Age.
That said, you might begin drawing the benefit as early as age 62, but doing so reduces your monthly benefit. Likewise, if you delay drawing the benefit until sometime after you reach FRA, your benefit may increase.
Your Social Security benefit is also based on the number of years you worked and paid into Social Security. The amount of your benefit is based on the highest paid 35 years of work. If you have not worked 35 years, the Social Security Administration will fill in zeroes for the number of years short of 35 and then calculate the Average Indexed Monthly Earnings. If you worked more than 35 years, only the highest earning 35 years are used in the calculation.
To include Social Security in your estate plan meaningfully, you need to know the amount of your monthly benefit.The Social Security Administration website provides various benefit calculators for determining your FRA, for estimating your retirement benefit, and other Social Security benefits.
Social Security and Estate Planning: Deciding When to Start Receiving Benefits
Deciding when to start drawing Social Security is complicated, and it's different for singles than for married couples.
For a single person, consider the age at which you would like to retire, the value of your other retirement assets, and the time period for which those assets are likely to last. When estimating how long your assets will last, consider your cost of living and general health. If you were ever married for more than ten years, you may want to investigate whether you may be eligible to draw Social Security spousal benefits based on your ex's work record.
The determination is more complicated for married couples. In addition to the factors singles should consider, married couples need to decide when it would be best for each of them to start drawing Social Security benefits, and that may not be at the same time.
Married couples also need to consider whether to seek spousal benefits. And if either in the marriage anticipates a short life expectancy, that can have a serious impact on when each should start drawing Social Security retirement benefits.
The Social Security Administration provides a calculator to help determine when to start drawing benefits. Using that calculator can help your investigation, but the safest route is consulting both your financial advisor and an estate planning lawyer.
Where to Turn for Help with Social Security and Estate Planning
Are you looking for help navigating Social Security and estate planning in order to maximize your benefits? Anna M. Price of Jenkins Fenstermaker, PLLC is an experienced West Virginia estate planning lawyer who will work with your financial advisor or accountant to help make the most of your retirement benefits, including Social Security, as part of your estate plan. Call Anna toll-free at 866.617.4736 or contact her using the firm's online contact form. Anna is ready to help you make the most of your hard-earned estate for yourself and your family.