Understanding the Potential Power of Social Security
Smart tips for entrepreneurs to implement now to get the most out of Social Security later
By Mark J. Kohler •
Opinions expressed by Entrepreneur contributors are their own.
The following excerpt is from Mark J. Kohler and Randall A. Luebke's book The Business Owner's Guide to Financial Freedom. Buy it now from Amazon | Barnes & Noble | iTunes | IndieBound
Many entrepreneurs see their business as their primary retirement tool. Regrettably, they often view Social Security as their second source of retirement income.
As an entrepreneur, Social Security benefits can play a significant role in funding your retirement. It's important to understand the role of Social Security and how it impacts you directly, as well as how it affects your business so you can make better choices and decisions when you address it.
Social Security benefits are a big deal, and most people do not fully comprehend the value of their Social Security benefits. Today, a married couple with a strong work history who maxed out their contributions into Social Security during their working years will typically receive between $800,000 and $1,000,000 in benefits paid to them from Social Security over their lifetimes. Looking at it from another perspective, a couple receiving a combined benefit of $4,000 a month, or $48,000 a year, would require a retirement nest egg of nearly $1,600,000 earning three percent to generate that level of income during retirement adjusted for inflation. That's a big deal!
The key strategy during the phase of paying into the system is to adjust your Social Security wages to the lowest level possible in order to maximize your benefits for later -- yes! There's a sweet spot to planning your contributions.
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As an entrepreneur running an operational business, you are going to pay into Social Security either through Self Employment Tax paid on a Schedule C or through a K-1 as an LLC. However, the beauty of an S corporation is that you have the autonomy to control how you pay those taxes and how much you pay. The S corporation strategy is an excellent strategy to save on FICA taxes and plan for your future Social Security benefit at the same time.
For the purposes of Social Security planning, here's the point: Check your Social Security benefits statements annually to be certain that the amount of FICA taxes you paid are reflected in this report and see what the calculation is for your potential benefit. Your financial advisor can also meet with you to calculate the optimal salary level to get the maximum benefit at retirement age. Don't take this payroll planning lightly. It can truly save you thousands in taxes annually and deliver you thousands more on the back end in Social Security if you do it right.
When you're ready to claim Social Security
Presently, the earliest age at which one can claim Social Security benefits is 62. If you're within 10 years of this mark, then the first rule is to strategize. You have options, and by claiming Social Security too soon or by making poor decisions, it could cost you hundreds of thousands of dollars. Now more than ever, it's important for you to understand your options and make the best choices among them.
There are a myriad of potential claiming strategies and scenarios. Moreover, the choices and decisions you make about your Social Security benefits are generally permanent and can't be undone. The following are some basic guidelines for claiming your benefits:
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1. Delay claiming your benefits. Yes, you've been paying into Social Security your entire life. You're concerned that the government may renege on the promise to pay, and of course no one knows for certain how long they'll live. However, if you claim benefits at the earliest possible date, you're going to receive a significantly reduced payment. That reduction is permanent with very few options available to you to fix this problem should you change your mind. At minimum, you should generally wait until Full Retirement Age (FRA) as defined by the Social Security Administration to receive your benefits. At FRA, you will receive 100 percent of the benefits you're entitled to receive. Moreover, you can earn an unlimited amount of other income, and there's no reduction in those benefits. If you can afford to wait and delay receiving your Social Security benefits beyond your FRA, you'll automatically receive a substantial increase in payments.
2. Delay claiming your spouse's benefits. The significant increase in Social Security benefits I just discussed for you can have a trickle-down effect with your spouse's benefits as well. If your spouse is younger and/or had a lesser earnings history, then by delaying your benefits, you're not only going to create a bigger payout for you, but the benefits also pass down to your spouse and it will provide a larger and permanent benefit throughout your spouse's life as well.
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3. Spousal benefits. If you were previously married and are now a widow, widower, or divorcee, you may be entitled to receive benefits under that spouse's earning records. Often, you can claim a survivor or spousal benefit and earn delayed credits on your own earning record simultaneously to supercharge the income you may receive over your lifetime.
I could go on and on with suggestions, ideas and strategies to consider. The reality is that you need a Social Security plan: one that will not only help you to determine the optimal claiming strategies but will help you to determine the optimal contribution strategy as well. Ignoring Social Security and going along with the government's plan will generally not be in your best interest. Take charge. Be in control. Make informed choices and decisions. It's well worth the time, effort and expense.
