Retirement income one issue you can’t ignore

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Published: July 19,1999

How is Social Security computed? Is the system really in jeopardy? Will I lose my Social Security if I have other sources of retirement income?

As baby-boomers mature, more and more questions about providing for retirement arise. To provide answers to some of the commonly raised questions about Social Security and overall retirement planning, the Mississippi Business Journaltalked with a Doris Watson, CPA, manager of the employee benefits division of the Horne CPA Group in Jackson.

Mississippi Business Journal: Mechanically speaking, how is Social Security computed?

Doris Watson: Social Security benefits are computed based on a person’s age and work history. First, a workers actual earnings for each year is compared with the maximum salary for Social Security purposes, currently $72,600. An index is prepared for each worker using the lesser of actual wages or the maximum allowable for Social Security. Next, the workers average monthly indexed earnings during his 35 highest earning years is used to compute the basic benefit for that worker. This is the amount the worker would receive at full retirement age, which is 65 for most people.

The basic benefit is decreased if the worker retires at 62. Similarly, it increases if the worker chooses to work beyond normal retirement age and does not file for Social Security until after age 65.

MBJ: Is it more important to earn a lot in your final work years or to have worked a long time for an average wage?

DW: It’s better to work a long time for an average wage. Working a few years at high wages will generally produce a lower benefit than a long history at moderate wages. Unlike some private retirement plans that look primarily at the last five years of earnings, Social Security benefits are calculated on lifetime earnings.

MBJ: When must people start drawing from their IRA or 401(K)?

DW: For both IRAs and 401(K)s, withdrawal must begin by age 70 and a half.

MBJ: What affect does income from private retirement plans have on the amount of Social Security a person can draw?

DW: None, unless the worker wwas employed in a job not covered by Social Security, such as federal civil service or some local governments.

Although retirement income does not affect the amount of someone’s Social Security benefit, it could affect the income taxation of their Social Security. A portion of Social Security, up to 85%, will be subject to income tax if the retiree’s income exceeds a certain level.

MBJ: What about capital gains from investments outside of a retirement plan? Do they impact Social Security benefits?

DW: No. Only earned income, either wages or self-employment income, affect the amount of Social Security benefit. Non-work earnings such as investment earnings, interest, pension, annuities, capital gains and other government benefits do not affect the amount of Social Security benefit. Again, this income may affect the taxability of a persons Social Security benefit.

MBJ:What is your advise to a person age 65 who enjoys working – should they retire or continue to work? Can you continue to draw a salary and receive Social Security after age 65? If you delay beginning Social Security will the benefit be larger when you do begin?

DW: The question of whether or not to continue working after becoming eligible for Social Security benefits is a personal one and involves more than just the financial aspects. For a person who is healthy and who finds joy and fulfillment in working, continuing to work may be a good choice. Perhaps the right answer is to continue working at a reduced level and also begin drawing benefits.

A person under age 65 can earn a maximum of $9,600 without losing any benefits. If a person earns more than that, $1 in benefits is withheld for every $2 earned over $9,600. A person who is over age 65 but under age 70 may earn $15,500 without losing benefits. For those age 65 and over, $1 benefit is deducted for every $3 earned over $15,500.

The annual limit on earnings for persons age 65 and over increases from $15,500 in 1999 to $17,000 for 2000 and then leaps to $25,000 for 2001 and up to $30,000 for 2002. The earnings limits no longer apply when a person is age 70 or older.

MBJ: What is the penalty for retiring at age 62?

DW: The Social Security benefit is reduced by 5/9 of 1% for each month a worker receives benefits before age 65. This amounts to approximately a 20% reduction at age 62. The closer the worker is to age 65 when benefits start, the smaller the reduction. For example, the reduction is 13 1/3% at age 63 and 6 2/3% at age 64.

The age at which a person can retire with no reduction in benefits is gradually being raised from age 65 to 67.For someone born in 1938, the age for full retirement benefits increases to age 65 + two months. The age for full retirement benefits is increased each year until it reaches age 67 for persons born in 1960.

MBJ: Do your clients voice concerns about the future of Social Security or are they confident that the system will survive?

DW: Yes, many of my clients fear that Social Security will not be available when their retirement comes. However, most of them realize that Social Security alone will not be enough to sustain their standard of living anyway. Additional income from company retirement plans or personal savings will be required regardless of the future of Social Security.

MBJ: Any tips for our readers concerning their Social Security accounts?

DW: Check your Social Security earnings record at least every three years. Errors can occur, particularly if you change jobs frequently or have more than one employer. In light of all the concerns over Y2K, it would be good to request an earnings record before the end of this year, check it for accuracy and then file it with your other important papers. Your request can be made online or by calling 1-800-772-1213.

Contact MBJ publisher Joe D. Jones, CPA, at cpajones@msbusiness.com. Doris Watson, CPA, may be contacted at dwatson.horne@hcpag.com.

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