2 Incomes = LESS Social Security Benefit Than 1?


“Between 1992 and 2004, however, the overall percent at risk increased substantially in the NRRI (see Table 2.2). The three main reasons are a decline in Social Security replacement rates because of a drop in one-earner couples and increases in the Full Retirement Age; a decline in real interest rates; and a shift from DB to DC pensions.”

Did you catch that? Read it again and see if something odd jumps off that page.

If not, let me explain.

More households are at risk in retirement. The reasons for this are:
1. Low interest rates (agreed)
2. Switch from pensions to 401k, 403B, TSP etc. (partially agree)
3. Decline in Social Security because of a drop in one earner couples,”Moreover, the growing prevalence of two-earner couples means that fewer households receive the spousal benefit.” (Could NOT disagree more!)

Let’s run the numbers using Charlotte and me as our example.

Say I’ve made the Median Household income over my life which is around $60k in current dollars.

(Now, please, PLEASE, remember that Social Security uses only the top 35 years of your earnings record to get your benefits. So, if you’re disputing that I made the median income right out of the gate remember that I started working at 22 and stop at 67 that is 45 years of earnings. Only 35 years are actually taken into consideration so most likely the 1st 10 years of my work history are not considered. )

With an annual income of $60k, adjusted for inflation, over the course of my working career, my AIME will be $5,000.

Remember your AIME is what you use to calculate your Primary Insurance Amount(PIA), which is the amount you’ll get at your Full Retirement Age (FRA). For me it’s 67. For you it’ll be between 66 and 67, depending on your year of birth. (For my detailed explanation of how you figure all this out, watch this video).

The first $926 of my AIME will net me $833 of Social Security Income.

The next amount will net me $1303 in Social Security income.

Combine the two and my PIA is $2,136.

Now, let’s say Charlotte worked her tail off for her entire career but didn’t earn any income, she stayed at home to raise our 4 tax credits. At her Full Retirement Age, she’d get 1/2 of MY PIA, or $1068 in Social Security benefits.

Between us then, at FULL RETIREMENT AGE, we’d net $3204 a month in Social Security, $38,452 a year. Remember, my median income was $60,000, so in this case Social Security would replace 64% of that income. Since we now have no earned income anymore we don’t pay 7.65% FICA and NO income tax either because Social Security is tax free if it’s your sole source of income.

See how this works? A 64% replacement ratio with NO tax due is a retirement CRISIS for us??? Hardly.

But back to the reason for this email.

Let’s say the tax credits have moved out of the house leaving Charlotte and me as empty nesters. Charlotte decides she wants to go to work for a while. We’ll say she’s 47 and decides to get a job paying $30k a year for the next 20 years (adjusted for inflation). We’ll assume she had no income previously too.

For the record $30k a year income is around $14.5 an hour.

Now, her total INDEXED earnings is $600,000. (20 years times $30k a year). Divide $600k by 420 and you get her AIME which is $1,428.

Take the first $926 and times by .90 which equals $833. Now take the remaining $502 and times by .32% and we get $161. Total them up and you have a PIA of $993.

So, in this scenario Charlotte would get $993 of Social Security, ON HER OWN BENEFIT RECORD! But that’s still LESS than what her Spousal Benefit would be so the SSA will default to her Spousal benefit. Notice though she doesn’t LOSE anything! She will still receive $1068 in benefits at her FRA.

However, let’s say instead of $30k a year she made $40k a year, which equals $19/hr.

In this case her total indexed earnings are $800,000. Her AIME will be $1902 and thus her PIA will be $1146 which is nearly $100 more than what her Spousal benefit would be. SSA defaults to her HIGHEST benefit.

Take her $1146 and add to my $2136 and we have an annual Social Security benefit of $39,386. There is NO REDUCTION IN BENEFITS from Charlotte getting a job. None whatsoever.

So, what to make of this? “Decline in Social Security because of a drop in one earner couples,”Moreover, the growing prevalence of two-earner couples means that fewer households receive the spousal benefit.”

That makes no sense! There is NO DECLINE in Social Security. Why would they say that???

I just don’t get it.

Secondly, and I won’t get into it much here but if we were living just fine on $60k while Charlotte was raising the kids and now they are out of the home, so Charlotte gets a job, WHY is our replacement ratio based on the income SHE makes plus my income???

Our income with Charlotte working has gone up to near $100k. But with the kids now OUT OF THE HOUSE have our expenses gone up too, as the replacement ratio models suggest?

Again, we made $60k a year with kids at home, when our expenses were the highest. We make $100k a year with kids out of home and expenditures decline dramatically. Current retirement planning models say for retirement success we need to have an adequate replacement rate of the higher income years when our expenses are the lowest. AGAIN HUH!?!?!

Yet these are the models being used to say “We’re all going to run out of money!!!” Or “”Don’t even think about retiring without $2 milllion!!”

I just don’t get.

© Copyright 2018 Heritage Wealth Planning