Halal Money Matters

Halal Money Matters Podcast

Episode 34 - Getting the Most Out of Social Security with Kirk Larson

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Monem Salam:
Welcome to Halal Money Matters, sponsored by Saturna Capital. I'm Monem Salam. And today we're going to be talking about a subject probably you wouldn't think that it's relevant to a lot of people, but actually, whether you're young or old, at some point in your life you will be coming across this. And this is talking about Social Security. We have a special guest, Kirk Larson, who is the Social Security Administration's public affairs specialist in the Northwest region. He's worked with the agency for over 25 years, and he's an expert in Social Security, not only in retirement benefits, but, as we'll learn in the episode, an expert in survivor and disability benefits as well. And one of the things that we wanted to kind of get across in this episode was that Social Security is actually not only about just when you retire and the checks you get, but, you know, you might be facing some type of a death in the family. There might be disabilities. All of these things Social Security plays a role in. So let's get started. Let's talk to Kirk and dig a little bit deeper.

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Monem Salam:
Thanks for taking the time to be able to join us here today. When I come across people, they're always like, not really thinking about the question of Social Security as to what it is, but really more about how it actually works. So really appreciate your time to be able to be with us today.

Kirk Larson:
No problem. Thank you for having me.

Monem Salam:
So let's just really  jump right in and talk a little bit about what is Social Security and what kind of programs it provides.

Kirk Larson:
Yeah. You know, when people say Social Security, they automatically think of Social Security retirement, really a collection of programs. So when you're working, paying into Social Security, you're not just purchasing a retirement program, you're also paying into disability benefits. You're also paying into kind of a life insurance program. So if you pass away and you have minor or disabled children or you have a surviving spouse, those individuals can get benefits off your record. And today, we have about 66 million people receiving monthly Social Security payments. And while the majority of those are getting retirement benefits, about 50 million, the other people are drawing benefits from those other very important programs. One thing I like to point out with this also, a lot of people forget this, as a survivor's program Social Security is the number one life insurance program in the country, and today we have about 4 million people getting benefits as a surviving spouse. And we have about 1.7 million children that have lost one or both of their parents and are able to draw benefits off of those parents' social security benefits.

Monem Salam:
So, for example, if I was working and I happened to pass away and I had younger children, then my wife or my widow, I guess could apply for benefits on behalf of my children.

Kirk Larson:
Exactly. And it doesn't necessarily have to be your wife.

Monem Salam:
Oh, okay.

Kirk Larson:
If you have adoptive children, if you have children in a marital relationship, outside of a marital relationship, and in some instances, it can even be grandchildren that might qualify for benefits. So our definition of child is…can be rather broad.

Monem Salam:
Let's kind of talk a little bit more in further detail maybe about the different programs. What else is available?

Kirk Larson:
So some other important benefits. Like I said, we have disability benefits. So if someone is working and paying into Social Security, they can qualify for disability benefits. And we're not talking about a lot of money. If you're a younger individual, you know, let's say you're 18 years old. You can still go ahead and potentially qualify for disability benefits, and you might only need about a year and a half worth of work. And when I say work, we're not talking about a lot of money. We're talking maybe about $7,000 that you would have earned in a year, and that could qualify as one year worth of benefits. Now, generally, if you're over the age of 31, we're going to be looking at, a little bit more work in order to qualify for benefits. Generally, you need to have five years worth of work out of the last ten years.

Monem Salam:
So you're 18 and you used to have a part time job in, you know, high school. Based on that, you're saying you could technically qualify for disability?

Kirk Larson:
Absolutely. Let's say you were 18 years old and you became disabled today. We could look backwards. And as long as you have about, three quarters worth of work in a six quarter period, you could qualify for benefits.

Monem Salam:
What type of benefits are we talking about? Like for this 18 year old, or…

Kirk Larson:
Well, it is based on how much you've worked and how much you paid into the system. So if you are a very highly paid 18 year old, your benefits could be pretty high because they don't pay based on what you've paid in. The computer looks at it and says, okay, this 18 year old they were making, you know, $50,000 a year. The computer would assume that you would have continued at least making that all the way through retirement age. So even though you might have only worked a year and a half or two years, your benefits could be rather high. Once again, though, if the money you've paid in is rather small, the benefits are going to be rather small as well.

Monem Salam:
What could be in the disability that we're talking about here?

Kirk Larson:
For someone who has a very minimal amount of work, you'd still probably be looking at about $400 to $500 a month. For someone who had a very higher amount of work, let's say like $50,000, could be around $2,000 to $2,300 a month.

Monem Salam:
What is considered disability?

Kirk Larson:
So that's a little bit of a tougher question. And that's a question I get all the time, as people say, you know, why is it challenging to qualify for Social Security disability? And I, I won't kid you. Social Security is not an easy program to qualify for. And the reason being is it comes down to the definition of what we mean by disabled. When we say disabled. It's a very different definition that people might be used to if they're looking at veterans benefits or they're looking at worker's compensation. Ours is a much more total permanent disability that we're looking at. And so I'll just give you the quick definition of when, if you were to go to our website, what it would say. We describe disability as a person who cannot work due to a severe medical condition, could be mental or physical, that has lasted or is expected to last at least one year or would result in death before the end of the one year period. The person's medical condition must prevent them from doing substantial gainful employment. And so this is where it boils down to. With your disabling condition, could you still return to work, any kind of work, any kind of job, and make $1,550 a month? If the answer was yes, even with your limitations, there is a job out there that you could perform at and make $1,550 a month, then you are not disabled for Social Security purposes.

Monem Salam:
I would assume that most people, even if they were considered disabled by other standards, in this particular case, probably would be able to find some meaningful work.

Kirk Larson:
Unless it's a very severe condition. Of course, that being said, we do have over 7.5 million people receiving Social Security disability benefits and an additional 7 million people that receive disability benefits from our other disability program. You may not know this, but Social Security actually administrates two disability programs. One is called Social Security Disability Insurance. And that's for people that have worked and paid into the program. And then we have another program called SSI, which is Supplemental Security Income. That is a needs-based benefit. That's the nation's safety net program. And under that program, if you are disabled, even if you're a child, even if you're a newborn and you have low income and low resources…and if you're a child, we're going to look at the income and resources of your parents..you might qualify for benefits from that program. Or if you're a senior 65 or older. And this is kind of outside the disability process, but under the Supplemental Security Program as well, if you are 65 or older and you have low income and low resources, this safety net program will also step in and guarantee that you'll have an income of at least $943 per month.

Monem Salam:
Okay. So I appreciate that. And then the second one you really talked about was the one for the 31. And you mentioned the age of 31, correct?

Kirk Larson:
Well, what happens is that, under our Social Security disability program for people that have worked and paid into the program, we require that you have a certain amount of work. Like I said, if you're 18, we're not going to require that you have much work in order to qualify for the program. But if you're 31 or older, generally you have to have worked five out of the last ten years in order to become insured. We would not use that same task for somebody that's 18, because we wouldn't say, oh, you have to have…we're going to look backwards from when you became disabled at age 18, and you have to have worked five of the last ten years. That wouldn't make any sense. And in a situation if you're 31 or older, we have required that you at least have five years worth of work in the last ten years immediately before becoming disabled.

Monem Salam:
So if there was somebody who was disabled, I've had a child who was disabled and you fill out this application, is there an interview process or do you come visit the home or how do you eventually qualify for this?

Kirk Larson:
If you're filing for disability, you can file for disability benefits right online and you just complete the application. Basically what we're seeking is information about your doctors. Where can we get evidence about your condition? So you're basically coming to Social Security, you're saying I have a disability. And generally most people don't have one disability usually. People get approved because they have a collection of disabilities. Maybe it's a back injury, knee injury. Maybe they have a major depression, other different things like that. So you say you have all these conditions. Basically the application process is to say, all right, where can we go to get your medical evidence? What are your doctor's names, their addresses, their phone numbers? When did you see the doctors? What did you see the doctors for? What type of medications are you on? What type of tests have you had? Most of the application process is just us reaching out, asking you where we can get the medical evidence, and then our doctors contact your doctors to get the medical information.

Monem Salam:
Is there anything in between as well that we want to talk about the program before we start talking about retirement benefits?

Kirk Larson:
Yeah, there are two other very important ones. And I'll briefly touch on those. They kind of follow retirement benefits. We have our spousal benefits program. Let's say your retirement benefit was very small. Well you might be able to file on your living spouse or ex-spouse's record and get some additional benefits off of their record. The spousal benefit guarantee is that your Social Security payment, what you're going to get from Social Security, will be no smaller than 50% of what your spouse is going to receive. So, for example, if you had never worked and your spouse had worked, and your spouse was going to get, let's say, $2,000 per month, you potentially could file on their record and get an additional $1,000 per month. That's what the spousal program does. Guarantee is that you'll at least get up to that level, that 50% level.

Monem Salam:
Okay. These are for non-working spouses who basically were either homemakers or for other reason, didn't work while they were able to work that they didn't work for, for whatever reason. And so this is kind of a way for them to be able to get some benefits without having to rely on the other spouse's income, I guess?

Kirk Larson:
Basically, yes. Now then, you don't necessarily have to be that you haven't done any work. Let's say your Social Security record was only going to be $800 a month. You had a rather small record. And your spouse was going to get $2,000. Well, you'd be eligible for 50% of that $2,000, brings it down to $1,000, but we require that you file for your own $800 payment first. That gets subtracted out of the thousand, and now you're drawing $800 off your own retirement record, and you get an additional $200 off your spouse's. So you might have worked, you this might not have an extensive work history, and we're going to guarantee that between your own work record and the spousal benefits, you'll get up to that 50%.

Monem Salam:
I think you might have mentioned this in in the very beginning, but let's supposing I didn't work and my spouse did, but then eventually we got a divorce. So then can I go back and say, well, during this time, you know, I wasn't working. My other spouse was, and I could still get some benefits?

Kirk Larson:
Absolutely. So we do have divorced spouses benefits. So once again, this is on a living spouse. We'll talk about survivors in just a moment. But on a living spouse, if you can establish that you were married to your ex-spouse for at least ten years, so we need to see the marriage and divorce certificate, and you're not currently married now to somebody else, you can go back and claim benefits on the ex-spouse's record.

Monem Salam:
Okay.

Kirk Larson:
And I'll even give you one more, more interesting here. We don't care how many ex-spouses you have. If you happen to have been married to four different people, ten years a piece, mind you, got to be at that ten year level, we'll let you check out all four of your ex-spouses and you get to choose the highest of your ex-spouses.

Monem Salam:
Mmm. Okay, that makes sense.

Kirk Larson:
If you did get remarried and you're collecting benefits on a prior spouse's record, that does terminate. Now then, you could immediately then file on your new spouse, if your new spouse was drawing benefits, so you might not lose coverage in that situation because you could immediately file on the record of the new spouse that you just married.

Monem Salam:
So if I'm doing this program, which is, you know, that I didn't work, I'm doing it off of my ex-spouse. Do I have to be retirement age, or could I be any age to be able to file that?

Kirk Larson:
For the retirement purposes, you need to be age 62 and be drawing benefits. If you're currently married, not only do you need to be 62, your spouse also needs to be drawing benefits. Interesting thing though with divorced spouses benefits though, your spouse just has to be age 62 and theoretically could file. We don't make you wait for your ex-spouse to file. Your ex-spouse would just have to theoretically be able to file, and you could claim benefits off of their record.

Monem Salam:
And just to give you a real life example and it's been quite a while now, but I had a client, whose husband passed away. She had never worked. She was staying at home, taking care of the kids. And as part of the benefit, they were getting Social Security up until each child turned 18. And so I think that might be another benefit, correct?

Kirk Larson:
That is, that is. So we just talked about living spouses. So what if you were divorced or you had a living spouse, you could get what we call spousal benefits. But what if someone passes away?  What happens then? Well, a couple of things. If someone passes away and they have a minor child, and what we call a minor child is a child that's under the age of 18 or between the ages of 18 and 19 and still in full time attendance at high school. That child could claim benefits. Or if there's a disabled child. You pass away and you have a disabled child, a child that's under the age of 18 or that became disabled before the age of 22, then that child could also get benefits on the deceased parent's record. But also if someone passed away and they have a widow or widower, or once again a divorced widow or widower, potentially they could get benefits off the deceased individual as well.

Monem Salam:
But they would have to be retired…

Kirk Larson:
That's a good question. There's a few things that they would need to do. So with survivor's benefits, there's a few ways you can get it. If you reach the age of 60, so you don't have to wait till 62 like you do with regular retirement benefits. But if you reach the age of 60, you could file on your deceased spouse's record and get 71.5% of their benefit for the rest of your life. Each month that you delay taking the check, so that percentage actually would go up. So if you waited till, let's say, age 60 and one month, the percentage would go up to 71.8% for example. So the longer you wait, the higher the percentage is. Or if you wait all the way until your full retirement age, and we'll talk about full retirement age when we talk about retirement benefits, if you wait until your full retirement age, you could claim 100% of the deceased individual's payment. Or the third way you could get it. If you are age 50 and we established that you are disabled and you have a deceased spouse, once again, you could activate that 71.5% as early as age 50 if you're disabled and you have that deceased spouse. Or the one last way you could do it is if you are caring for the minor child of the deceased individual. So you were married to the deceased. You're taking care of their minor child and the child is under the age of 16. You can also activate survivor's benefits and get up to 75% of the deceased individual's payment, Now then when the child hits 16, and your portion of the payments would go away. But the child can technically remain on the record at least until age 18 as we discussed earlier.

Monem Salam:
We talked a little bit about the benefits for disabled. But, kind of paint a scenario so that it's easier for people to understand if you don't mind. And that is an example I worked, you know, my entire career. Let's supposing let's say like 30, 40 years. I do have a child who's, you know, who's disabled, special needs. And they were born that way, for example. Would they be eligible for any kind of benefit from Social Security, even if I passed away and my wife or my spouse passed away as well?

Kirk Larson:
Yes. This is what we would have to do. Let's not have you pass away too soon. Let's say you're into your 80s and you pass away. This is how we would have to be able to determine this. If we could determine that your child became disabled before the age of 22. Your child might be 60 years old now by the time you pass away. As long as we can establish that the child became disabled and unable to work before the age of 22, even though they might be 60 years old now, they can now get benefits on your record.

Monem Salam:
Is there any kind of an income cap or anything like that, or.

Kirk Larson:
No, not under the program. Now, many disabled children do qualify for that needs-based SSI program we talked about a moment ago, but if you were then to pass away, so let's say your disabled child was getting assistance from the SSI program, Supplemental Security Income, your child could be on that benefit. Then when you passed away, they would simply move from that benefit to surviving adult child benefits on your record. Once again, though, we'd have to show that they became disabled before the age of 22.

Monem Salam:
Sure, even if they had, for example, the parents did set up a special needs trust, or had one of the siblings become the caretaker of the child, that still would not disqualify you from getting these benefits?

Kirk Larson:
For survivor's benefits, no. For the SSI Supplemental Security Income benefits, we would have to look at the trust in that situation. That's a needs-based benefit. But for regular survivor's benefits, even if there was a trust involved, even if the child have their own money, would not be an impediment to them receiving the survivor's benefits off of your record.

Monem Salam:
Great. This is really helpful information. I do come across many people who have special needs children, and they're always worried about what's going to happen after they pass away, you know, those type of things. So I appreciate the explanation there. Can we talk a little bit about, as a retirement benefit, why Social Security was created, when I was, just a little bit of a brief history?

Kirk Larson:
Yeah. So real quickly, Great Depression. We're going backwards a little bit here, 1929. Up to that point, many older individuals that were not able to work anymore depended upon the family for support. There really weren't any retirement programs before that. Great Depression comes along, and unfortunately, in many situations, a lot of the children are out of work as well. And so a lot of parents that would have depended upon their children for support, it wasn't there. The children didn't have jobs, and they couldn't support their families, including the older adults. Congress and the President around that time voted on having a social security system. Some place where people could put money and it would be protected from the loss of jobs or the crash of the stock market. So they developed the Social Security system. And originally when it started out, it really started out just as a retirement program. Now it's kind of morphed over time, creating spousal benefits and survivor's benefits and disability benefits and Medicare coverage. But originally, back then, it was designed to be a protected program that a collapse of a bank or the stock market or the loss of children who would have normally been supporting people. If those go away, you could then depend on this for at least a base income. It was never designed to be a standalone program, but it was designed to provide at least a strong, secure base.

Monem Salam:
Is there a pool of funds that's reserved for Social Security, or is it basically just as an IOU that the US government says, yes, we're going to be able to pay?

Kirk Larson:
Well, it depends on what you consider an IOU. So currently, Social Security has about $2.7 trillion saved up in the Social Security trust fund. We have what we call as, kind of a fancy IOU, it's called a Treasury Security Bond. Just like you can go out and buy a bond, we've done the same thing. We happen to hold $2.7 trillion in bonds, and those bonds do have maturity dates, and they do have interest rates. And as those bonds mature, we've actually been collecting back the money and collecting back the interest to fund the program. So I guess you could call Treasury securities. It's a fancy IOU. Essentially that's what it is. It is an IOU, but it is an IOU that's backed by the United States government. And it's an IOU that generates interest. And it has, done that for the program since the 1980s, when it kind of came into being, and we began to accumulate that money.

Monem Salam:
Yeah. No, this is helpful because I've heard many, many people talk about the fact that there's really no real money there. It's just basically something where the government just promises they're going to do it, but there's really no money. But you're telling me there is actually money there, that you use that money to invest that money in treasury bonds. And whenever they mature, you cash it out, you use some of it, and then you basically invest the rest ,it's like an investment fund, if you want to call it.

Kirk Larson:
Basically. The only difference today is we're now in a different situation. We are now liquidating the Social Security trust fund. For many years, money has matured, we would invest it back in, buy more securities, and that's how we ended up with getting a $2.7 trillion. Now we're in a time period where we're not actually even bringing in enough money to fully fund the program. So people working, paying into Social Security, for many years, we were able to save money. Now we're in that time period where we're cashing it out. The monies flowing in from people working does not fully fund the program. So we are now slowly liquidating the Social Security trust fund. That will allow us to pay full benefits until the year 2035. But the reality is this, right now, if we don't make changes in the Social Security program, come the year 2035, we will be required to cut everybody's Social Security payment by about 17%.

Monem Salam:
But I appreciate the fact that you're mentioning that it is a fund. It's slowly being depleted only because there's more people that are getting benefits than there are people that are paying into it. Let's talk a little bit further about the actual retirement benefit that you have. And I know, you know, I'm not near the age where I need to retire, is that there's actually two different cutoff points for ages, correct, when you can actually begin to draw. And I think I'm, if I'm not mistaken, it's 62. And then it's 65?

Kirk Larson:
Well it used to be 65. So we have something called the full retirement age. And that's the age at which you can claim 100% of your benefits. So we'll start with that one. It used to be that if you waited and filed at age 65, you would get 100% of what your Social Security payment is. That has now shifted. And for people born between 1943 and 1954, the new full retirement age, the age at which you'd get 100% of your benefit, that has increased to age 66. Then we continued to move the full retirement age forward. For someone born in 1955, for example, it would be age 66 and two months. Someone born in 1959, it's age 66 and two months. And then for people born 1960 or later, the current full retirement age is age 67. So we have expanded the full retirement age out. We pushed it out two years from the original age 65 time period. However, as you pointed out, there is some good news still. You can still file for your benefits at age 62.

Monem Salam:
But you will get less if you file at 62, I'm assuming?

Kirk Larson:
You are exactly right. That of course has increased as well. So if you could have gotten 100% at age 66 and you file at age 62, you take a 25% lifetime cut by filing early. And now that we push the full retirement age out to age 67, if you now retire at age 62, there is a 30% cut to your benefits.

Monem Salam:
If I was eligible for, I don't know, let's say $1,000 a month. And that was if I turned 67, if I start taking the benefits at 62, it'll be $700 a month.

Kirk Larson:
Yes, I like this number because this is actually a little more closer to the real number. Let's go with $2,000. I'm a generous guy. I want to give you a $2,000.

Monem Salam:
Thank you.

Kirk Larson:
It's all right. That's all right. So, $2,000 at age 67, if you decided to file at age 62, 60 months early, mind you, you're filing quite early. You'll take a 30% cut. You go from $2,000 down to $1,400. This is how I like people to think about this, though. Every single month you file early, not every single year, but every single month you file early before your full retirement age, whatever that is, age 66, age 67, somewhere in between. Every single month you file early, your 100% benefit is reduced by about one half of 1% per month. So if you filed at age 62 versus 67, 60 months, 60 times half a percent, that's 30%. That person takes a 30% cut. But if you filed at age 66 and ten months, you filed just two months early, two times half a percent, that's 1%. You'd only take a 1% cut to your $2,000 payment. So this really puts people in control on making their benefits look like what they want them to look like, based on when they activate the Social Security payment.

Monem Salam:
Right. And so hidden in your comment right there, was the fact that it's not a 62 use it or lose it until 67. At any point between 62 and 67, for example, you could decide, yes, I want to retire. I want to be able to take my money from the Social Security, just the formula changes as to what you'll get.

Kirk Larson:
Exactly, exactly. And then it evolves month to month, depending on how old you are. Every month, you delay taking the benefits past age 62, it's continuing to grow. It's getting larger. And I'll even give you one more. We even give you bonus credits. If you arrive at your full retirement age, let's use 67 as the example here. If you wait beyond your full retirement age, maybe you're working, maybe you're not, doesn't matter. Simply by waiting to activate your check after your full retirement age, we will increase your benefits each and every month you wait by 0.66% per month that you delay taking the check. So why we will reduce you by about half a percent if you file early, the bonus credits are worth 0.66% that you delay or, make it a little easier, 8% a year.

Monem Salam:
Mm hmm.

Kirk Larson:
So if you could have gotten that $2,000 at 67 and you waited till age 68, 12 extra months, you're going to get an 8% bonus for the rest of your life. You'll go from $2,000 to $2,160 a month.

Monem Salam:
So, for example, I could work until I'm 69, 70, 71 and then start taking the Social Security. And I would just build it by 8% every year.

Kirk Larson:
Ooh good question. Actually, we do stop giving the bonus credits at age 70.

Monem Salam:
Okay.

Kirk Larson:
So you definitely don't want to wait past age 70 to activate your check.

Monem Salam:
Okay.

Kirk Larson:
However, if you don't want the money, Social Security will never make you file for your retirement benefits. Just want you to understand that.

Monem Salam:
(Laughs) That's really good. But let's supposing for whatever reason, you're too busy working until you're 71, 72 and you're like, oh my God, I forgot to apply, like and I want to file now at 72. I can still do it. The increase would only stop at 70.

Kirk Larson:
That's right. There is a small window. We will, actually, and we thought about that, because people do miss that. Usually they don't miss it by two years. But we will go backwards up to six months. So if you came in at 70 and six months and you said, oh my gosh, I forgot to file, I was so busy. No problem, we will go backwards up to six months to give you the back benefits. Actually, we'll do that any time you're over your full retirement age. I had a person that their plan was to wait until age 70, and at age 68, and a half roughly, they came in and they said, you know, I'm not going to wait. I've, you know, I've seen some friends pass away and I want to get my benefits. I want to start doing some things, doing some traveling. And I said, hey, you know, we could give you basically a 12% increase. Or guess what? I could give you an 8% increase. You could get 108% of your benefits, and I'll give you six months worth of back benefits. So I'll give you six checks at 108% of your benefits. And for that person, it end up being around, if I recall, about $13,000, $14,000. Great back check. Great way to help them get started on their retirement. They got that money and were able to move on to bigger and better things.

Monem Salam:
Okay. But you can still work and continue to get benefits, correct? Or do you have to retire?

Kirk Larson:
Interesting question. So there is a work restriction. There's a good side and a bad side to our work restrictions. So first of all, if you're under your full retirement age, you're 62, 63, 64, 65, 66, you're not at your full retirement age yet. There is a work restriction. And it's there basically to remind people we're not giving you this money because you've reached a certain age. You're starting your retirement benefits because you can't work any longer. You reach an age where you can no longer work. It's not to reward you for reaching age 62. It's there to protect you if you can no longer work. So if you're under your full retirement age, the work restriction is currently $22,320, and for every $2 you go over that, you lose $1 from your Social Security payment. Here's the good side. Once you reach your full retirement age, whenever that is 66, 67 somewhere in between. Once you hit that full retirement age, no work restriction. You can be making $1 million and you'll get all 12 of your Social Security payments.

Monem Salam:
And so I guess the idea is you're strong enough, able enough to work when you're between 62 and 67, go ahead and keep doing it. Wait for the benefit to kick in at 67 and then decide what you want to do after that point.

Kirk Larson:
Exactly.

Monem Salam:
But then the benefits are taxed, correct?

Kirk Larson:
Yes. You know, a lot of people are kind of shocked by that, that the benefits are taxed and potentially for income tax purposes, I'm not a tax expert, so this is where we usually tell people, talk to your financial advisor, talk to a tax consultant, Social Security does not endorse any particular ones, even though I'm appearing on this show today, I want you to know that we do not endorse any particular financial advisors, but we do endorse people getting financial advice. This is one of those big things that people need to do. You need to understand what your tax liabilities are going to be in retirement years. Currently, about 35 to 40% of people getting Social Security benefits do pay federal income taxes on their social Security checks.

Monem Salam:
If you're in a state that has state income tax, do you pay that as well, or…

Kirk Larson:
Not all states do. There are, I know that some states do give you a break on that. They will not tax your Social Security checks. But I believe the majority of states that do have state income tax, I believe that does become one of your taxable benefits.

Monem Salam:
Okay. How does Social Security calculate what my benefits going to be?

Kirk Larson:
So a lot of people aren't quite familiar with this. They're kind of familiar more with the way a pension plan or…I'll kind of start at the beginning. Social Security benefits, in order to become insured, even to get a Social Security payment, you need to have worked and earned 40 credits. You can earn up to four credits per year. To earn one credit this year, we're not talking about a lot of money, you have to make $1,730. So if you go out and make $6,920 this year, you get your four work credits. Accumulate 40 credits over your lifetime, and you'll qualify for a Social Security check. After you have 40 credits, we don't care about credits anymore. That just means you're going to get a retirement check. To figure out what that check's going to be, we have to do something different. Now we're going to go ahead and we take your entire work history. We're going to look back to all the money that you've made over your lifetime. And good news here, we take that money that you've earned in the past and we adjust it for inflation. We bring your entire work record up to a more even playing field, and then the computer goes through and it's not going to look for the highest three years worth of work, not going to base it on the high five or the big ten. We're now going to look at your 35 highest year's worth of work and we're going to base your benefit on the average of those 35 highest years.

Monem Salam:
So in this particular case, the more you put into the system, the more you'll get back.

Kirk Larson:
Not necessarily. You know, I often get that question, you know, if I work more, will my benefits be higher? And the answer is not necessarily because we're looking just for your highest 35 years. So let's say you work from age 20 to age 65. That's 45 years worth of work. We're automatically going to throw out the lowest ten years. Now then, if you've worked very steadily, and so you decide, hey, I'm going to work till age 70. Well, that will make my benefits higher. Once again, not necessarily. If you already have 35 pretty good years worth of work, adding another year's worth of work is not going to make a significant difference.

Monem Salam:
Because it doesn't move the average up.

Kirk Larson:
Exactly. Yeah. Now then, if you're somebody like most people, maybe in your 20s, you had very low earnings, you didn't make a lot of money during that time period. And remember, we're adjusting for inflation. So somebody in your audience might be saying, hey, you know, in the early 80s, I didn't make any money at all. I was maybe making $10,000 a year. Remember that we're not using $10,000 from the early 80s. In today's terms, that might be worth $40,000 or $50,000. Now that might become one of your large years. So it's hard to say that, you know, continuing to work will make a huge difference. For most people that have had a steady career, adding one more year is not going to make a difference. But for some people that maybe had very low earnings in their 20s or maybe 30s or took time off from work, then maybe, yeah, by working longer, you're getting rid of some of those lower years.

Monem Salam:
Mmm hmm. Similarly related to talking about your highest years and salaries and those type of things. I think Social Security's not tax on your entire salary. There's a cutoff point, right, where above a certain salary limit…

Kirk Larson:
That's correct. The maximum currently for this year is $168,600. So once you go beyond that, the Social Security taxes, 5.45% I believe it is, that stops coming out of your Social Security check. So you will stop paying your FICA taxes. Now then the Medicare tax will continue to come out, continue to take it out on that. But on your FICA taxes you would cap out. So if you made $1 million, for our purposes, it looks just like $168,600.

Monem Salam:
But to calculate the 35 years, you would still use the $1 million.

Kirk Larson:
No. For our purposes, since we don't take taxes out on your million dollars, we only take taxes out on the first $168,600. For our purposes, that year would look like $168,600. That's why there's a cap on the maximum that a person can make. If you were somebody that worked for 35 years making $1 million per year, your Social Security check is going to look just like the person that made in today's dollars $168,000, for the benefit payment purposes.

Monem Salam:
Then I think there's a way I can go to the website for Social Security and really find out what my benefit would be.

Kirk Larson:
Yes. Very important. If any of your listeners have not done this yet, you need to go to our website and you can set up your individualized My Social Security account. By doing that, you can then look at your Social Security statement, which will show you what your future benefits would be, what you would get at retirement age, what you get if you became disabled, what your survivors could receive, a number of other calculators that you can use to help plan your benefits. Some great tools there. And if you're getting benefits, there's even some better tools. If you're getting benefits, you can now manage your benefits online. If you need to change your address, change your phone number, change your direct deposit. You can do all that right online. You need to get a replacement Social Security card or replacement Medicare card. You don't need to call us. You don't need to go into an office. You can just request those right online and they'll be sent to you.

Monem Salam:
Great. I don't have to remember I have tax records for my 35 years. Is there something the government already knows about it, that you're going to do this based on your calculator?

Kirk Larson:
We will. As a matter of fact, that's another reason you want to pull up your Social Security statement. We encourage everybody to do this because you do want to look at your Social Security statement and ensure that your money is there. So when you work, you send tax information, whether it's a W-2 form or if you're self-employed, you're sending in self-employment forms to the IRS. The IRS then shares that information with us, and we update your record. Now then, things can happen, you know, when you're handling hundreds of millions of records every year from work, some things happen. We encourage everybody to check out their Social Security statement and ensure that all the work they've done is properly documented on that record, because that is the record we're going to use to change your benefits and calculate how much you're going to get. And if you do see an error on that, you're looking at your Social Security statement, you go, oh my gosh, I know I worked in 1990, but it shows zero. You need to contact us as soon as possible so that we can get the records that we need to make the correction to your record.

Monem Salam:
Okay. That's great. Kirk, this has been really, really helpful and I really appreciate your time spending with us to really talk about the benefits. Is there anything maybe I might have left off that you can think of that you might want to fill in?

Kirk Larson:
Just as a reminder, sign up for that My Social Security account .Wealth of information there. Visit our website. We have a great Frequently Asked Questions section. That actually has 200 of the most common questions that are asked about all of our different benefit programs. So just as a reminder to do that. And last thing, I just always like to tell people, don't forget you can also file for benefits right online. When you're ready to file for retirement disability, Medicare coverage, you can do all that right from the comfort of your own home. You can just sign up for the benefits right there.

Monem Salam:
Thank you so much for your time, Kirk.

Kirk Larson:
Thank you.

[music]

Monem Salam:
Thank you for listening to Halal Money Matters. If you like what you hear, please do rate us on the app stores and also leave us a review. It helps other people find us a lot easier.

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The thoughts and opinions expressed on Halal Money Matters do not necessarily reflect the views of Saturna Capital, Amana Mutual Funds, or their affiliates. This podcast is prepared based on information Saturna Capital deems reliable; however, Saturna Capital does not warrant the accuracy or completeness of the information. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. Investors should consult with a financial adviser prior to making an investment decision. The views and information discussed in this commentary are at a specific point in time, are subject to change, and may not reflect the views of the firm as a whole. All material presented in this publication, unless specifically indicated otherwise, is under copyright to Saturna. No part of this publication may be altered in any way, copied, or distributed without the prior express written permission of Saturna Capital.