Are your spouse and children supported by your Social Security benefits? What happens in the unlikely event that you pass away suddenly and unexpectedly? In this episode, Michael, John, Tommy, and Ben explain some of the lesser-known aspects of Social Security. Diving into the realm of family benefits, they discuss scenarios where non-contributing spouses or children can still access significant returns.
With a focus on survivor and child benefits, they pose crucial questions regarding optimal timing and strategies for claiming Social Security. You will learn about the application process and the coordination between Social Security and Medicare. Listen to learn about the necessary tools to make informed decisions about your Social Security benefits so you can pave the way for a more secure and prosperous retirement.
Listen to the full episode here:
What you will learn:
- What benefits children and spouses of those with Social Security receive. (4:00)
- How to unlock the survivor and child benefits from Social Security. (10:00)
- When it may be the right decision to turn your Social Security benefits on at 62. (12:00)
- What you need to know about survivor benefits. (14:10)
- The importance of understanding how and when to turn your benefits on. (17:30)
- How Medicare and Social Security work together. (21:20)
- How one goes about applying for Social Security. (24:00)
Ideas worth sharing:
- “The greatest return on Social Security benefits is that single wage house where you’re getting your retirement benefit that you paid for, plus 50% for somebody that didn’t have to pay into the system.” - Mason & Associates, LLC
- “If you have not filed for Social Security, you are able to file for just Medicare at age 65 or a special enrollment period if you have continued working.” - Mason & Associates, LLC
- “If you’re about to turn on Social Security and you go through that process on SSA.gov, realize that the default position is to have zero dollars withheld for federal income tax.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Tommy Blackburn: Welcome to the Federal Employee Financial Planning podcast, hosted by Michael Mason, certified financial planner; John Mason, CFP, and Tommy Blackburn, CFP and certified public accountant (CPA).
We also have with us Ben Rakes, CFP and IRS enrolled agent. It's probably one of the most credentialed shows out there you're going to hear. Definitely one of the most credentialed and experienced with federal employees.
Today's episode, we're going to be talking about Social Security part three. We've covered a number of topics already; such as how is it calculated, potential claiming strategies. You can go back to part one and part two of those Social Security episodes to catch that.
Tonight's episode, today's episode, I think we're going to talk about tax torpedo, potentially how Medicare may coordinate with this as well as some family benefits. John, how are we doing?
John Mason: Tommy, thank you for the great opening. And I just cannot believe, we started recording Social Security. And then we did part one, and then we recorded and we did part two, and now, we're on part three here.
And I don't even know if we're going to be done by the time we get through this episode, so it's continuing. And for our audience, like there may be a part four, we're not sure yet, we'll see how far we get.
Tommy Blackburn: It's almost like the tax code. I think when I think about Social Security, just like the FERS employee benefit book and the handbook, there's a lot of material here, a lot of stories we could go through, but we're going to try to keep it succinct and looking forward to going through part three.
I know we’re talking about some subjects that are pretty near and dear to our heart as far as like the tax torpedo and being aware of how some of that works.
John Mason: Well, let's do a quick welcome and shout out to the audience. Thank you for joining us on another episode of Federal Employee Financial Planning. If this is your first time, we're Mason & Associates. We have over three decades of experience serving federal employees.
We're financial planners first, we're content creators second. And as you navigate through our resource library that we have now, probably well over 30 episodes, may approaching 40 by the time this one airs, we have so much content out there.
I'm sure/we're sure that you have questions and we'd love to hear from you: masonfp@masonllc.net. And if you'd like to become a client, you can do that too. Start the process by requesting an introductory phone call through our website. So welcome, welcome back.
And then again, by the time this airs, we're also going to have more and more YouTube content that's out there. Specifically myself, Tommy, and Ben. Mike, maybe you're going to get involved in some of these video creations as well.
So, we're continuing to put out more content. Check out the YouTube channel, like, subscribe to the various videos and follow us so that you get the notifications as we release new content.
So, Social Security, this is part three, Tommy. I think an easy place to start here, if it's okay with you guys, would be maybe some like family benefits and spousal benefits. Because we've, in the prior episodes, have talked so much about, I went to work, I paid in for 35 years.
I got my 40 quarters, now I'm going to receive a benefit. We talked about 62 versus 70 and what have you. Let's talk now about the family who has spouses or children who may have never paid into the system.
Michael Mason: Really interesting discussion. They don't exist a whole lot today. But maybe the best benefit out of Social Security is one spouse goes to work, the other spouse stays home, and raises the children. And here, let's just create a benefit.
Let's say the working spouse because to do it in today's world, you probably need to be at the highest incomes you can be. So, the working spouse has at age 67, a $45,000 benefit without ever paying a dime into Social Security that the spouse of that working family has earned 45.
So, the non-working spouse is going to get half of that, having never paid anything. My math says $22,500 for that non-working spouse.
John Mason: And that's Mike, defined as the spousal benefit. So, the spousal benefit says you went to work outside of the home for a W-2 salary or self-employment and you've accrued a benefit of $45,000. Your spouse stayed at home and worked and raised a family, but didn't receive a W-2 income for doing that.
In that instance, the federal government has issued these things called spousal benefits, which effectively increases the family's retirement pay by 50%. So, the $45,000 increase by 22,500 and we can call them non-working spouse, the spouse that didn't go for a W-2 salary, is really what we're saying, is entitled to spousal benefits.
Michael Mason: And that's really a fair statement. And I won't get into the fraud that happens, but sometimes you get this benefit, you didn't get a W-2, but you got cash under the table doing something different. That's an entirely different scenario.
The government does this a lot. They encourage what they want. So, years ago, they encouraged, believe it or not, one of the spouses stay at home and usually was a female spouse to raise the children to give them that foundation, and they encouraged that by giving you this benefit.
I don't know that they're encouraging it as much today in what's being taught in our schools and whatnot, but it was encouraged then. And that's how most of the tax code and the benefit code has been developed over the years.
Tommy Blackburn: And I think what we'll see as we kind of go through maybe what we perceive as a little bit of an inequity here for some families where both spouses do work as well as how the system has changed over time …
It's what you see, I think a lot of times. Like a system was designed, initially had the best of intentions, and as it's tried to evolve over time sometimes it creates either loopholes or it creates things that were maybe unintended. Maybe we don't actually mean for it to be that way, but this is how it is.
So, we started with the example of a one earner household where another spouse stays at home and takes care of the family, for example. In today's world, maybe the vast majority of families are two earner households where mom and dad or both partners go out and do that W-2 job. Both earn and both have at their own Social Security record.
Well, I guess logically with me not knowing what I do know, if I was to think about that, how would this work?
Okay, so one spouse has their record and then they're probably entitled to half of their other spouse’s. So, we both get to pick up the other half that we would have if one of us didn't work?
Well, no, that's not how this works. So, John, why don't you explain how it does work for a two-earner household or Ben.
John Mason: Yeah, sure. So, I think here, and Mike and Ken have been saying this for many years now, and it's fair as a fairytale, and that's going to be something that I think we echo in this episode numerous times. And this is one of those examples where it's not fair.
So, in Mike's example, Tommy, he mentioned $45,000 FRA benefit for the primary breadwinner, and then $0 paid in for the spouse. And then that example, the non-working outside of the house spouse received spousal benefits of 22,500.
And in this example, we assume that person A probably had a pretty high paying job, $150,000 or $200,000 a year to get there. Well, let's assume same example, but let's make person B have a $40,000 or $50,000 salary.
Well, in that example, person B accrued a retirement benefit probably around $22,000, $22,500. So, they had the privilege of paying a 6.2% of their pay for 35 years or more.
Their employer had the privilege of paying in 6.2% of their pay for 35 years or more to get a benefit identical to what they could have received had they paid nothing. Fair is a fairytale. This person effectively wasted Social Security contributions to the tune of 12.4% for 35 years because they could have had that number for free.
Michael Mason: And John, as I've thought about this, it could look like Bobby at some point where she stayed at home, made sure you guys got educated, made sure she was there for you.
And then in the last 10, 15 years, I've got nothing else to do. Let me add to the household income and develop a benefit of $22,600, and you pay all that money in 6.2% to get a $100 more. And when you could have just done nothing and got the 22,500.
John Mason: The greatest return on Social Security benefits to be clear is that single wage house where you're getting your retirement benefit that you paid for plus 50% for somebody who did not have to pay 6.2% or 12.4%.
So, it's fair is definitely a fairytale. So, that's how spousal benefits work. And maybe let's talk a little bit next about survivor, child and how we unlock these great benefits because that is something that I think is often missed.
Ben Raikes: So, a survivor benefit would work in a little bit different way than those spousal benefits would work. Let's just go with the same example that we've been working with this entire time.
You've got one spouse, the higher earner that's going to have a full retirement age benefit of $45,000 a year. The non-working spouse has a benefit of $22,500 a year. What happens if they're both receiving benefits and that higher earner passes away?
John Mason: You're going to keep the higher of the two. So, the 225 goes poof and the surviving spouse is left with the $45,000.
Ben Raikes: Exactly. Your 22,500 goes poof, you jump into the higher amount. But just as we saw with the spousal benefits, you don't keep your 22,500 plus the deceased earner's 45, you get stepped into the higher amount, but your amount, it doesn't continue at all.
John Mason: And now let's talk Ben, so we've talked about that survivor benefit. How about child benefits for like maybe … maybe you and I are married. Okay, we're 62 years old, we're married together.
I know that's a scary world for you and me as we're doing this recording together. And then we have minor children, maybe they're 10, maybe we recently adopted. What do our family benefits look like then?
Ben Raikes: Well, John, under that scenario, we are able to get benefits not on just your record or my record, but the kids are actually eligible to receive Social Security benefits as well.
But the key is that one of us has to turn on our benefits at age 62, otherwise, no one is able to start collecting. And the math can get really kind of interesting there. Does it make sense to turn it on while the kids can still receive their benefit under that scenario? Do we still delay? I mean, it can be a huge benefit in that specific scenario to take early.
John Mason: And we've seen this, Mike. You and I know have worked a couple joint clients and we've seen older clients with maybe a younger spouse and minor children. And although we're big fans of delaying Social Security until age 70, when you start throwing in the minor children … and what's key like Ben, you were just mentioning is let's say I'm the only earner.
In order to unlock spousal benefits, in order to unlock those child benefits, I have to turn mine on. I have to turn it on to unlock all these other things. So, now all of a sudden, instead of delaying, maybe we are fans of turning it on at 62, 63 or whenever there's no income test.
Michael Mason: Yeah, maybe right at age 67, but right when there's no income test. Back in the day, for a client we're both thinking abou,t all he had to do was file and suspend. All he had to do was file to unlock the benefits for his five and six-year-old kids.
I mean, he was a man with age 66, 67 with a younger spouse and five, six-year-old kids. I mean that's $15,000 to $18,000 per child they were receiving, and it's in their tax bracket. So, when it's in the child's tax bracket, you get to save every bit of it, don't you, Tommy?
Tommy Blackburn: Because they probably don't have any other earned income or it's probably minimal. So, the only thing hitting that tax return, that child's tax return is the Social Security, which if that's all we have, it's absolutely tax-free.
So, yeah, you can be tax-free income, $15,000 a year tax-free. That can go a long way to saving for college or whatever have you used. And you mentioned that file and suspend strategy.
I know in a previous episode we mentioned that's pretty much gone now, so you can no longer do that. But back then that's a huge home run win for that family.
John Mason: That's right. Now, the key is basically, if you want to unlock any benefits you have to turn yours on. So, any of those restricted apps and file and suspend — it's very spooky what happened because on Halloween night in 2015, Congress decided to change all the rules with Social Security and nobody knew about it.
So, let's go right to survivor benefits. Let's do another example. Person A and person B, Tommy, were married and person A passes away with a spouse and two children. And again, let's continue this example where person B is not working. What happens to this young family?
Tommy Blackburn: So, if it's a young family now that we're talking about, so spouse B they're going to be able to collect the benefit for having a minor child under 16. So, until that child reaches age 16, they're going to get to collect a benefit.
And then the children themselves are going to get to collect a benefit until they're age 18 or maybe 19 if they're going to like a college or some type of post-secondary education.
So, the family could, and again, the kids benefits, that's tax that they're on their tax return. So, that's probably tax-free. Spouse B, if they don't go back to work, theirs could be tax free as well. So, we could have quite a bit of Social Security flowing into the family based on that primary earner's record.
John Mason: I didn't think about it until just now and it's something that we've always done when we've worked with young families, is creating a Social Security account for a 35 or 40 or a 45-year-old family is really important.
So, you go to ssa.gov, this is a call to action. If you're young and you're listening to this episode, ssa.gov statement, and then look, you're going to see a couple line items.
One is going to say survivor benefits, you’re spouse caring for a dependent child. That is you caring for the child like Tom, you said until 16. And then the next one is your child. And then the line after that is going to be family maximum.
And if you're a pretty high earning spouse A, that family maximum could be between $4,000 and $5,000 a month, which is significant. So, how much life insurance do we need? Do I have the right amount of life insurance? And what does this look like going forward?
Tommy Blackburn: And this is real for you and me, and I know we even talked with Mike and Ken about it as we were thinking through our own life insurance. This is real John and Tommy thinking about how much life insurance should I have in thinking through, okay, Sarah or Jess would get these Social Security benefits, 4,000, 5,000 a month.
Plus now, we're going to have additional life insurance amounts on us. We account for this. We absolutely thought through what does this look like to our family, our respective families in that scenario.
John Mason: Just another reason to download that statement and Tommy, you made me also think just now is guess what also applies? The earnings test. So, if Jess was working, all of a sudden, that spouse caring for a dependent child could contest that.
Tommy Blackburn: Yeah, could go away, could very much take away the incentive to continue to work. So, yeah, we have to be aware of these things and we even have to … this young family has to think through too, what could a potential marriage do, at least to the spouse caring for the children to their Social Security benefit.
Not to say we have moral and ethical obligations here, but be aware, remarriage could make one of those benefits go away. So, these are things to think through.
Ben Raikes: And how particularly important for those that have young children. Because the spouse's benefit is going to be until the child reaches age 16, but the kids continue to 18 or 19 depending on whether they go to college.
If you have adult kids or even adult-ish kids that are 15, 16, 17-years-old, it's not going to make a huge difference. But for those of you with young kids, 1, 2, 3 years old, that could be 15 plus years of benefits. That's something we definitely need to consider.
John Mason: And we can't leave this subject or this topic, Mike, until we talk about the blackout period.
So, person A and person B had this family, they had young children. Person A dies, person B is making all this money, 4,000 $5,000 a month probably tax-free. She wakes up, the second kid graduates high school, and what happens?
Michael Mason: Well, you make a really good point and let me just say — and I'm going to say this and if it ticks off anybody … you said “she,” which that's okay. Because in the world we live in, there's many times that the husband dies and the she that was raising the kids.
So, we're going to say he died, she's raised the kids. She stayed at home, she's got to benefit, bam, the kids are 17 or 18 and all of a sudden, their benefit goes away and hers goes away as well. Because she can't take a survivor benefit until age 60, can she?
John Mason: That’s right. So, she or he, thank you in this example, goes into a blackout period where there's no entitlement until age 60. And that's just another reason when you're doing life insurance planning that we have to think about all of this.
Michael Mason: Well, I want to tell you that I grew up in the life insurance world. We don't mention these credentials, but they're pretty important; chartered life underwriter, chartered financial consultant.
And when we would do factfinders, I was the one guy that was saying, “You're going to get this benefit from Social Security.” The other people wanted to sell big life insurance contracts ignored the Social Security benefit because the bigger the insurance contract, the bigger the premium, the bigger the payday.
So, we want to get it right. At some point, you're going to send it back to me and we're not going to do it just yet, but fair is a fairytale. Let's maybe think about how one person's earnings can be spread amongst four or five adults, not necessarily children. We'll come back to that one in a minute.
John Mason: Yeah, let's just stay there.
Tommy Blackburn: Let's hat on the mine. I think we've covered the family benefit decently enough for what we needed to. So, let’s-
Michael Mason: So, my brother Ken and I created a cult years ago, and the cult said, “We're going to get married, we're going to get married for 10 years.” So, I'm the main income earner and I'm going to be married for 10 years to spouse A, B, and C.
And they never have to work, they never have to go to work. Boom, I've got a $45,000 benefit at age 67 because I was married 10 years to each one of those. I've got a $45,000 benefit.
Spouse, A, B, and C, each have a $22,500 benefit. And if I'm the one that dies first, then they all get $45,000. You wonder why Social Security is broke. That's just not fair. There's an issue with that and that cult could get even bigger John if you threw some kids in there.
John Mason: Well, we don't want to go down that path because that just gets way too hard in a podcast type format with no visuals. So, we've covered quite a bit, we've covered a lot already.
Let's talk a little bit about Social Security and Medicare guys and what that looks like, and if the decisions are linked or unlinked or coordinated, and then how all that works please.
Tommy Blackburn: So, they are two separate systems but there is some coordination as to how they get paid for and potentially when it gets turned on. But they are separate systems.
So, if we have not filed for Social Security, we are able to file for just Medicare at age 65 or a special enrollment period if we've continued working.
So, we can file for part A, no additional cost. Part B, we're going to pay a premium, maybe more depending on our income. And we may have a drug plan and a supplement as well. But that is separate.
So, we can file just for those parts of Medicare at 65 and we do not have to turn on our Social Security. Once we turn on Social Security under that scenario, Medicare is going to begin to be withheld from those Social Security premiums or at least part B.
And I believe your part D I think or your … if you have a surcharge on there that will be withheld. But definitely part B will.
The other one is, let's say we started Social Security before we got on Medicare. So, if we've already started Social Security early, once we hit that age 65, we're going to auto enroll in Medicare.
Michael Mason: I think the key thing there is whether you've turned on Social Security or not, and maybe you're going to work past age 65 and you're covered with health insurance. The one thing we want to make sure we do is file for Medicare Part A. I mean it's a no-cost thing. You want to file for that at 65, don't you Tommy?
Tommy Blackburn: You do with one caveat that I can think of here. And maybe that could even be true for maybe a Mike and a Bobby if you go past it, which is, let's say we're participating in a high deductible plan and we want to continue to fund our HSAs.
So, that's where we have, so you can't contribute to an HSA if you're enrolled in any part of Medicare. So, that may be the one caveat where if you still want to fund that HSA, you decide to forego part A, which doesn't cost you anything. Maybe not, that's the main thing I can think of there as to why you might decide to forego part A.
Michael Mason: Probably why you need a qualified financial planner to walk you through these pieces.
Tommy Blackburn: Probably.
John Mason: So, to be clear summarizing, if you apply for Social Security at 62, you're going to auto enroll in A and B Medicare at 65 and Social Security's automatically going to take those premiums out of your Social Security check.
The decisions are not linked, but they are coordinated in a way that once you again start drawing Social Security, Tommy, like you said, those Medicare premiums are coming out.
So, Ben and Tommy, you have a point too, but I'm also curious if one of you can tell our listeners about how would one even go about applying for Social Security and what does that look like for our clients?
Ben Raikes: It’s pretty simple. We walk our clients through it all the time. You want to go to ssa.gov and there are just links there that will help you apply for Medicare parts A and B. We suggest doing this online. It is going to be much simpler than any other method of applying. I don't have too much more on this.
John Mason: Ben that is just … we got to do better than that man. Come on man. So, is that our advice when clients come in and they're like, “Hey Ben, I'm turning 62 in two months,” do you just say “Go do this on your own?”
Ben Raikes: “Of course, go do it on your own. Can't you do these kinds ….” No, of course John, we are going to hold their hand and we're going to walk them through it.
But what I think is important is for them to have their credentials ready, them to know the website that we need to go through, them to have their information at their fingertips.
And then we are going to work with them to make sure that they're making the best decision possible on when it is to start benefits, when it is smart to enroll into Medicare parts A and B.
Michael Mason: So, what we're going to do is we're going to set up that Zoom meeting. It's going to be Zoom, we're going to be on there with them because they haven't done it before. All they've done is get their Social Security statements.
So, we're going to have that Zoom meeting and we're going to tell them if you're turning on Social Security, we need a bank account. You're going to have to know your spouse's date of birth.
Tommy Blackburn: They may ask for a marriage certificate.
Michael Mason: Shouldn’t be too difficult. Know the spouse's date of birth and Social Security numbers and those things.
Tommy Blackburn: And we're going to take a PDF of the application, whatever type of application and we're going to save it in our files and we're going to send it to you so you have it for your files.
There's a note section in the application process where we're going to put “I know what I filled out, but here's exactly what I want to do as well. So, you can read the note.” There's no confusion and we're probably going to get a call from Social Security to make sure that …
And when I say “us,” I mean the client to ensure this is what you wanted to have happen. So, the online particularly when we're doing it together, seems to be a really great experience for everybody.
Michael Mason: Yeah and if you want Social Security’s help in doing this, you may have to log in and request and maybe a month later they'll say, “We've got an online appointment for you.”
But when you want Mason & Associates to help you with it, it's going to be the next available appointment, which is going to be pretty quick. Pretty quick.
Tommy Blackburn: I was going to say to go back to Medicare and how this overlaps sometimes. Actually had a story with a client recently or actually a friend who was saying that they didn't realize once …
This is just amazing because things aren't always communicated. The system does not always talk to you about what's happening. They turn their Social Security on after they were already enrolled in Medicare, they didn't realize those premiums were being withheld and they kept stroking the quarterly checks.
So, if it's not being withheld from Social Security, if you haven't turned it on, you make your premium payments quarterly. They kept doing it. And then lo and behold, one day, I think without an explanation, they got a check in the mail, a refund of these premiums they have been paying I think about a year had gone by.
So, we do want our clients and those listening to be aware it will be withheld once Social Security has been turned on. And so, that way you're not overpaying and getting a random check in the mail wondering what that's about.
John Mason: Well, another awesome. So, many good points guys. To our audience, hopefully you're enjoying this content because we're not going to finish, we're going to have one more episode on Social Security where we talk about the tax torpedo.
So, as we wrap up this episode we've talked about quite a bit, Mike, and maybe you have some final thoughts that you'd like to share with our audience before we close out.
Michael Mason: I was thinking real quick, maybe we do just a quick lightning round to summarize. So, I'm thinking remember you turn it on before retirement age, you take a 6% penalty for every year early. You delay from 67 to 70, you get an 8% bonus.
So, that would be my lightning round. Just remember, this is what's happening. I'd like you guys to hit your highlights and then we'll close the show.
John Mason: Maybe for me, and we haven't talked about this, it's an action item. If you're about to turn on Social Security and you go through that process on ssa.gov, realize that the default position is to have $0 withheld for federal income tax.
And many states don't tax it Social Security retirement benefits, but the default there too is no tax withholding. What's your tax plan look like? What's your cash flow look like? Is that appropriate?
If we need taxes withheld, you can either maybe like log into opm.gov and make a change there. Or you can submit a W-4 and ask for taxes to be withheld on that Social Security retirement benefit.
Michael Mason: I think that's an SSA-4. Isn't that what they call it for the Social Security?
Tommy Blackburn: SSA-4 or was it 44? Yeah, maybe it is four.
Michael Mason: Yeah.
Tommy Blackburn: I don't know. I Google Social Security W-4 and it pops up like a champ.
Michael Mason: Yeah. The other thing, it's not the exact, but it goes hand in hand with Social Security is your Medicare Part B premiums. If they're extremely high, you may want to think about, hey when did I retire? Do I have an appeal to lower my Medicare part?
Tommy Blackburn: And that's the SSA-44 I believe is the life-changing event of hey, I have an appeal here. I think the withholding for Social Security is a W-4V. Google it regardless, either the way you'll get to where you need to go.
John Mason: Awesome guys. Well, what another great episode of the Federal Employee Financial Planning Podcast. Thank you to my co-host, thank you again to the audience. Please leave us a five star rating.
Send us an email with any questions, comments, concerns, what keeps you up at night. Remember at Mason & Associates, we know how to answer the question you have and we'll also be able to answer the question you didn't know to ask. We’re Mason & Associates, masonllc.net .
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.