If you’re confused about Social Security, it’s no wonder. It’s about as clear as mud for most people, and the partnership structure can make it even more so.
While most people are able to see exactly how much they contribute to Social Security on their W-2 each year, like partners at many other large partnerships, partner physicians pay Social Security tax as part of a quarterly estimate. When you pay your taxes, that amount is then reported on line 5 of Form 1040 SE on your tax return.
Partner physicians are taxed 12.4% of your annual earnings for Social Security, which is currently capped at $128,400. Assuming you earn more than the cap amount, you will pay the maximum $15,921.60 annually into Social Security. (The good news: you may deduct half of the amount an employer would pay on your taxes.)
Which brings us to the next question: How much will I get? That answer depends on when and how you claim Social Security.
Let’s say you are single and you decided to begin collecting Social Security on your 67th birthday (or ‘Full Retirement Age’) in 2018. Assuming you had contributed the maximum amount to Social Security for the past 20 years, your annual benefit would be $33,456.
However, for every year you wait to claim your benefits, that amount increases by 8% per year, plus a cost of living adjustment, or COLA. The result: by waiting until your 70th birthday to collect Social Security, you can boost your annual benefit to $44,162. That’s a big difference. (Note that collecting before full retirement age can have a similar but negative impact on your income.) Here’s an excellent article that explains how to determine how much you will receive. You can also see your current estimate by creating an account at My Social Security.
Also, if you’re married, your spouse is usually entitled to receive a spousal benefit of 50% or your benefit amount OR his or her own benefit, whichever is greater, while both of you are alive. After one of you passes, the survivor receives the higher of your two benefits.
Taxes and inflation are another important piece of the puzzle. Unlike your Common Plan, Social Security benefits are indexed for inflation, meaning that they may go up every year depending on inflation. (currently Common Plan Benefits are locked in the day you retire and won’t adjust for inflation.) For example, if your current Adjusted Gross Income (AGI) is over $44,000 in retirement, 85% of your benefit will be taxed as regular income.
Many people ask me if Social Security will exist when they are ready to retire. This has become a political issue, and as with any political issue, it’s a good idea to look at the data for yourself. The Social Security Trustee’s Annual Report states that, “scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2092.” That means that if no changes are made, you can expect to receive 75% of your current estimate.
That being said, Washington has many levers they can pull to keep Social Security paying 100% of the benefits for the next 75 years, including raising the retirement age and raising the taxable income cap above $128,400. In fact, the American Academy of Actuaries has built a free game that allows you to create your solution to Social Security. Check it out here. It’s more fun than it sounds—at least if you’re a numbers geek like me! But games aside, be sure to maximize your benefits by waiting to claim until age 70, and be sure to coordinate your claiming strategy with your spouse. That way you can count on at least some portion of your retirement income to come from Social Security.
About the author: Eric Imley is a partner and Certified Financial Planner at Eagle West Group, an advisory firm that has been helping KP Physicians for almost 25 years. In his spare time, he likes to do Tai Chi, swim, walk and spend time with his wonderful wife Tracy and their two daughters.
Advisory services offered through EWG Elevate, Inc. dba Eagle West Group.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.