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Farmer-specific claiming strategies of Social Security

Jon Holthaus for Progressive Dairyman Published on 30 September 2016

As a farmer, chances are you’ve had the conversation of Social Security with your accountant, attorney or financial adviser, both during the early years of your business and today as you get closer to qualifying for benefits. Within the industry, there are times that there can be significant deductions, leading to years in which losses are recognized or carried forward.

Because of this, your Social Security benefit may be lower than individuals in other industries – and you might not think that Social Security planning is really necessary. Whatever your situation may be, a question that seems to always draw some curiosity and conversation is: When should I draw Social Security?

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Your neighbor, friends at the coffee shop, veterinarian – they all will have a different rationale as to why they decided to either start as early as they could or delayed claiming benefits as long as possible.

Making a decision that will have significance for the rest of your life can cause many to get emotional or do what “feels” good today. Taking an emotional approach to claiming Social Security benefits isn’t uncommon, but it may not be the most beneficial.

There are many factors to consider when taking Social Security; including, but not limited to:

  • How long do you and your spouse want to “work”? This is especially important if your spouse works off the farm.

  • Do you need the benefit for a specific reason or goal?

  • How is your current health, and is there longevity in your family? How about your spouse?

  • What other sources of “retirement” income will you have? Including IRAs, other government benefits, farm income, rent, etc.?

  • What will your ideal lifestyle look like in retirement? How much do you like to/want to spend on yourself?

These may seem like tedious questions, or the answers may vary depending on your discretionary income after mitigating risk. However, they are important because there are more than 100 different strategies in which to draw Social Security, so this will not be an article to use as a “be all and end all” to make your decision.

Instead, it may help be a tool to simply identify potential topics and solutions specific to you, a farmer, which may not be as relative to non-farmers.

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For example, consider that many farm families may have had one of the spouses working off the farm over the years and, thus, may have income significantly higher than the on-farm spouse. But first, let’s make sure we all have a general understanding of Social Security.

The basics of Social Security

First off, let’s start with some facts, rules and lingo when it comes to Social Security, and then we will get to the core topics. There are many different acronyms, like FRA, which just means full retirement age or “normal” retirement age in the eyes of Uncle Sam. To explain FRA simply, if you are older than 57 currently, your FRA is around 66 years old (give or take some months). If you are younger than 57, your FRA is around 67 years old.

At your full retirement age, you will get your “PIA,” which stands for primary insurance amount and just means you will get the full monthly amount the government calculated. However, you can claim your benefits as early as 62, but if you receive benefits prior to your FRA, you will receive reduced benefits – and the reduction could be substantial over time.

You can also start your benefits after your FRA. By waiting past your FRA, your benefit payout will increase by about 8 percent per year up until age 70, which is pretty substantial over time. Lastly, when married couples are both receiving their own Social Security benefit, and you pass away, your spouse does not get to continue receiving both benefits; he or she would get only the higher of the two.

Knowing this information brings us to a question, or statement, that can arise with farming couples.

  •  “What sense does it make to wait if I pass away in my early 70s?”

Good question. On the surface, many would agree this single risk alone results in a clear solution to claim early. However, won’t your increased benefit last for two lives? Could it make sense that between you and your spouse, one of you with the lower benefit take their benefit early, or right at FRA, and the other try to maximize the payout? Let’s see an example.

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Potential claiming strategy

Bob has the option to draw at 62 and receive $1,800 per month. If he waits until 70, the benefit will be $3,168. Bob has heart complications, and his father and grandfather both passed away in their early 70s. Bob wants to make sure his spouse will be able to live comfortably if something should happen to him.

Bob’s wife, Sue, is the same age as Bob and will have a significantly lower benefit of $1,100 per month at 62. Sue is very healthy, and most of her family has lived to be well past 90 years old.

Bob has a conundrum and is weighing his options as “devil’s advocate.” After weighing some options with his strategic professionals, Bob begins to think it may be beneficial for Sue to claim her benefit prior to 70 years old (at 62, 66, etc.), and they can enjoy the income early. Additionally, he thinks he may wait until 70 to file in order to maximize his benefit to $3,168 per month.

By doing this, Bob has locked in a substantial benefit not only for his lifetime but for Sue’s as well. Even if Bob passed away as early as 72, Sue would be able to receive his maximized benefit that could potentially pay out to Sue for more than 20 years.

In this situation, this strategy may allow you and your spouse to “have your cake and eat it too.” With this extra financial income coming outside of the family farm for Mom and Dad, it may lower the need to draw as much income from the farm and, thus, help to alleviate financial stress of the next-generation operator.

This is just the tip of the iceberg when it comes to Social Security claiming strategies. Be sure to save this article for future reference, as we will dive more in depth with Social Security. It’s valuable to be aware of how drawing benefits prior to FRA, and while working, may be working against you in more ways than one.

Additionally, knowing that your Social Security can be taxed may lead to significant customizations to your financial and retirement plan. Being self-employed and a farmer can create some roadblocks as well as opportunities that the general population doesn’t face. We can dive deep into those problems and solutions specific to you, in future articles, to show you not only the parameters and rules but some potential solutions to tailor your financial plan.

We have made some progress on the topic of Social Security. Some of it may be new to a number of folks; to others, it may be review. Just know that the factors you are considering are not the same as other folks around your age.

Be sure your team of professionals has working knowledge of Social Security, and adequately inform them of your benefit amounts, financial information, family background and goals/concerns. As entrepreneurs and self-employed individuals, you and your spouse may have been self-reliant and self-taught through the years, in many areas of your life.

However, do not be afraid to be open-minded, and allow a trusted professional to help give you some options that may potentially bring hundreds of thousands of dollars of additional income to your household over your lifetime.  end mark

Jon Holthaus
  • Jon Holthaus

  • Financial Planner
  • Holthaus Financial Group
  • Email Jon Holthaus

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