Wednesday, 24 October 2018

US Social Security - Do you Qualify?

By: Norman H. Chait, CFA, Managing Principal at Nardis Advisors LLC

normanchait headshotI recently returned to Israel after living in New York for 23 years. It is great to be back, and have felt warmly welcomed. Nevertheless, it does take time to get used to things, even as a fluent Hebrew speaker. Simply put, things operate differently here versus the US. Sometimes it is better and sometimes it can be frustrating. So, am happy to share experiences of making Aliyah for the second time.

In navigating Israeli bureaucracy, one may forget that "once an American always an American.” Unless you voluntarily give up your US citizenship, you have rights, benefits and obligations to consider back in the land of Uncle Sam.

Members of the American community in Israel have asked whether they are eligible to receive social security benefits. This is a complex subject, so let us focus on some key general principles to assist you in considering how to maximize your benefits.

Are you eligible for social security?

To qualify for social security benefits, you must have worked for at least 40 calendar quarters (ten years) in the US, or have paid US self-employment tax if you own a business outside the US. The quarters do not have to be consecutive. You may also be eligible even if you did not work for the minimum period, but are divorced or widowed from someone who did.

At what age can you claim social security?

While the full retirement age is between 66 and 67 depending on date of birth, one may claim reduced social security benefits at age 62 (up to 30% less dollars), or increased benefits if one delays up to age 70 (up to 24-32% more). Unless you really need the money immediately, you may indeed want to delay your initial claim date.

How much can you receive?

Here is a key fact people often miss. Social security determines your monthly benefit on an inflation-adjusted basis by averaging your highest 35 years of earnings. Assume this monthly payment is $1,500. If you worked only for 10 years, you will be paid only $429, or 28% of the full amount.

So, if possible we suggest contributing to social security as long as possible. To do in Israel, one will need to generate self-employment (Heb: Atzmai) income. And one can do so even through running a small home business, such as consulting, catering, tutoring and so on.

How much do you need to contribute to social security?

Social security payouts are regressive in that you get the highest matched payout on the initial dollars earned. At present, in round numbers, the first $10,600 earned annually has an 90% benefit payout ratio. This drops to 32% on the next $53,400, and thereafter to only 15% of additional earnings up to a cap of $127,200.

In other words, earning a few hundred dollars a month in self-employment income can translate to an almost similar amount in future monthly benefits, if one indeed does so for up to 35 years.

As of 2018, each lifetime quarterly social security credit will be $1,320. So, one will want to earn a minimum of $5,280 per annum in self-employment income to take full advantage.

How much would you have to save to receive similar annual income?

Social security benefits can also be compared to a financial nest egg. Taking our example of $1,500 per month (or $18,000 per annum), one would require $250,000 in savings to generate an equivalent amount assuming an ambitious 7.2% annual return, or $500,000 at a more realistic 3.6% annual payout. One can tweak the numbers, but this illustration aims to depict how much social security may be worth to you on a capitalized basis.

Two Caveats

If you are eligible to receive a pension from an Israeli or other non-US employer, it is possible that your monthly benefit may be reduced by up to 50% (Windfall Elimination Program). This does not include payments from Bituah Leumi (Israel National Insurance). Also, it is possible that in the future the Social Security Administration will not have sufficient capital to pay out all claims. At present the program is fully funded until 2034. However, we understand that few people maximize their social security benefits, often claiming too little too early. Therefore, we are optimistic that the program should be able to pay out most of the eligible benefits for many years to come.

 

Disclaimer: Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.

If you have a US social security question, please post it in the comment box below and Norman Chait will be happy to respond.

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