I’ve earned more than the Social Security income limit for more than 35 years. I own my own business with my wife.
She worked for 12 years before we had children and returned to work five years ago, but earns only $40,000. I earn enough in my business to pay both of us more than the income limit.
She’s a 50% owner in the business and helps with random items.
We plan on retiring at 67 or 70 (10 or 13 years from now). We would be well served for Social Security purposes to split the business income between us, which would surpass the $160,200 maximum, correct?
Yes, you’d help your wife boost her future Social Security payments. Benefits are based on your 35 top-earning years, so your wife will get larger checks someday if she can boost her income.
But I’m not sure the two of you will come out ahead in retirement if you maximize your wife’s future Social Security payments. In this scenario, you and your wife would pay a lot more in Social Security taxes. The trade-off might not be worth it.
The $160,200 you refer to is Social Security’s maximum taxable amount for 2023. This cap goes up pretty much every year. Any money you earn above this limit isn’t taxed by Social Security. Those taxes are a hefty 12.4% for self-employed people like you because you have to kick in 6.2% on both the employer’s and the employee’s side. But you’re currently earning a lot of money that isn’t subject to Social Security taxes.
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In a nutshell, if you gave your wife $160,200 of business income, you’d have to fork over nearly $20,000 extra to Social Security. Now, it may be possible to deduct half of the self-employment tax — which includes both Social Security and Medicare taxes — on your income taxes, depending on a host of factors. But that’s a matter to sort out with your CPA.
Paying $20,000 extra in taxes may be worth it if you and your wife want additional guaranteed income from Social Security. But a lot of high-earning people like yourself would prefer to invest that extra money to build a bigger nest egg.
Ultimately, I think you should look at the big picture. What kind of lifestyle do you want in retirement? Approximately how much annual income do you think you’ll need to buy yourself that lifestyle?
As a general rule, you want to replace between 70% and 80% of your pre-retirement income. But your actual needs will depend on a host of factors. If you want to be jet-setting seniors who own multiple beachfront homes, you’ll probably need more. But if you have simple tastes, you’re in good health and you want to retire debt-free somewhere with a low cost of living, you can probably get away with substantially less.
Decide on a goal, then try working backward. Set a target for each source of retirement income you expect to receive: investments, Social Security, business and real estate, etc.
Given your income, you can easily afford to hire a financial planner, and doing so would be well worth it for you. They can use software to make projections for both your retirement needs and income. Then, you can decide whether you’d be better served by boosting your wife’s future Social Security or using that money to invest more. Look for a fee-based financial planner so they’re getting paid based on the service they provide instead of the product they sell you.
A financial planner can also help you project your Social Security benefits under various scenarios. You could estimate your future payments under the arrangement you propose, where you divide your business income between the two of you. But you can also project her payments if she were to receive spousal benefits instead of her own retirement benefit. Your wife would be eligible for 50% of your primary insurance amount (the benefit you get at full retirement age, which is 67 for anyone born after 1957) as long as you both wait until 67 to collect.
Unless you and your wife got a late start on investing, I’m guessing your retirement plans don’t hinge on Social Security. Only about 6% of taxpayers make more than Social Security’s wage cap in a given year. Earning above the taxable maximum for 35 years is pretty rare.
Many Americans will need to squeeze every last penny out of Social Security to afford retirement. About a quarter of adults 65 and older depend on Social Security for at least 90% of their incomes, according to the Center on Budget and Policy Priorities. Fortunately, you can afford a comfortable retirement even if you don’t maximize your Social Security benefits.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].