You’re probably familiar with Tax Freedom Day®, which is April 16th this year for the country, according to The Tax Foundation. But are you aware of FICA Freedom Day? It’s the date when that first check arrives absent FICA deductions for Social Security.
FICA, or the Federal Insurance Contributions Act, requires taxes be deducted for employer and employee contributions to Social Security and Medicare. Those Social Security deductions are 6.2% of an employee’s income (the employer also contributes 6.2%), until the employee has earned more than the maximum taxable wage base, which in 2021 is $142,800. FICA taxes for Medicare have no wage limit and continue to be deducted and matched by employer contributions at 1.45% of wages. (For the remaining purposes of this article, I’ll limit my comments to Social Security taxes in relation to FICA.)
When my corporate career began ascending some twenty-five years ago, I began to watch this dynamic more closely, to the point where I could generally estimate where my own FICA Freedom Day would land on the calendar. A quick example is in order:
The Calendar Math:
Consider a client who regularly earns about $240,000 in base salary and an $80,000 bonus paid in the last week of March. They would have earned about $60,000 in salary and $80,000 in bonus income as of the beginning of the second quarter, $140,000 total, and probably one paycheck away from exceeding the magic number of $142,800 for 2021. Getting a meeting scheduled with that client in April would be forward thinking.
And armed with that knowledge, you can prepare to stoke a timely conversation that falls into the classic “I’ve some good news, and some bad news” category, or words to that effect. Here’s the good news to share with your clients, in the event their earnings success has left them jaded. They make good money! They are successful! They likely enjoy a comfortable lifestyle including a nice home, enriching vacations, providing good educations for their children, all the usual trappings of a healthy income. While their paycheck is now larger for the rest of the year, say by a few hundred bucks a month after taxes, that’s not the point. That extra few bucks a month isn’t going to change their lives particularly if they are within five to ten years of retirement.
Which leads me to the bad news, wrapped in some flattery. Your client’s high income means that their future Social Security income will replace a proportionally smaller share of income than someone who makes less. For example, the maximum benefit in 2021 for someone at full retirement age is $3,148 a month, or $37,776 in the first year, according to ssa.gov. To earn that maximum benefit, they’d have needed to have their income exceed the taxable wage base for their top thirty-five years of earnings. Someone who earned twice that taxable wage base, or three times as much, isn’t going to collect a meaningfully larger check. Your $300,000 or $500,000 a year client won’t get any appreciably larger check from Social Security than the client who earned $175,000 if during the last twenty or thirty years, both of their incomes came close to or exceeded that taxable wage base. As the movie title goes, that $37,776 is as good as it gets for a high earner.
This is a significant opportunity, while preparing for that “good news/bad news” meeting with the client, to tee up the topic of future retirement income. Think of the client couple who are used to a lifestyle afforded by a $300,000 a year one-earner income, have little or no pension waiting for them, and Social Security will replace maybe $50,000 or so of that income after factoring in that the non-earning spouse gets a check for half the breadwinner amount.
Even if they think they can comfortably live on 70% of preretirement income ($210,000), there’s an enormous gap to fill of $160,000 a year. How much of that $160,000 do they want in rock solid guaranteed cashflow, and how much are they willing to subject to some degree of probability? Answering those questions will help in part to determine the mix and scale of solutions necessary to do the job according to the client’s desires.
FICA Freedom Day is a great opportunity to kick-start the retirement income discussion with your clients. The annuity industry is poised to help.
John can be reached at [email protected] or 860-559-3193