US Social Security for expats – do you qualify?

Americans living outside the United States have asked whether they are eligible to receive social security benefits. US Social Security for expats is a complex subject, so let us focus on some key general principles to assist you in considering how to maximize your benefits.

Before we get started, we are financial advisors serving US expats, with a focus on Israel. We’ve written these blogs on expat finance that you may wish to read:

Expat investing tips

A guide to retiring in Israel

Checklist for moving to Israel

Expat IRA tips

Are you eligible for Social Security?

For an expat 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 (for ten years or more) or widowed from someone who did.

At what age can you claim Social Security?

While the Full Retirement Age is between 66 and 67 for US citizens 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 depending on official retirement age).

Just because you can claim Social Security doesn’t mean you should. Unless you really need the money immediately, you may indeed want to delay your initial claim date. This is general guidance, however, that may not be applicable to your specific situation. For specific recommendations that take into you’re the complexities of being an American abroad, it is best to consult with a financial advisor who specializes in counseling expats.

How much can you receive?

Here is a key fact that American expats often miss about Social Security.

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 for as long as possible.

To contribute to Social Security as an American expats outside the US, one will need to generate self-employment 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 pay-outs are regressive in that you get the highest matched pay-out on the initial dollars earned. As of January 2022, in round numbers:

The first $1,024 per month (or $12,288 per annum) has a 90% benefit payout ratio.

This drops to 32% on the earning over $1,024 and less than $6,172 (ie. The next $61,776 per annum)

Thereafter drops to 15% of additional earnings up to a cap of $147,000.

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[i].

As of 2022, each lifetime quarterly social security credit will be now be $1,510. So, one will want to earn a minimum of $6,040 per annum in self-employment income to take full advantage.

How much would you need 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 a non-US employer, it is possible that your monthly benefit may be reduced by up to 50% (Windfall Elimination Program). For Israeli residents, this does not apply to payments received from Israel National Insurance Institute.

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.

Israel and US Taxation

Persons living in Israel who receive US social security benefits are not taxed on this in either country.

Updated Information – Social Security for US expats for 2022

Please note that for 2022, the Social Security cost of living adjustment is 5.9%, the largest in 39 years, owing to a spike in inflation resulting from COVID-related economic difficulties. The average annual cost of living increase over the past ten years has been 1.65%.[ii]

The maximum monthly social security benefit for a person retiring at full retirement age (67 for persons born after 1960 – and between 66 and 67 for persons born before) has risen by $197 to $3,345. If you delay taking social security until age 70 then this rises to at least $4,147.

Conclusion

We hope you have enjoyed our article on Social Security for expats.

We are expat financial advisors located in Israel and the US, serving expats globally. If you are moving to Israel or another country and don’t know where to start when it comes to the financial side of things, please contact us.

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[i] https://www.ssa.gov/oact/cola/piaformula.html

[ii] https://www.investopedia.com/social-security-payment-schedule-5213627#toc-what-beneficiaries-can-expect-in-2022

Norman H. Chait, CFA Managing Principal, Nardis Advisors LLC, Originally published November 6, 2017 – Updated February 7, 2022

Sources

Social Security. (N.D.) Primary Insurance Amount. https://www.ssa.gov/oact/cola/piaformula.html

Williams, Ward. (27 December, 2021). Investopedia. Social Security Insurance Payment Schedule 2022. https://www.investopedia.com/social-security-payment-schedule-5213627#toc-what-beneficiaries-can-expect-in-2022

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.