Jason and Emilia discuss starting Social Security at age 62 or waiting until age 70, taxes, inflation and deferred retirement credits.
Below is the full transcript:
Announcer: Welcome back America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence and freedom, as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason: America. Welcome back to another round of Sound Retirement Radio, and Emilia Bernal, welcome back.
Emilia: Thank you Jason, it’s great to be back.
Jason: It is good to be back. Man the end of summer, life is good.
Emilia: Starting to get cooler, already.
Jason: I’ve had a cup of coffee, you know, I was off coffee for a little bit-
Emilia: Oh, that’s right.
Jason: … but I’m back to one cup of coffee in the morning, and I just like my coffee, I really do.
Emilia: Some people can’t do without it.
Jason: I’ve quit coffee so many times, that I should probably quit quitting.
Emilia: Well, I always say this, never stop never stopping.
Jason: So, this is episode number 179, and what’s the title for today?
Emilia: We have, When Should You Take Social Security?
Jason: When Should You Take Social Security? This is an important question. This is one that we get asked a lot. We’ve covered this in the past, we’ve had experts from around the country on. But I thought we’d revisit it, because it’s something that just about everybody heading into retirement has to think about. Before we get into that though, we like to start the morning right by renewing our mind, and also something a little bit fun. So I’ve got this, actually, a few verses here for us. Because this is one I’ve been studying, and reading, and thinking about. So this comes to us from John 15, and it starts with verse 11, and goes through verse 17.
But it says this. This is really cool, listen to this. And this is Jesus speaking. It says, “I have told you this so that my joy may be in you, and that your joy may be complete. My command is this. Love each other, as I have loved you. Greater love has no one than this, to lay down one’s life for one’s friends. You are my friends if you do what I command. I no longer call you servants, because a servant does not know his master’s business. Instead, I have called you friends. For everything that I have learned from my father, I have made known to you. You did not choose me, but I chose you, and appointed you, so that you might go and bear fruit, fruit that will last. And so that whatever you ask in the name of my father will give you.” I’m sorry, “Whatever you ask in my name, the father will give you. This is my command. Love each other.”
But the verse here that really just says to me, boggle my mind recently, I mean they’re just amazing, all of it but, “I chose you,” wow. To be his friend, the greater the universe wants to be.
Emilia: That’s beautiful.
Jason: Be a friend, yeah, that’s amazing.
Emilia: Thank you. Okay, now here I go with my-
Jason: Oh yes, all right, yeah.
Emilia: … corny jokes. Well, kind of just a little background, I wanted to say, I’m originally from New Mexico, and in New Mexico, Chili season is there-
Jason: Chili season-
Emilia: But if you say it right it’s Chi-leh. So my joke is a little play on that, and I think I might have used this one before but I really like it. I’ve already tested it on a client so I was like, he laughed, and here it goes … So what does a nosy pepper do?
Jason: I don’t know.
Emilia: It gets jalap in your business.
Jason: You’re funny.
Emilia: I know, that’s just how it goes, jalapeno.
Emilia: Jalap in your business.
Jason: See my wife is always on me because I say jala-pee-no-
Jason: And she’s like, “Jason that is not the right way to say that.”
Emilia: Good for her!
Jason: How do you say it?
Jason: Jala-pen-yo. Was that pretty good? Jala-pen-yo?
Jason: Okay, alright.
Emilia: Little accent there, alright. So yeah let’s get started, we have a lot of information today, but we wanna get started with why is social security so important?
Jason: Guaranteed income. We’re always talking that retirement’s about cash flow. This is for many people, the only guaranteed income they’re gonna have in retirement. Some people still have a pension, some people will annuitize some of their money to create their own guaranteed annuity from an insurance company. But people have been paying into social security for a long time, it’s a guaranteed cash flow, and there’s a couple of nuances about social security that make it really powerful. Number one, it’s inflation adjusted, so since the mid-1970s I think the average has been 3.71 has been the cost of living allowance. The last 10 years that cost of living allowance has only been about 1.69. So you’ve got inflation adjusted income, it’s tax efficient. So if people have to make a decision between taking social security or pulling a dollar out of a retirement account, the social security goes a little but further because Uncle Sam doesn’t get as much of that money.
And a worst case scenario only 85 cents of every dollar is taxable. There are spousal benefits. There are survivor benefits. So when one spouse passes away, the surviving spouse, the easiest way to think of it is the surviving spouse gets to step up to the higher of the two benefits. And then there are delayed retirement credits. So the longer you wait to start social security, the higher the benefit is. And so there’s all these nuances, but the bottom line is it’s guaranteed income on the social security statement that we receive.
I think social security says that for most retirees, social security will represent about 40 percent of their income needs, or replace about 40 percent of their working year income for most retirees. So it’s a big chunk of money. For some people it’s the only income they have in retirement. For other people it represents a significant portion of what they have in retirement. And for some people it’s just an added bonus, it’s just like hey social security’s here, let’s take that income, they don’t really need to depend on it but it’s just an added extra. Whatever it means to our listeners lives though, we just wanna be thinking about it, we wanna be talking about it, we wanna be understanding some of the nuances, and help them make a really good decision. One that they feel good about that they don’t end up regretting. I think that’s what we’re really trying to avoid is regrets.
Emilia: Very important, and you always say that being part of the budget, a big part of talking about retirement is you focus on budget. Budgeting, and we have the retirement budget calculator. So throwing that social security in there, kind of seeing where everything goes. We wanna let our listeners know that you can go to soundretirementplanning.com, or sorry retirementbudgetcalculator.com, and you can purchase retirement budget calculator and look at your social security, and how it’s gonna work for you.
Jason: Yeah one of the cool things about our calculator, because a budget is about income and expenses. So not only have we dialed in the budget calculator so you can really dial in all of your expenses, but you can also put in the different incomes that you’re gonna have. And so the neat thing about that, is our calculator allows you to start income in the future. So let’s say you’re gonna retire at 60, but you’re not planning on starting your social security until 70. Our calculator allows you to model that, we don’t tell you what the social security is, you have to know those numbers to input them, but you can put in the calculator, hey I’m gonna have social security that’s gonna start this far into the future, so that when you’re looking at that future budget, you can see what your inflation adjusted expenses are gonna be, but then you can also see that future cash flow item coming in. Yeah the retirement budget calculator, just a cool tool.
For our listeners they need to remember that they get 50 percent off the purchase price. It’s only 27 dollars right now, if they use the coupon code podcast. That’s not gonna last forever, so if you’re listening to this podcast six months from now, but right now that’s the opportunity for folks.
Emilia: Get out there and buy it, that’s great, it’s a great deal. When I see 50 percent off on anything I’m like, oh that’s awesome!.
Jason: Yeah that’s what always gets my wife. Every time we walk into that coach store, they come up and they say, “Hey here’s a special coupon.” Forget it, we’re not getting out of there without- [crosstalk 00:08:04]
Emilia: It’s like buying, in my mind it’s like I get to buy two, I think that’s why. Buy one for yourself and buy one for your friend, there you go. Alright so our next question, so why is inflation important with social security?
Jason: Inflation’s that slow moving train that eats away at your purchasing power over time. So social security has this component, this piece that’s built into it, that congress doesn’t have to get involved with. Which is a good thing because Congress likes to drag their feet sometimes on these decisions. But social security automatically increases every year based on the consumer price and X for urban wage earners. There have been several years in the last 10 years where there has been no inflation increase, but the fact is you’ve got this income that is gonna be increasing over time to help you keep up with the rising cost of inflation. You ask anybody that’s retired today how much retirement is going to cost in the future, and it’s really hard for people to wrap their minds around inflation because we always live in the moment, in the present. But we know that inflation exists.
In my book I give an example of a client who brought by a budget that his mom kept back from the 19 … I wanna say it was the 1950s, and when you look at the spending that she was doing back then, and you compare it to today, anybody would think how in the world could you live on that small of a budget? We’ve got an inflation target, the federal reserve says they want inflation, we definitely don’t want deflation we don’t want prices falling. And so we need to be planning that our dollars just won’t purchase as much in the future, and in social security’s inflation adjusted income, so that makes it a really powerful benefit.
One thing I’d like to say there, Emilia, even as people think about the retirement budget calculator. Because one of the things we allow you to do is to model how that income’s gonna change over time. So you can add an inflation component to these things. I always like to aim low, so even though we can say historically over the last 40 plus years, social security’s increased at 3.7 percent. The last 10 years social security’s only increased about 1.69 percent. So I think if people are gonna be modeling social security, the more conservative approach is to always aim low. I like to say let’s hope for the best, plan for the worst. And so if you model one and a half percent and we end up getting three, well that’s icing on the cake. But if you model three and you only get one, man that’s gonna hurt. So be careful with that.
Emilia: Very important. You mentioned hoping for the best a planning for the worst, so for our listeners out there who are looking to start their retirement planning journey, we have some webinars coming up. We have a live webinar, so if you’re one of our listeners that likes to be there live, ask questions, Jason’s gonna have a live webinar next Thursday, September 13th. And you can go to soundretirementplanning.com and register for that webinar today, and it does begin at 5:30pm Pacific Standard Time. And just as a side note for our listeners who would prefer just a replay. Maybe later on, can’t make it to next Thursday or would just prefer a one on one, get to replay that, we also have a webinar replay or soundretirementplanning.com that you can listen to as well.
Jason: Yeah and I don’t usually do those replays of the webinars, I like to do them live. But last month I kind of messed up when we were doing our webinar. For some reason I had it in my mind that it was gonna start at 5:30 and about 5:14 I looked, and I was like oh man this thing was supposed to start at 5. So I did put that webinar replay up there for people where I messed up for them. So I’m not gonna have that up there forever, but for right now if people can’t make the live event, for sure that’s a resource that they can plug in to.
Emilia: Great, great. So moving back on to social security here. So big part of this too, how do taxes work with social security retirement income?
Jason: Yeah so we touched on this just a little bit, but its tax efficient income. And there are what are called, the provisional income rules that determine how much of your social security income is taxable to you. And I’ve seen little, somebody once said a small hinge swings a big door, and I found that to be the case when it comes to people’s tax returns. A lot of people just are not thinking about their finances, their money, and their tax return at the same time, and you really want to.
Because remember retirement’s about cash flow, but it’s about how much income you actually get to keep at the end of the day, after Uncle Sam gets their cut. And there’s a couple of little nuances there, so with provisional income rules, provisional income looks at all of your income sources, and then 50 percent of your social security to determine how much of your social security is gonna be taxable to you. So the worst case scenario would be 85 cents of every dollar would be taxable. Would count towards income on your tax return, that’s the worst case scenario. But sometimes people will buy municipal bonds because it’s tax-free income, but that tax-free income from municipal bonds does count against the provisional income rules.
So even though it’s tax-free income from a federal taxation stand point, it still counts against the formula for how much of your social security is taxable. The nuance there though is that qualified distributions from a Roth IRA do not count against provisional income. So if you’ve been listening to the show for a while or you’ve read my book, and you know how important taxes are when it comes to these retirement accounts, and maybe people have been putting the brakes on contributing to the retirement accounts, and instead they’ve been contributing to the Roth. Or maybe people have strategically the last several years been converting money to get money into those tax-free Roth accounts.
It gives them some flexibility to help them decide how much of their social security is gonna be taxable. And here’s a good example, let’s say that somebody has converted all of their money into Roths, and they need cash flow for retirement. Well they could be, let’s just give some crazy numbers here, they could be taking 100,000 dollars a year of income out of that Roth retirement account. And also have social security, and be in a situation where none of their social security gets taxed, if those were their only two income sources. So 100,000 dollars from Roth, and then all of their social security income. And because they have no other income sources, in that situation none of their social security would end up being taxable to them. So they end up living a tax-free life because of that. So the thing I wanna warn people on with tax is, if you look at the palm of your hand and you notice how intricate and unique your finger prints are, it’s kind of like your tax return too.
Everybody’s tax return has so many moving parts, that we can’t really make broad statements about taxes because we don’t know people’s individual circumstances. But it is something that I cover on both the webinar, we’re gonna talk about taxes, as well as the webinar replay. I cover all these tax changes that just happened for 2018. So provisional income rules. Another things I’ve seen where people have a lot of dividends or interest income hitting their tax return. And especially this is for people who are really conservative and their using things like bank certificates of deposit that are kicking off this interest income, but they’re not necessarily spending the interest income, it’s just generating more income on their tax return.
And they don’t even realize, it’s not just generating taxes that they have to pay on their tax return, but it’s also affecting how much of their social security is taxable potentially. So there was one time I remember we met with a gentleman, and just by thinking more strategically about that interest income, we were able to actually increase the amount of interest that he was earning, reduce the amount of taxes he was paying, and significantly reduce the amount of social security that was being taxed. Now that’s not gonna work for everybody all the time, but it’s those little nuances that you really need to be thinking about when it comes to social security.
Emilia: That’s why it takes a professional to take a good look at those things and help with the planning process, and I think that’s where it’s great for our listeners to at least try the webinars out and get more information. The more you know about these things, the better decisions you can make if you talk to somebody about it.
Jason: And you know the thing about taxes is most of the people we serve say, “Jason, we live in a great country, we don’t mind paying our fair share of taxes, but we don’t wanna pay more than our fair share.” And so I don’t know how you qualify what fair is.
Emilia: Can we get 50 percent off on that?
Jason: But, ignorance is not bliss when it comes to taxes. I mean the prepared mind is going to probably have an opportunity to pay a little bit less money in taxes if they understand how the rules work, and then structuring things in a way that benefits them.
Emilia: Okay, well great so there’s a-
Jason: That’s called tax planning. There’s a big difference between tax planning and tax evasion.
Emilia: I thought you were gonna say tax preparation.
Jason: No, well tax preparation too. Yeah we’re big proponents of tax planning, where we’re just looking at how the rules work and we’re saying well what’s the best way to structure things. We’re not a big fan of saying hey, you don’t have to pay the IRS your fair share, that gets people in a lot of trouble, and when it comes to IRS, I believe in black and white I don’t like any gray area.
Emilia: That’s good, that’s great information thank you. Alright Jason, so take me back to social security and some of the things that are helpful here. So what are the deferred retirement credits with social security.
Jason: So most people know that the opportunity is you can start social security as early as 62, or you would delay it as late as age 70. 70 would be the latest you would defer you social security. If you start it early, you take a permanent reduction in your benefits, and if you wait all the way until 70, you earn delayed retirement credits. Then for a lot of people today, I’m being a little bit vague here because a lot of this is dependent on your birthday, but if you’re born between 1943 and 1954, you take a 25 percent reduction. And then your full retirement age is gonna be around age 66 for most people depending on when their birthday is. That’s full retirement age, that’s when you would take no reduction, that’s when you get your full benefit. But every year that you wait beyond age 66, you earn these 8 percent delayed retirement credits.
So it’s possible that if you deferred out to age 70, you could end up with 132 percent of what your social security benefit would be. But it’s not just 132 percent because you also get to take advantage of those cost to living adjustments that had been applied every year. Again it’s just social security is a wonderful benefit, people have paid into it for a long time. Sometimes the different between starting social security early or delaying it, could be 50 to 100 thousand dollars of additional lifetime income. So that’s a pretty big financial decision for most people. And the other thing is for some people, when they start social security, really determines whether or not they’re gonna have enough money to make it their entire retirement, or whether they potentially run out of money early. So for some people it can really be an important decision.
Emilia: Yeah social security is very important to a lot of people. Like you said, some people this is all the income they have, so making those smart decisions about when to start it are … I can see that part of the planning is very important.
Jason: I don’t know why with such an important decision like retirement, why people wouldn’t want to just get some advice, and maybe a second set of eyes to help them make sure they’re thinking that decision through in its entirety. And the hard part is, the folks at social security, because we’ve had the social security administration on the program. We’ve had Kirk Larson who’s the Western Washington Public Affairs Specialist, and he even said, he said, “Look, when you go into the social security administration, their job is to help you qualify for the highest benefit you’re eligible for the day you walk into the office. They’re not financial planners, they’re not looking at your financial life and trying to help you make decisions about the best way to do this into the future. So the social security administration is a great resource, but they’re just not designed to do planning for people, that’s not what they’re in business to do.”
Emilia: Yeah makes perfect sense, they’re really not. And they’re not sitting there thinking, oh what can I do to make this better for you today? I’ve heard people say they wait in like two, three hours and so I think they’re just kind of-
Jason: It’s kind of weird actually, at least our local social security there’s bulletproof glass, and there’s a guy with a gun standing there-
Emilia: Never been in there, good to know, I would’ve probably been surprised by that.
Jason: It was shocking yeah, when you walk in there it’s like wow what is going on here? Am I walking into a penitentiary or what? People I guess get pretty emotional about social security.
Emilia: Finances are an emotional part of your life I can imagine. So another question here, so the big question is-
Jason: You know I said he’s an armed guard, well maybe-
Emilia: Maybe just a taser?
Jason: Well I see these guys in uniform so I think everybody’s carrying a gun, maybe he’s not armed.
Emilia: Just some pepper spray maybe.
Jason: They definitely have some kind of security person present.
Emilia: Yeah, okay well now I know. I’ll make sure to keep an eye out-
Jason: Go back behind and see if the guy’s packing a gun or not.
Emilia: Well if they have metal detectors then we’ll know. Not really. So again the big question, should people start at age 62, 66, or 70?
Jason: Yeah and this is the one where everybody would just like to have a cookie cutter response, and then you hear there’s also a lot of fear around this. People would say oh you just start as early as you can because social security is gonna be broke. Which the social security trustees report does say that there’s gonna come a time in the future where they’re not gonna be able to pay out all of their promised benefits. So there is truth to the fact that Congress, our country is gonna have to come together and figure out how to keep this really important program going for retirees. But I think that that could be a mistake if you’re basing it just on this fear that social security is gonna go broke in the future. Or not that it’s gonna go broke but they won’t be able to pay every promised dollar.
Emilia: So you need to start taking it as soon as they can to avoid not getting everything.
Jason: Exactly yeah. We better start it right when we turn 62, and we’re just looking at this for some focus the other day, and it was interesting. If you started at 62, it means that a lot of people are gonna have to dip into their retirement savings, their 401ks and their IRAs to help supplement their income until social security starts if you’re gonna be retiring early. Let’s say you’re gonna retire at 62, that means that for a lot of people are gonna have to dip into that resource.
And so the question becomes, well if I have to dip into that resource then it’s possible that I’m gonna end up leaving my family less money in the future by dipping into that income. So in this particular example, what I was looking at was if we start social security at 62, and if the goal is to leave your family as much money as possible, in what scenario do we end up leaving the family more money at age, say 82 at life expectancy. And it’s true that you will your family in that particular analysis at least, you end up leaving your family more money if life expectancy is age 82 if you start the benefit early at age 62, based on these projections for this particular person.
Again this is a moving target for everybody. However, if they end up living closer towards 92 or 93, then they end up about 100,000 dollars ahead by delaying social security. So the tricky part in all this, none of us know when we’re gonna check out, and so life expectancy’s important and that’s why at sound retirement planning, under the resources page, I have got some links in there to summit what I found to be some of the best life expectancy calculators. These are mortality calculators that have been developed by insurance companies. Those guys are pretty good at figuring out mortality cost because they’re doing things like life insurance.
Emilia: Trying to beat you at the game of when you’re gonna pass.
Jason: That’s right. Emilia I just realized we’re out of time.
Emilia: Oh well thank you for having me Jason.
Jason: Thanks I appreciate it. Until next week, signing out.
Announcer: Information and opinions expressed here and believed to accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual, and is not constituted solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have not liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussion are a subject of the claim paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent feed based wealth management firm, located at 9057 Washington Avenue, North West, Silverdale Washington. For additional information, call 1800-514-5046, or visit us online at soundretirementplanning.com.