Jason and Emilia discuss Social Security as a foundation for retirement income.
Below is the full transcript:
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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. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m your host, Jason Parker. It’s my good fortune to have Emilia Bernal in the Studio with me this morning. Emilia, welcome back.
Emilia: Thank you. It’s good to be back.
Jason: It is good to have you back. It’s been too long since I’ve had the good fortune to have you in the studio with me here this morning. We’ve got a great show lined up for our listeners. Hopefully, we’ve got a lot of people driving down the road in Seattle this morning, maybe people around the country who have marked it on their calendar that 2016 is going to be their year to retire. One of the things we’re going to be talking about today is a foundation. Building a good retirement plan is I would say in part about having a good foundation. We’re going to talk about what a foundation looks like with respect to social security.
This is episode 078. If you’re driving down the road this morning, you can’t catch the entire program, I want to encourage you to visit us online at Soundretirementplanning.com. As many of our loyal listeners know, I like to start the morning with a verse to renew our mind. This comes to us from 1 Timothy chapter 5, “Never speak harshly to an older man, but appeal to him respectfully as you would to your own father. Talk to younger man as you would talk to your own brothers. Treat older women as you would your mother, and treat younger women with all purity as you would your own sisters.” That’s awesome.
Emilia: Yeah. It’s a great verse.
Jason: It’s a good one, especially for us guys that are getting a little bit older, because we want you to speak kindly to us. I’ve got a joke. Emilia, the other day, this woman was coming home. She saw her husband out, waving a newspaper around his head. She said, “Honey, what in the world are you doing?” He said, “I’m swatting flies.” He said, “I’ve got 3 males and 2 females.” She said, “Really? How in the world did you know that you got 3 males and 2 females.” He said, “Well, 3 of them were on the remote control of the TV and 2 of them were on the phone.” Oh goodness.
Emilia: Well, I guess that’s the same in my house. Now I know.
Jason: All right. Emilia, this episode 078, some important things are going on was social security. Hopefully, people are getting ready to retire. They really given some thoughts and some consideration into this decision, because it’s very important. Today’s episode is really about helping our listeners think about some of the things they should be thinking about before they make the decision.
Emilia: Definitely. I want to start off, Jason. I think the main question is, everybody knows that at 62 years, you’re supposed to begin taking the social security. Should people start taking social security as soon as they turn 62 years old?
Jason: Yeah. That’s such a great question. I’ll tell you what. The way that people answer that 5 years ago, compared to the way that they answered today is a lot different. What I used to hear a lot of people say is, “Well, I don’t think social security is really going to be there for the long haul, so I better just get in and get as much as I can, and get it as soon as I can while it’s still there. That could end up being a very big mistake. In fact, when I do speaking engagements, one of the questions I’ll often ask people is how much money they paid for their first home. That’s a very fascinating to me, when I go around the room I’ll hear $30,000 $45,000. It’s incredible what people paid for their first home.
A mistake with social security in election, choosing to start social security as early as age 62, which for some people that might be the best decision, but for some people it could be a mistake that cost them $50,000 of lifetime benefits. $100,000 from married couple is not uncommon to see and lost benefits for people that just where a married couple both take their benefits as early as age 62. If you’re sick and you’re not doing well, and your life expectancy isn’t long, well, that might be a good reason to start at 62, but just to use fear as your primary motivator for why you’re going to start, then it may not be the best decision. Frankly, believing that social security isn’t going to be there for you is you’re using fear as the foundation for that decision making process.
I would definitely say no, you can’t. Unfortunately, with social security, there are not very many cooker cutter answers where we can just say, “Everybody go do this.” That’s not very good advice. No. Everybody should not start their benefits as early as they can. One of the reason for that is because you take a permanent reduction in your benefits. If you’re born between 1943 and 1954, you’re going to take a 25% permanent reduction of what your full benefit would’ve been, by waiting until your full retirement age. That’s not just a 1 year reduction. That’s a permanent reduction for the remainder of your life in those benefits that you’re going to receive, and then possibly, the benefits that your spouse is going to receive. Making that kind of decision can really have a negative impact on somebody’s overall well-being.
Emilia: Great. That’s a great information. I know we’re just getting started into my questions but I did want just mention we have a webinar you have scheduled for Wednesday, January 20th at 5:30pm. That’s going to focus completely on some of these questions, and any questions that other people might have, right?
Jason: Yes. Not just on how to maximize social security, how to coordinate social security, how to incorporate it into an overall retirement plan, but also, there’ve been some pretty big changes that have happened with social security. Thank you for reminding our listeners. In order to do that, they just visit Soundretirementplanning.com. On the right hand side of the screen, you’re going to see a great big orange box that says, “Register for our social security webinar.” That’s how they can register for that event.
Emilia: Great.
Jason: That’s free, by the way too. There’s no cost to attend.
Emilia: Even better. My next question then, Jason, is why is Social Security planning so important?
Jason: It’s critically important. Like I say, we’re talking about potentially 50 to $100,000 of lost benefits if you don’t understand the right way to do this for married couples, especially for married couples. Even for people that have been widowed, or divorced or for people that are single, for a lot of people. We’ve started the conversation off today talking about a foundation. No matter what it is you’re going to build, whether it’s a retirement plan or a house, you always want to have a good solid strong foundation as your starting point. If you build the house without a foundation and the wind blows, and the rain is come down, guess what what’s going to happen with that house. You’re going to potentially have some trouble. Same thing with the retirement cash flow plan. If you don’t start with a good foundation, It’s possible you could get into some trouble down the road.
We like social security for a couple of reasons. Number 1, it’s tax efficient income. What that means is in a worst case scenario, for really income earners, 85 cents of every dollar that you receive from social security is taxable, but with a lot of middle income people where less than 85 cents of every dollar is taxable from social security, so that’s really a neat benefit. It’s inflation adjusted income. Since the mid-1970s it’s been an automatic. It’s based on the consumer price index for urban wage earners that Social Security is tied to that index, and it will go up automatically if there’s an increase. It’s inflation adjusted income. The final reason that we really like it from a foundation standpoint is that, it has a benefit for the surviving spouse. When one person passes away, we’ve got income that will be available for a surviving spouse.
Between those 3 different elements, social security is incredibly powerful. If I sound like a broken record, one thing that I’m always saying is that retirement is all about cash flow. It’s your income that will determine your lifestyle in retirement, not your net worth. Social Security for most or for many retirees represents 30 to 40% of their income in retirement. We want to get this decision right. Sometimes, if that means that we have to take some withdrawals from IRAs in the early years, so that we can maximize Social Security, sometime that’s the best strategy early.
Emilia: Great. In your opinion, what is the single most important consideration on when to start?
Jason: The single most important consideration on when to start social security is to not make that decision in a vacuum or to make it in a bubble. I say that because I see people make this mistake all the time. It’s one thing to actuarially say, “Okay, based on my wife, and our family history, and longevity here’s how we should start it to get the most money out”. That doesn’t even always pencil out to be the best. You have to … What I really encourage people to do is make social security a part of a good retirement cash flow plan. Use the retirement plan in conjunction with a good social security claiming strategy.
Don’t make that decision in a vacuum. Don’t make it in a bubble. Take into consideration the other assets that you have, other income sources that you have, and your overall retirement cash flow plan, and make sure that all those pieces are working together, and then you’re going to have a good plan. Where I see people mess this up all the time is they’re making decisions based maybe on an article they read, or something a friend said at a Christmas party, and that’s not a very good planning. We want the best for people. They paid into this system for a long time, they deserve to get as much as back out of it as they can.
Emilia: Yes. I just like to give our listeners another little reminder that Jason is going to have a webinar focusing on all your concerns, questions regarding social security, Wednesday, January 20th at 5:30 pm. You can go to Soundretirementplanning.com. Click on the big orange box to register for that webinar. I have a few more questions and hopefully you all can keep listening with us. With all these going on, Jason, congress recently changed some rules regarding claiming strategies. Can you help our listeners understand what change?
Jason: Yeah. This is very unsettling for people. We tried to make plans based on, and we do make plans based on the way that everything works today. Unfortunately, and reality is, one of the risks that we faced when doing planning is public policy risk. When it comes to a program like social security, our elected officials can come along and they can change the rules for how the system works. We just saw this happened, November 2nd, 2015, the new budget act that was passed changed social security fundamentally and significantly. In fact, I was just meeting with a married couple recently. These were folks that we had met probably in June of last year. From June until November, based on the planning that were doing, they probably looking at about $30,000 of lost benefits over their lifetime based on the decision that congress literally made overnight.
You definitely need to be concerned about who it is that people are electing. We’re coming up on and election opportunity for people help determine and decide who and how some of these programs are going to work. One of the things I found interesting, and you can actually find this on Soundretirementplanning.com. I wrote an article that talks about all these changes that just took place. I’ll mention some of those here in just a minute. In the article, one of the things I did was I put links to how a congressmen and senators voted on this particular budget bill, so that people can actually go and see, “Hey. Are the people that we’re voting for supporting the programs that are important to us, or are they cutting them?” This is a good example, because social security just took a hit, especially for married couples.
I would encourage if your married, and this is an important topic to you, and we’re coming up on election, go find out how people are voting on these things. Know what they’re saying, because everybody will say whatever it is you want to hear, really it’s unfortunate but, that’s what we see. Some of the changes that took place, November 2nd, and this is really … The biggest impact really is to married couples, is who this is going to impact, which is why is it that married couples are the target of these? Middle income married couples are who got targeted with this thing. That should make people angry. Essentially what it did was, there were 2 provisions, 2 planning provisions that we were able to use to help show people how to coordinate benefits to get as much as out to that program as we could. One was called the restricted application, and the other one was called file and suspend.
Those are being phased out, both the restricted application, and the file-and-suspend are being phased out. I want to focus on file-and-suspend first, because that’s where the timeline is the tightest. We’re recording this in January, we’re having this webinar in January of 2016, so if you’re listening to this in February, or March, the clock is ticking. Essentially what congress said in this budget bill for the file and suspend strategy is that they gave people 180 days from the date that that bill was passed, basically, until the end of April, the first part of May. I think it’s April 30th is the cut off. If people are currently for retirement age, they still, right now today, they have this opportunity to capture this file and suspend strategy. After April 30th, it’s gone forever, unless we have elected leaders that go back in and change the program again.
If somebody is for retirement age right now, which is for a lot of people that were born between 1943 and 1954, that means age 66. If they’re 66 right now, today, and they have not yet filed [inaudible 00:14:12] suspend, they absolutely need to be on this webinar, because there’s a window that’s going to shut, and they might miss it, and it could be a big mistake for them. For people that have that opportunity, it’s a great opportunity to capture too. We definitely want people to understand the file-and-suspend.
The other big change that took place is the restricted application. Now, that is being grandfathered in, fortunately, for some people. Here’s the problem. It’s based on your birthday. If you were born January 2nd, 1954 or later, you’ve lost the restricted applications. It’s no longer an option for you. However, if you were born from January 1954 or earlier, those folks are going to get grandfathered into the restricted application. That’s so critical, because that’s really one of the primary strategies where by coordinating a primary social security benefit and a spousal benefit in showing when to turn one on and turn the other off to earn the late retirement credits. That is such a powerful strategy.
I would like to say that they made social security simpler by these changes, but really they’ve made them more complex, because now we have a whole new set of rules, and it’s based on when your birthday is. My dad is not going to be happy about that either, since his birthday is 1954, February. He missed it by 1 month. I haven’t told him yet.
Emilia: Thinking of birthdays, and even just at my age, do you think social security will still be around in the future when we reach a retirement age, I guess you can say?
Jason: I think it will be. I think it’s become a core component of this machine that we’ve created in our country. I think it’s a really great safety net for people. For some people, it represents a significant portion of their retirement security, and so I don’t think it’s going to go away. I think that we could see some means testing take place, where some people based on the assets that they have or the income that they have, maybe they won’t qualify for as much benefit. I think that’s a possibility. I think we could special taxes come about where some people on our country will be expected to pay more towards that program. I think higher is a very real possibility. Social security, I think it was really when it was really initially structured, it was designed to be safety net.
It wasn’t supposed to start until your 65 years old. At the time, life expectancy was 66. It wasn’t designed to pay out to a whole lot of people. It was supposed to be a safety net for old age retirement income. The reality is too, there’s some people, and I get this, I understand their argument, they’ve paid into it for a long time, but I meet with people with have millions of dollars that they’ve saved, that really don’t need social security. They could live without it. Their point is, and their argument is valid, they paid into the program with the understanding that a promise was being made that they would receive a benefit back for that. Now, for some of these politicians that are running for office saying, “Hey, you’re not going to get that” It’s making people angry, and for good reason. They should be angry.
Emilia: You mentioned their taxes. How do taxes work with social security?
Jason: That’s a good question. Let me just finish my thought here on this. Will social security be there? I think social security is going to be there. I think it also makes good sense for people to have back up plan in place in the event that the rules changed again. Right now, the Social Security trustees report that comes out every year. When I looked at my most recent Social security statement, it said that by the year 2033, social security was only going to be on the pay out 77 cents for every dollar that that owed in benefits. In other words, if you were going to be receiving a $1,000 a month, now that would be reduced to only $770 per month by the year 2033, at the rate that we’re currently going. That’s this trustees’ report, the social security trustees report that comes out every year. Everybody can find that. It’s on the front of their social security statement. You can log in, create an account at Mysocialsecurity.gov and look at your own statement. Look at what that’s says.
That’s one of the reasons I think people would, though they make the mistake of just saying, “Well, I’m going to start right at 62 to try to get as much as I can out of this thing.” There’s potentially something to be loss either way, because if social security makes good on that warning of not being able to pay all the benefits by the year 2033, well then that’s a problem. That’s why we want to have a safety net, a backup plan in place. I’m a big fan of back up plans. We’ve backed up computers. We have back up resources at our home, in case we lose power if there’s an emergency that would require to be able to live at home and have enough food and water for a period of time. Having a backup plan is a good thing in every area of our life I think, having a financial safety net, having an emergency fund to establish, because things are going to come up. Programs are going to change. Taxes are going to change.
To your question, like I said earlier, one of the reasons I like social security so much, from an income stand point, is because it is tax efficient income. I just posted a new article about qualified charitable distributions. In fact, the congress made those a permanent part of the tax code. They did that in December of 2015. All kinds of exciting things happening. In that article, I go through a case example, where I show the difference between using an IRA to make a gift to a charity versus just taking the required minimum distribution from the IRA and then turning around making a charity and writing it off on schedule A under itemized deductions.
What’s really interesting about that article is it really illustrates the impact of social security from a tax standpoint, because depending on which way you go, in one way 85 cents of every dollar is taxable from your social security benefits. If you go the other way, if you go to the qualified charitable distribution way, it actually reduce the amount of this, in this example. It reduce their social security taxation from about 85 cents down to about 65 cents per dollar, as being taxable. That’s the specific illustration based on a hypothetical example, but it just really goes to underscore that understanding how incomes hit in your tax return will impact the taxation of your social security.
One of the great things for people to remember is that income from a Roth IRA is not counted toward your provisional income. It’s this provisional income rule that will determine how much of your social security is taxable. Again, I wish Social Security was easier to understand. I wish the taxation was easier to understand. We’re going to be doing a webinar this coming up. When? I can’t remember
Emilia: Wednesday, January 20th at 5:30 pm.
Jason: Yeah. If you want to really dig in to social security, you want to learn more about how the program works, understand how to incorporate it into a good retirement cash flow plan, have a better understand of the taxation, understand some of these rules that have changed with social security, I think that’s going to be the opportunity that people should be all looking for. One of the things we’re doing a little bit different this year with Sound Retirement Planning is we’re going to be bringing some other experts onto the program for the month of January specifically to discuss social security.
We’re leading up to this event on January 20th. Then in February, we’re switching gears. We’re probably not going to be back talking those social security for the remainder of the years. This is really a good opportunity for people to dig in specially if they’re thinking about retirement in the next 12 months.
Emilia: Yes. Just a reminder, go to Soundretirementplanning.com and click on the orange box to register for the webinar, January 20th at 5:30 pm.
Jason: All right Emilia. I just realized we’re out of time here.
Emilia: All right.
Jason: I sure appreciate you taking time to be a guest and helped me with Sound Retirement Radio this month.
Emilia: You’re very welcome. Thank you for having me.
Jason: Folks, until next week. This is Jason Parker, signing out.
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