Jason Parker: Alrighty everybody, thank you for joining me today for this webinar on how to maximize your Social Security Benefits. My name’s Jason Parker. I’m the president of Parker Financial. We’re going to go ahead and get this program started. First, as we do begin to talk about Social Security, I just want to clarify that Parker Financial is not connected with or affiliated with the United States government or the Social Security Administration. We specialize in investment and tax planning advice for retirees and pre-retirees. I have passed the series 65 securities exam which makes me a registered investment advisory representative with Parker Financial.
We’re located right here in Silverdale, Washington. The opinions and information voiced in the material are not intended to provide specific advice or recommendations for any individual. It does not constitute a solicitation for any securities or insurance products. We are going to be talking about some basic tax concepts and tax planning. The tax code is complex so we don’t want you to run out and take action on anything that we talk about today.
All of the information I believe to be accurate but I make no guarantees that is is. Sometimes I find that when I do these presentations I’ll misspeak so as always we want you to just verify everything that you hear today and consult with a trusted professional for additional information. Okay, first I want to tell you a little bit about me and what we do. I’ll start with SoundRetirementRadio.com and if you’re not currently listening to this, you can listen to the podcast. If you go to iTunes and do a search for Retirement, I think Sound Retirement Radio is now in the third position. I’ve been doing this for over five years and I’ve had the good fortune of being able to bring experts onto the radio show from all over the country. One of the experts that we’ve brought onto the program several times has been Kirk Larson from the Social Security Administration. Kirk, I’ve found, is a wealth of knowledge. He’s the western Washington public affairs specialist for the Social Security Administration and it’s been one of the favorite podcast downloads over the years. Some of those radio shows that I’ve recorded with him.
If you are in the Seattle area, you can listen to the radio show every Saturday morning from 8am to 9am on 1300AM KKOL. When my first book was published, we had a write up in Investment News Magazine. I write an article for the Kitsap Peninsula Business Journal every month. At our firm we specialize in working with retirement issues so everything we are usually looking at and talking about is retirement related. I was recently interviewed on CNN Money from their Help Desk. They had somebody call in with a question regarding Social Security and CNN happened to find us and my little firm so I had the good fortune of being able to help with that particular issue.
I’m really excited and I want you to notice we’ve got a picture of my new book coming out, Sound Retirement Planning. If you would like to be notified when the book is available, visit our Facebook page. It’s at Sound Retirement Planning, just do a search on Facebook for Sound Retirement Planning. If you like the Facebook page for Sound Retirement Planning, we will let you know when the book’s going to launch and you’re going to want to do this because we’re going to make it a really great offer for you if you are a fan of the Facebook page. You will be notified and there’s going to be a lot of special giveaways and some things that you’re probably not going to want to miss. Please take a minute and like us over there at Facebook at Sound Retirement Planning.
I also have a blog, of course, that I keep. SoundRetirementPlanning.com is where you can find the blog. Okay, so as we start talking about Social Security today I want to start with the very basics. Many people know that back in, I think it was 1973, Social Security Administration or that Congress passed legislation to automatically include a cost-of-living allowance with Social Security Retirement Benefits. I believe it was 1975 that that legislation actually went into effect. Prior to that, Congress had to vote on the cost-of-living allowance for Social Security. Since that time, Social Security has averaged a cost-of-living increase of 2.53 percent so its inflation-adjusted income.
It is tax-advantaged income. Your Social Security Benefits are tax-advantaged income so in some instances if, for example, let’s say you’re a married couple and you have less than $35,000 per year of income, it’s possible that none of your Social Security Benefits will be taxed. If, let’s say you’re a married couple and you have more than $44,000 of total income including … There’s a calculation we’ll talk a little bit more about provisional income rules and how they determine how much of your Social Security is taxable. As much as eighty-five cents of every dollar is taxed from Social Security and this is the instance that most of the people we serve find themselves in. Usually about eighty-five cents of every dollar that they get from Social Security ends up being taxed.
The other thing that makes Social Security Benefits so compelling and so important is that you have a survivor benefit so not only does this income impact you for married couples out there but it’s also going to potentially have a big impact on how much income your spouse is going to have when you pass away. It’s really important to understand all of these different components and how they work together. Let’s talk just real briefly about taxes. I’m going to give you a very simplistic explanation of taxation of Social Security Benefits. Obviously, I wish the tax code was this simple but it’s really not. In order to understand the taxation of your Social Security, what you’re going to do is you’re going to look at all of your income including the income from your tax-free municipal bonds and then 50 percent of your Social Security Benefits. What you’re trying to figure out is your provisional income. That’s going to determine how much of your Social Security is going to be taxed every year.
I just want to give you an example of the power of understanding your cash flow in retirement because really, what we’re talking about … Anytime, you’re putting together a retirement plan, you want to make sure you have just a really solid income plan. A really solid cash flow plan. I’ve learned that retirement really is all about cash flow. It’s not your net worth that will determine your lifestyle in retirement. It’s your income. If we look at Social Security, let’s say you’re receiving $2,000 per month from Social Security or $24,000 a year and let’s say you have … You’re a higher income earner. We’re going to assume the worst-case scenario currently that eighty-five cents of every dollar that you receive from Social Security is going to be taxed. At the end of the year, $20,400 is taxed. We’ll assume you’re in a 25 percent marginal income tax bracket and you end up paying $5,100 in taxes that year based on your $24,000 cash flow.
Now the other alternative you might have is to take money from your retirement account. Maybe you had a 401k that you’ve converted over to an IRA or maybe a TSP or a 403b. One of these retirement accounts. Most of you know in most instances, your contributing money to those retirement accounts, not paying taxes on them now. When you pull money out, you pay taxes. Let’s say same scenario now, you’re pulling money out of your IRA to supplement your retirement income. You still want $2,000 per month so you have $24,000 a year of income. Now every dollar that you pull out is taxable and so you’re looking at $24,000 of cash flow. You’re still in the 25 percent tax bracket. You can see you end up paying $6,000 in taxes by taking the same income. You have the same $24,000 per year, $2,000 a month, but it costs you an additional $900 in taxes by taking that income from your IRA instead of your Social Security.
So here’s the thing that I want you to think about. Right now, marginal income tax rates are at some of the lowest levels we’ve seen in our country in a very long time. There may be a wonderful opportunity for you depending on when you retire and how old you are, from somewhere between sixty-two to seventy, to consider not starting your Social Security right away if you’ve retired at this point and potentially converting some of your IRA money into Roth IRA accounts. Keep this is mind as you are thinking about when you want to start your Social Security. There could be some tax planning opportunities involved in this decision-making process. Not just a matter of trying to get as much out of the Social Security system as you can but also at the same time making sure that we’re not giving Uncle Sam too much money every year. Most of my clients say they don’t mind paying their fair share but they don’t want to pay more than their fair share.
A couple more Social Security basics for you. Number one, if you were born between 1943 and 1954, you can begin your Social Security Benefits as early as age sixty-two. If you start your benefits at sixty-two, you’re going to take a permanent reduction of 25 percent. So in other words, for that same demographic, if you were born between 1943 and 1954, age sixty-six would be your full retirement age. Let’s just say at your full retirement, at sixty-six, you would receive $1,000 a month of Social Security income. If you elect to start your benefits at sixty-two, you’d take a 25 percent reduction. So at sixty-two you would only receive $750 per month of income. The other thing is, there’s an earning limitation. If you start taking Social Security before your full retirement age, before age sixty-six, for 2014 there is a $15,480 earnings limitation. For every two dollars you earn above that earnings limit, Social Security is going to reduce your benefits that year by one dollar.
So we’ve seen instances where we’ve had people that retire at sixty-two, they start their Social Security Benefits, a great working opportunity, job opportunity comes up, they go back to work and now in their new job they’re making so much money that they end up not receiving any of their Social Security Benefits in that year. If you’re going to be working at sixty-two, you plan on working or you think there’s an opportunity or possibility you might go back to work, you may want to consider delaying Social Security just for that reason. At least take it into consideration.
At sixty-six, this is when you become eligible for your full retirement benefit. At age sixty-six, now you can earn as much money as you want and you don’t have to worry about the earnings limitations. That’s a nice feature and benefit and this is a magic time for married couples because at age sixty-six, this is when you become eligible for what we call Switch Strategies. I’m going to explain and this is where we get into Social Security planning where we can really help maximize the amount of money for married couples that they’re going to receive over their lifetime by understanding these Switch Strategies.
The other thing to consider, at age sixty-six, you can file for your benefits and put them into suspense. In most instances, even if you don’t want to take your Social Security, it’s probably going to make sense for you to File and Suspend. The reason for that is let’s say you file for benefits at sixty-six and then at sixty-eight, some kind of opportunity comes up and you’d like a lump sum of money. You can actually go back to the Social Security Administration and request a lump sum so even though you hadn’t been receiving income, by having filed for your benefits, putting them into suspense, it gives you access to the money that had not been paid to you. That’s also something to consider.
The other core component you need to know about Social Security is that every year you wait beyond age sixty-six to start taking your benefits, you earn delayed retirement credits of eight percent per year. That’s very attractive. In other words, if you were eligible for your full retirement benefit of $1,000 at age sixty-six, at age seventy you would be eligible for 132 percent of that benefit or $1,320 per month at age seventy. Remember, the statement that you receive from Social Security Administration is in today’s dollars so the Social Security Administration is not adjusting that future benefit for those cost-of-living allowances and when we’re doing planning for people, we are taking that into consideration. Eight percent bonus credits for every year that you wait, in fact those bonus credits are applied on a monthly basis. I think it’s about .66 percent a month so if you were sixty-six in six months, you would receive about a four percent bonus credit for waiting six months before you started your benefits after your full retirement age.
If you’re single, divorced or widowed, trying to determine whether or not when you should start Social Security really becomes more of a very typical and common what we call Break Even Analysis. With a Break Even Analysis, essentially what we’re doing is we say “Look, if you start your Social Security at sixty-two, you’re going to receive more payments over potentially a longer period of time whereas if you start your benefits at sixty-six, the idea is you receive a larger benefit but theoretically over a shorter period of time.” So you run a simple Break Even Analysis and for most single people, the Break Even Analysis is usually somewhere between seventy-five and eighty is when you will break even. So if you think you’re going to live beyond that point, it can make sense to delay taking your benefits to earn those delayed retirement credits.
Social Security, of course, was developed by actuaries who are looking at large groups of people to understand life expectancy and what they don’t do is they don’t look at every individual’s like an insurance company. If you were going to buy life insurance, they want to know about your family history and your family heritage. The Social Security Administration does not do that so because you probably know your life expectancy better than Social Security, you know if you eat right, if you’re exercising, you can take those items into consideration when doing this simple Break Even Analysis.
There are some unique rules out there so if you were divorced. Let’s say you were married to your ex-spouse for ten years and now you’re divorced. It may be possible to claim benefits on your ex-spouse’s earnings record and if you were widowed, there’s also a possibility here that you could begin taking Social Security Benefits as early as age sixty based on your deceased spouse’s earnings record. If you are divorced or widowed, these are elements that a lot of people miss, especially widowed folks because sometimes when you go into the Social Security Administration they will just help you understand the highest benefit you’re eligible for at the time you walk in. You could potentially be eligible for a widow’s benefit that you could start at age sixty and delay taking your own benefit all the way, say, to age seventy.
So there’s some structuring here that you need to know about and it’s really important that you meet with somebody, an advisor, that can help you make this decision because the Social Security Administration, they are not financial advisors. This is not their job. Their job is to help you understand what’s the most benefit you’re eligible for the day you walk into the office, not how do you get the most out of the system over your lifetime. It’s just the way they’re trained.
Okay, so this is where we find a lot of opportunities to help people maximize Social Security. It’s in Social Security for married couples. There are a couple components you need to understand. First of all, your Social Security, you’re eligible for your own benefit based on your own earnings record. You are also eligible for a spousal benefit based on your spouse’s earnings record and then you’re eligible for a survivor benefit. The spousal benefit and understanding Switch Strategies is how we can really maximize income for married couples from the Social Security Administration.
The two primary Switch Strategies that we help guide people with today are what we call the File and Suspend and the Restricted Application. What I’m going to do is I’m just going to give you a very simplistic example and I wish life were this simple and easy and the reality is I’d like to be able to tell you over the webinar here the absolute how you can specifically structure Social Security but from my experience, I’ve learned that this is a very personalized analysis that needs to be done. We really need to understand your specific situation to help you understand actuarial how to maximize benefits.
Mr. And Mrs. Jones. They come in to see me. Mr. Jones is sixty-six years old. He’s an engineer. His full retirement age, he’s at full retirement age and his benefit at sixty-six is $2,000 per month if he wanted to start it but Mr. Jones says to me, he says “Jason, you know, I enjoy working. I want to keep working. I’m not ready to retire yet and therefore I don’t really need to start Social Security.” Mrs. Jones, on the other hand, she comes in. She is also sixty-six. She’s full retirement age and she’s eligible for her own benefit of $1,000 per month. If she wanted to retire today she could receive $1,000 per month and she says “Jason, I’m a schoolteacher. These kids are different today than they used to be and I’m done. I’m ready to retire.” So the question for Mr. and Mrs. Jones is how do we structure their Social Security to help them get the most benefit that we can?
Essentially what I’m going to do is I’m going to use both the File and Suspend and the Restricted Application in one example to show you how we can do this for this couple. For Mr. Jones, what we’re going to do because he wants to continue to work is we are going to have him file for his benefits and put them into suspense. He’s going to File and Suspend. That means that he’s not going to be receiving any benefits from the Social Security Administration but by doing so he’s activated his benefits and so now Mrs. Jones becomes eligible for a spousal benefit based on her husband’s earnings record. Her spousal benefit is fifty percent of what his full retirement benefit would have been. Now she has an option. She has the ability to either take her own benefit, which is $1,000 per month in this example, or she can take just her spousal benefit. She can file for a Restricted Application. File for just her spousal benefit and her spousal benefit would be $1,000 per month.
This is exactly what we’re going to do for these folks. By Mr. Jones filing for his benefits and putting them into suspense, he continues to earn those delayed retirement credits all the way up to age seventy. Then Mrs. Jones, by filing a Restricted Application, she is also going to continue to earned delayed retirement credits on her own benefit. Let me show you what this looks like. So Mr. Jones at age seventy, when he turns his benefit on, it would be $3,202 per month. Now remember, he’s going to receive 132 percent of what his full benefit would have been but we are also taking into consideration the average cost-of-living allowance of 2.53 percent. So down there, these are the assumptions I’m making. Full retirement age, assumed cost-of-living allowance is 2.53 percent, his life expectancy is age eighty-eight. Her life expectancy is age ninety. So when he’s seventy years old he says “Okay, I’m ready to retire.” He turns on his benefit and he now is receiving $3,202 per month.
Mrs. Jones at age sixty-six, she files the Restricted Application. She takes only her spousal benefit which is $1,000 per month so from age sixty-six to seventy she’s receiving $1,000 a month of income based on her husband’s earnings record. At age seventy, she … Remember, she hasn’t elected her own benefit yet so now she does … This is why we call it a Switch Strategy. She switches from her spousal benefit to her own benefit. Her own benefit has been earning those eight percent delayed retirement credits every year plus, in this case, we’re assuming the cost-of-living allowance of 2.53 percent. Now at age seventy, she turns on her own benefit which is now $1,600 per month of income.
Let me show you the power of this because the numbers I think speak for themselves. If they had both said, “You know, we just want to start our benefits at age sixty-two.” Let’s say that had retired at sixty-two, they both started taking benefits. Assuming he lives to age eighty-eight, she lives to ninety, they would have received about $654,000 of lifetime benefits from the Social Security Administration over both of their lifetimes. If they waited until age sixty-six and they both filed for benefits at age sixty-six, they would have ended up receiving $723,054 of lifetime benefits from the Social Security Administration. By understanding the nuances in the system, by understanding the File and Suspend and the Restricted Application, we’re able to structure their Social Security in such a way that over their lifetime they end up receiving $818,000 of lifetime benefits from Social Security. So that’s if you consider what they would have received at sixty-two versus what they received by using the File and Suspend and the Restricted Application, that’s more than $150,000 of additional lifetime benefits just by understanding how the system works. There’s a lot of people that mess this up.
The other thing that I want to say is there are instances, you know … As a guy that likes numbers, sometimes us financial advisors, we think “Boy, we can help people get all this extra money in retirement.” Which, you know, we can show you how to do that but one of the things we need to keep in mind is I had some folks come in and they were higher net worth, very wealthy folks. They had very good income from pensions. The point that they made to me, they said “Jason, you know, we could do this. We could delay taking our Social Security and yes, we would end up receiving more money over our lifetime but a lot of that additional income we’d receive wouldn’t be until we’re in our mid-to-late seventies.”
Their point to me was, they said “You know, for us, Social Security income is just going to kind of be an extra and if we start taking it at sixty-two, that’s extra money that we can use to travel and enjoy our lifestyle and enjoy our kids.” They don’t really have to depend on Social Security so even though we can show you how to maximize benefits, sometimes the question is it’s a quality versus quantity. Do you take the money at a younger age when you have a higher quality of life and you can enjoy it more or do you delay your benefits so that you get a higher quantity of money but that money comes, for the most part, more of it’s going to come towards the end of your life? As a disclosure to that, I will say this. As a disclaimer. They were higher net worth folks and they had that flexibility. If you have that flexibility, that’s great. I’ve seen other instances, though, where we’ve worked with people when putting together a retirement plan where if you start benefits at the wrong time, it can be the difference whether or not people run out of money in retirement or make it all the way to retirement.
One of the things I really want to highlight. This decision on Social Security should not be made in a vacuum. It should be made in the context of a comprehensive retirement income plan. Social Security, for most people retiring, is a significant portion of a good retirement income plan and so we want to make sure that we’re coordinating it. That we understand how it works and that it works within the context of your retirement plan. Don’t do this without understanding how all of the other pieces of the puzzle are working together but it is some powerful strategies.
The next step is this. Like I said, my new book is coming out, Sound Retirement Planning. I have an entire chapter devoted to how to maximize Social Security Benefits. When you like Sound Retirement Planning on Facebook, it’s going to make you eligible to buy the book at a discount when it first comes out. In addition, we’re going to have a bunch of other fun giveaways that you’re going to want to know about which could potentially include Social Security. The other thing I want you to know, if you have any questions on this, we want to be a resource for you. I really hope that by us spending some time together, your retirement will be better and you can call our firm Parker Financial here in old town Silverdale. 1-800-514-5046. Again, that number is 1-800-514-5046.
I sure appreciate you taking time out of your busy schedule to be with us today. Again, visit my blog at SoundRetirementPlanning.com. Every time I come across a little nuance, you know, I meet with a lot of people and we get to learn from a lot of people that have retired and figure out what’s important to them. I like to write about those case examples right on SoundRetirementPlanning.com so it’s an opportunity for you to learn as we go, as we’re helping real people. Also, plug into SoundRetirementRadio.com. That’s the weekly radio show. You can get it as a podcast, you can listen to it online but we’re bringing experts from all over the country onto that program to help educate and inform so that when you’re making these decisions you have a greater sense of clarity. You have a greater sense of confidence and my hope is you get to experience more freedom because that’s what you’ve worked hard for.
Again, I’m Jason Parker. Thank you so much for being on the program and I look forward to hearing from you. If you have any questions, feel free to post them on the Facebook page or get in touch with us via the blog. Thank you for being here.