Social Security Tips

All right, let's dig in. We got a lot to talk about today, and we're going to cover the subject of Social Security: how to think about it, why you should be thinking about it, what's important about it, how does it affect you. So many things. We talked before the show about this being something of a multi-show kind of subject. We could talk about this thing probably for months because it's so nuanced, but for today we're going to keep it a little simple. But we're going to get into a couple things that probably are not as simple, and there's certainly things that get missed by a lot of people. So why don't you start us with this thing, because I believe this was your... yeah, this was your idea, I believe.

Who knows Social Security? So obviously I don't take Social Security. Before working and planning, I had no concept of it, but when you start researching it, this has been around forever. The idea of social insurance has literally been around forever.

Oh yeah. But in terms of the... not just here?

No, no, around the world. We adopted it from other countries, actually, so we weren't even an early adopter either. So this social insurance came about under Franklin D. Roosevelt, FDR.

Yep. He got signed into law in 1935, before World War II. 85 years ago.

Yeah, just after the Great Depression this thing came to be, and that was a big driver of Social Security as we knew it.

Oh yeah. When you're reading about the history, it's amazing to read about the letters that got sent to the White House, just stating... it was always from older widows saying, "I don't have enough money to eat," or "I can't pay for my home," all these things. And they're sending letters to the White House, and it made a difference, I think, because they're still talking about... when you talk about the history of Social Security, it's huge.

Now, the iterations of Social Security obviously have changed. We've seen some tremendous change in Social Security since 1935. It actually was signed into law in 35, but it took another seven, eight, nine years, I think, before they began sending money.

Yes, correct. Distribution, maybe 42 or 43 or something like that.

But once the distribution started, it was lump sum initially, and then they started getting into the payment-based system, more of what we know today. Right. But boy, has it gone through some changes. And today it faces a lot of criticism, mostly because it's not well funded anymore. And that's not because it was intended to be a system that seems to be broke. It was a system that had great intentions. Everything about it had the right intentions. Unfortunately, I don't think anybody way back then believed or even fathomed how many people would be on it 20, 30, 40, 50 years, 60 years later, 80 years, 85 years. Isn't that crazy? But who knew that we'd have so many people on it and fewer paying into it than anyone would have imagined? So the system definitely needs continuous improvement, and hopefully that will happen so that it doesn't go away.

Because I think that's a huge fear for a lot of not only our clients, but just in general people. You hear a lot, wondering, is it going to be around when I need it?

Oh yeah. One of our dental consultants asked me this morning, are we going to get that? I was like, sure. Will it be around when we retire? Potentially. It might look different.

But I don't think that... it's lasted this long. I think it's going to be around, Sarah. But I've told clients now for several years, I think it's going to be more of a graded kind of thing. So if you're very well off, for example, I think if your income was such and your wealth is such that it's not necessary for you, then I think you're going to have a much more watered-down version. I really think that's where we go. And then folks that truly need it, who have worked hard, they've put in their 10 years to get their 40 credits and now they qualify, I think it'll absolutely be there for them. But the framework's going to have to change. Otherwise, as we continue to see this... you say it all the time, people are living longer. As long as that happens, there's more and more stress being placed on the Social Security system. So either more tax, more being paid in, or fewer people use it. And I think you start considering people that truly don't need it. Those people have to be willing to give it up. And that may sound super liberal, but I just think it's the right thing. If you don't need it... I don't know that, unless you just want more tax. One way or another, you got to fix the darn thing. And yeah, you can't have your cake and eat it too, I don't believe.

I don't think so either. But for clients now, everyone taking Social Security, it's been around forever, but you'd be surprised. Everyone we talked to, I can't think of a time that someone was coming to retirement, we were doing planning, that Social Security wasn't a question. And it's not their source of income... for our clients it's definitely not their only source of income.

Right.

But you can't neglect it. I mean, it's 30, 40, 35, 40 grand to them a year.

Yeah, and that makes a difference. Well, especially when you're talking about a married couple.

Yeah.

So you've got two Social Security incomes under one roof. That can be a significant amount of money. So would they be impoverished if they didn't have it? No, they could survive, and they'd be just fine. On the other hand, it absolutely adds to their net worth. It adds to their ability to live a certain life and do more for others. So, yeah. And frankly, they paid into the system.

Yeah.

All these years. Some of our clients have worked 20, 30, 40 years, and they've been paying in religiously to the system, so they deserve to get something of this payback. But it definitely doesn't change their lifestyle per se. But gosh, you definitely need to think about it, because it will make a difference in net worth.

Oh, absolutely. And you just said people work 20, 30, 40 years. I met our first potential client last week...

And I thought you were about to say you've worked for 30 years, and I'm like, wait a minute.

No.

Okay, sorry, it's impossible. I was watching you talk and I thought, is she about to say she's worked 30 years? She's gonna lie.

No, but I met someone, and all of our clients were like 30 years, 35 years. He has worked at one place, and it's Harris Teeter, for 40 years. Does extremely well, is in a great position. But 40 years, that was the first time I've encountered someone in planning that has been... obviously he wasn't in the same position 40 years ago.

Right.

In terms of in the hierarchy of Harris Teeter. But he has been with that company for so long.

That sounds so heretical to younger people today.

Yeah, most of them change jobs every four months, and to hear 40 years, it's impressive.

Oh my gosh. But when you look at it, when you think about it, that person has moved through the ranks. They have plenty to show for what they've done. Being a career-minded person, there's nothing wrong with that. But I think you have a lot of people today that hear that, Sarah, and they think, oh my God, how did you do that? And everyone today thinks that's just the worst thing in the world. Let me just jump around, but I got to tell you, the ones that stay focused and they grow through the ranks of an organization, they generally retire wealthier than those who've bounced around. Because if you're constantly restarting or going back to the start position, you have to relearn and relearn and relearn. And sometimes that works out, but, well, there's something to be said for tenured employees or tenured partners in a business. They tend to do pretty well, to your point.

Oh yeah. He's definitely loyal and has only good things to say. His wife worked as well, so they are in a great position. But I was just impressed.

Well, I say kudos to him. And I like some Harris Teeter, I shop there pretty often. So if he's listening, thanks for all the good work you do.

Yeah. So he will be someone that we obviously still include Social Security in his planning.

Yeah.

He's going to be somebody that receives it. And one of the main questions we get, I think most people default to this... so you can start taking it at 62, that's the earliest, and you can delay until age 70. And Social Security will send you a statement, or you can go online and log in. It'll be a personalized statement of how much you're going to receive at each age. People want to wait until 70.

Yeah.

Because they see that larger number, and it's just that concept of, oh, if I wait until age 70, I get a thousand dollars more a month.

You can get substantially greater amounts if you wait. But should you? There's a kicker here.

There is a kicker here. Absolutely. It doesn't always mean it's the right thing to do.

It's a carrot. But let's be honest, there's a reason why it's done that way. They want you to wait, and the longer you wait, yes, you get paid more. But the government knows something that the average person doesn't think about, and it's called mortality. And they know what your average lifespan looks like. And I think where you're headed with this is, if you take it at 62, yes, you get a lot less, but if you take it at age 70, you live less.

That's right. So you have less years.

People, which one's better? And what if you take it at 62 and you die unexpectedly at 69.

Oh yeah, right. Were you better off? Probably you were. If you took it at 62, you at least enjoyed something. Yeah, I'm going to say you benefited more than taking age 70 of your dad, right? So, but that's the part that so many people miss. They just see the number.

And so if you could just know, if you had a crystal ball and you knew when your time was coming, when you knew the date, man, if you knew that date you could plan so well. But heck, we don't know if we're going to live five years, 10 years, 20 years after we retire. You hope. And so if I knew I was going to live to age 80, for example, then we know that the crossover point happens right around 77, 78, 79 years old. So if I wait till I'm 70, I get a lot better cash flow per month and I'm going to be better off. But if I don't know that I'm going to make it past that crossover, then I probably am going to be wishing I took it at 62 or 65 or 66 or as early as I can.

Oh, absolutely. And one of the things to think about too, so when it was designed, it's only supposed to supplement 40 of your pre-retirement income stream, right? And Phil made a good point, this is for the median income. So this is not someone as a high earner or a highly comped employee. This is for median incomes.

Yeah, that's right. You think about it, the higher your income, the amount of Social Security caps. So eventually when you hit the cap, the amount of Social Security, the amount that it represents of your final year's income stream, is going to start going down. The amount doesn't change, the percentage, but the numerator does, right? So as your income goes up, then that 40 percent starts to whittle away.

And we were talking before the show about one of our clients who has significant income. He just retired, but his Social Security, he's at the highest amount that is allowed, and I think his is what, three or four thousand a month? Yeah, yeah, it's substantial. But that is, I did a little calculation, I think it's 3.8 percent of what his pre-retirement income was, right? So if you look at his pre-retirement income, he didn't get a 40 replacement with Social Security. He gets less than four.

Yeah, so it's a big, that's where a lot of people, I think they get a little mixed up with how Social Security is going to work. But I think we've also, over the years, people have come to believe that, oh, I'll get Social Security, man, that's going to make retirement a lot better. But the fact is, really depends on how you live, depends on your lifestyle.

Absolutely, which can play into when you take it as well. Because if you don't need that money, you start taking at age 62 and invest, then why wait until age 70? You're definitely going to come out better if you are not using that money and spending it, almost every time. And especially if you've already retired, you don't have other earned income, which means you don't give up much of your Social Security to tax, you're gonna have a lot more. Absolutely, just no question about it.

Which probably leads us into that longer life conversation, and then how is Social Security going to be taxed? How do people get affected by the tax depending on their setup or their situation once they take Social Security? And boy, this is one that gets missed a lot, Sarah. People know that it gets taxed, but I think there's a lot of confusion around the subject, so let's talk about that for a minute.

Absolutely. So you are going to get taxed on your Social Security, and what we'll talk about today is people who are more like our clients. So they're going to be the highers, they might still be working and earning money, and how, obviously it's a question every time, usually to the CPA, sometimes to us: how am I going to pay tax on this? And Phil said before, when we were working on the show, that earlier in his career people would assume that they're paying an 85 tax on their Social Security, which is ludicrous.

It is, it is. There's an 85 of Social Security that can be taxed, right? But you don't pay 85 percent tax. But yeah, I can remember early in my career having people ask me that question, and I can remember some of them just being vehement about this whole Social Security hoax, or this Social Security confiscatory tax. And they would say to me, you know what, I gave up 85 of my Social Security. And that is actually what spurred my interest and made me start researching Social Security 25, 30 years ago. And I quickly realized, okay, wait a minute, they're confusing this thing called provisional income, and it's 85 percent of their Social Security can be taxed at ordinary income tax rates, but not an 85 tax. So that would be, but yeah, that was true exceptional.

All right, so you're going to get taxed on your Social Security. I'd move out of the country if that were the case. Amen. You're going to receive in January the form SSA-1099, and it's just going to tell you what benefits you received in the previous year. So that's what you're going to pass on to your CPA. You don't have to track it, you're going to get a form, going to make it very simple. What they're going to do is take wages, self-employment, dividends, interest into account, and then half of your Social Security. That's right. To see if you meet that provisional income. That's right.

Yeah, the provisional income is a weird thing, and a lot of people don't understand it, but it's a great point. So if you take any other income, and most people say, oh well, I don't work, I don't have earned income. Well, you got dividends and interest, honey. That's right. If you have interest, dividends, if you have wages, so you're still working even a little bit, you have all of those things plus one half of the Social Security amount that you're receiving. That is summed to equal what will eventually determine if you're going to be in this provisional income tax category.

And so it's pretty simple. If you're a single taxpayer, then you can have, say, 25 000 of provisional income, and that means you're going to pay probably 50 of your Social Security is going to be included on your taxable income. But if you make, say, 34 000 of provisional income, that's where the 85 percent rule kicks in, and so up to 85 percent of your Social Security is going to be taxed as ordinary income. And if you're married filing jointly, then those numbers do go up a little bit, but the top amount, or the highest amount that you can have under the provisional income rules, is forty four thousand. You go over 44 000, back in that same boat as the individual filer. Now you're going to pay on both Social Securitys, up to 85 percent of those Social Security checks are going to be taxed as ordinary income.

So provisional income's real, and a lot of folks don't realize that half of your Social Security goes into the calculation. So most people say, well, wait a minute, I've paid into Social Security, why is that part of this provisional income? Well, I don't know, I can't answer that, but I can tell you that's how the government does it. And your local authorities, got to speak to the local authorities. That's right. But it definitely causes a lot of Social Security to be taxed.

The other thing, though, is before you get into that, if you haven't reached your full retirement age, then you've got this dollar for two dollar thing. Talk about that.

Absolutely. So let me say one thing. The 85 that we keep talking about, that is the maximum amount that is going to be included in your taxable income. So, that's right, you could be earning two million dollars a year and it's still just gonna be the 85 percent. You're not going to go over that. That's exactly right.

All right, so for retirement age, when we are saying that, keep in mind that is age 67 for those after 1960, and I believe it's 66 for those prior to 1960. So there we go again with how Social Security changes. That's just one of the changes. Yep.

So anytime you see FRA, it's just full retirement age. So guidelines for that: in 2020, you start losing a dollar in benefit for every two dollars you earn over 18 240. So what this means is, if you are still working and you make over 18 240 and you are receiving Social Security, you lose a dollar for every two dollars earned over the 18 240.

Yeah, so it's a little bit of a calculation you have to figure out. There it is. But just to make the math simple, if you were making 20 000 a year, then you're talking about what, 18 1760.

basically over that amount, and so basically that 1760, divide that by two, let's call that nine hundred dollars. That's how much you're going to lose on your Social Security. That's the dollar for two dollar calculation. So because you earned 20 000, you had to give up about 900 of your Social Security.

And I want people to hear that. That's important, because I have conversations with clients all the time who say, "Well, gosh, I might as well not work because I'm going to give up all of my Social Security." Well, no, you're not. It's a dollar for every two dollars over the amount, so you're still going to keep part of it, and you're still better off than you were. You still have more money. If you just don't want to work, that's a different story, but don't think that all of your Social Security goes away or is taken away in the form of taxes just because you're making over that 18 240. That's just not the case.

Right, and this goes back to when we first started talking about this. It doesn't always make sense to take at 70.

No, but that's where planning comes in, because everyone's situation is different, and all of these little nuances can really change your outcome, especially if it isn't four percent of what your pre-retirement income was. Let's be real. If you aren't in that situation, then all of these little strategies can make a difference. They can make some pretty significant differences.

Jason Beckley in our Hickory office, Jason was probably the first one in our firm years ago to really start testing this Social Security theory and how best to use it, and he dug into this thing pretty deep. And one of the things that we found was there were cases where it could make multiple differences, and if you want to talk about money, it made a lot of difference in net worth, and in some cases a quarter of a million, 300 000 over someone's lifetime. That's a lot of money.

If you're talking about, you may not need it, but what about gifting, or what about wanting to do something for your grandchildren, or what about wanting to leave something to your favorite charity? All of that money adds to the net worth, and it makes a big difference. And so looking at these multiple strategies, you want to look at it that way so that you can pick the one that makes the most sense for you now and later.

Yeah, like you said earlier, these people that are drawing Social Security, they've paid into Social Security, so you want to optimize what you're getting. Don't give it up. There's no reason.

Agreed. Until they close these loopholes, and I think there's some there, without a doubt, just like in any other part of our codes. But gosh, don't give up what's rightfully yours. And if you don't know the rules, that's really, to your point, Sarah, that's where planning is so critical.

We say it all the time. A lot of clients will come to us and they think all we do is manage the money, and we've reached a point, I think I can say this with great confidence, we rarely take just the assets now to manage. If a client doesn't want to go through our planning process and really appreciate the holistic format that we deliver, we're better off usually not to take them as a client, because we know that we're going to miss things that would benefit them, and they're going to miss things that would benefit them, and that's not a win for either of us.

No, and you can say that with confidence, because the people I met with last week who I was just talking about, I told him, we either do planning or we're not a good fit, and I would send you somewhere else. I would say that we're not for you.

It'd be great to think that all we're out there to do is collect assets to manage them, and at one point in our firm's history we were. That's exactly what we did, is just we tried to grow assets. But today that happens by default, and it's because we're doing holistic planning and we know how important that is.

And so I think in the case of Social Security, if you don't plan, you are going to miss things that are rightfully yours, and I say shame on you and shame on the planner if they're not helping you navigate that, because it's not that easy. If you look at what's written by the regulators for Social Security, it is an incredible amount of information, and to try to understand it takes a lot of effort, and most people are never going to put that much effort into it. So it's a lot of evidence.

Oh my gosh, it's always, well, if this happens or if that happens.

Yeah. So if you don't work with us, work with a planner who truly understands it. And if you don't think your planner does, then we'd welcome the opportunity to share with you how it might affect you. At least you have a second opinion. You'll know if it makes sense or not and how it affects your outcome.

Absolutely. So one thing to touch on before we roll into wine, right? One strategy that we bring up to clients a lot that I would say 90 of them have no clue about, so this is just one of the things we're talking planning that we bring up that makes sense a lot of time, well, can make sense for people's plan, is spousal benefits.

Yep, yep. That one's overlooked a lot.

It really is. And that is where maybe the higher earner takes their Social Security, so they start drawing, and then their spouse takes the spousal benefit, and it can be up to half of what you are drawing, right? So you can, and then your spouse can wait until age 70. So you have to find that mixture. It's almost like a puzzle, now that I'm talking about it.

Well, it is a puzzle in a lot of ways. And when you start thinking about waiting till 70, for every year beyond your full retirement age that you wait, to a maximum of 70, you get an 8 raise in that monthly amount. That's a lot. That's a big raise. So that's where this planning really makes a difference.

So if you've got a spouse that could start collecting on yours, and you're the breadwinner, and they let there's a crew, they turn yours off at age 70, turn their zone, they're gonna have a substantially greater benefit than they would have if they just did it the normal way.

Right, and a lot of people don't know that that rule exists.

So turning on, turning off Social Security, perfectly legal, an easy thing to do if you know it exists. That's one of those techniques that I was mentioning, or I wasn't mentioning the technique, but I was saying that in Jason's research we found several hundred thousand dollars of additional net worth, and those kinds of increases in net worth were basically the result of this kind of planning.

Okay, there you go. See, so that's another answer to the first question we said: does it always make sense to wait till 70? Sometimes.

You know what the old saying is? It all depends.

Oh, I did not know that was the old saying, but it does all depend.

It depends. It depends on what your goals are, what are your objectives, what your family look like. Is it just you? Is there a spouse involved? Do you have kids, grandkids? Depending on what you're trying to accomplish, which is why planning is so important today.

Financial planning and just a financial landscape today, so much more complicated than it was just 10 years ago, and certainly more complicated than it was 50 years ago. Lots of moving parts, lots of taxes, lots of things that create a very, very nebulous situation. And if you don't have someone to help you work through it, you're going to make mistakes, and mistakes are costly. Those are blind spots that can hurt you.

Amen.

Yeah, man. So