For something so important for our retirement, it’s a shame that there is so much confusion and misinformation about social security out there.
As a result, many people are sabotaging their social security benefit… and receiving much less than they could… because they make bad decisions during their retirement planning process.
When you should start taking social security is one of the most important factors here. There is a “best” time – but it’s different for everybody, and there are certain things you must keep in mind when making the decision.
We get into detail on that, as well as…
What you need to know about taxes
How Medicare and social security fit together
Why you might want to wait until age 70
Ways to maximize your benefit for steady income
And more
Listen now…
Mentioned in this episode:
Transcript
April Schoen: Hi everyone, welcome. This is April Schoen. Thank you for joining us today, as we're going to be talking about social security. I'm sitting here with John Curry, author of Preparing for a Secure Retirement. Welcome, John.
John Curry: Hey, April. Good to see you
April: Good to be here. John's been helping clients with retirement planning issues, including social security, Medicare, IRA rollovers, inherited IRAs, required minimum distributions, since 1975. That's a long time, John.
John: It is.
April: I realized the other day is that in June, it'll be 10 years that I've been in financial services, almost a full decade.
John: I got you beat just a little bit. I've got four-and-a-half decades, 45 years of doing this.
April: You do have me beat just a little bit. That's good. Yeah, and in that time, we've helped thousands of people with these retirement planning issues. But what's really relevant for today are the lessons that we've learned: what works for people, what doesn't work for people. I know we're going to get into that today, specifically around social security, and talk about some planning strategies.
Before we get there, I do want to make sure that I introduce the team, because John has done a very good job over the years of building our team to make sure that our clients are taken care of. So on our team, we have Debbie Bradbury, Ed Bradbury, of course we have John Curry. We have Audie Ritter, Jay Wolfe, and myself.
What Benefits Can Do For Us
John, one of the things that I like about our team is some of the diversity that we bring to the table. I know in our seminars, we talk a lot about the difference in our ages, and how that helps us in our planning. I'm 36. I'm married. I have two small children. So my goals, my concerns, my risks, the threats that I face, are very different at this stage of my life compared to someone like you, who's 67.
John: Correct. Although those risks are similar, however. Think about the hazards we face. What are they? Dying too soon. I don't know about you, but whenever I die is too soon. So as a young woman with children, the event of your death would cause financial harm for the family. At my age, maybe not so much because of other assets. So the life insurance I bought to protect people then are important to me for different reasons, as far as leaving a legacy to children, grandchildren, and now even great-grandchildren.
April: Right.
John: Some of those risks are similar. For example, investments. As you're accumulating your money to build up money for your retirement, you want to grow the money, but you don't want to lose your money. Well now that I'm in retirement, I still want it to grow, but I'm more concerned about protecting that money than I am growing the money.
April: Right.
John: I still want both. Don't get me wrong. But I want the income guarantee. That's a good segue, because of what we're going to talk about with social security, that's another form of reliable income that will come in at retirement. We all have similar risks, no matter how old we are.
April: That's right. And really, that social security, I know we talk a lot about it being that retirement baseline, this is going to provide an income for you that you can't outlive, and that's very important as we go into retirement. For you, you're 67. You're collecting social security already. I know you'll share with us today some of your experiences that you've had with social security.
John: Absolutely.
April: Good. Before we dive in, I do want to hit one question that we get all the time, and that is, is John retiring? I just said he's 67, and he's already collecting social security. We get this question all the time. I will answer for him. The answer is no, he's not retiring, at least not yet. In fact, John and I last night, we were at a working dinner, and we were talking about his vision for the next 20 years, and even the next 33 years.
John: That's correct. Because like George Burns and Kirk Douglas, two of my heroes, I intend to live to be 100 years old. I hope I'm still, quote, performing, like George Burns was. Kirk Douglas is now 102. We have the same birthday, December 9th. But he's still a productive member of society, and published another book recently.
April: That's right. I'm sure all those things will come true, that's for sure. But, in all seriousness, though, you are taking more time off.
John: Correct.
April: We talked about this last night. Going to more conferences, taking time off, and doing the things you want to do, which is very important.
John: It's important to note that those conferences now include more things that are personal, not so much as professional. But it still want to keep that ... the saw sharp, and go to things on taxes, social security, Medicare. I'm still doing that too.
April: Good.
John: Because that's a passion.
April: That's right. Yes, it is. That's also though why you've built the team that you have, so that when you are going to do these things that you want to do, you know that your clients are well taken care of.
John: Absolutely. I am in a position of where, and have been for a number of years now, with you joining the team and helping me build the team even more, to where between you, Jay, Ed, Debbie, Audie, and whoever is going to join the team in the future, we're in a position where I know I could be gone for a month, and clients are going to be taken care of.
April: Right.
John: Client calls in, I know beyond a shadow of a doubt they'll be taken care of, because of the loving, caring people who want to do the right thing for clients.
April: That's right.
John: That's important.
April: That's important. That's why we, if you've been in a client meeting with us, then you know that we have two people in every meeting.
John: Correct.
April: We do that for a lot of reasons, but one is continuity, so that if John's at a conference and he's unavailable, well, you have the rest of the team here to help.
John: Well, there's another reason. Let's just be candid about it. I talk about living until 100, but I'm not promised even tomorrow. No one is. I keep that heart shaped pillow that I'm looking at right now to remind me of my open heart surgery, which was July 10th, 2008.
April: Right.
John: Also, it's imperative to me that in the event of my permanent disability or I should die, that clients are taken care of. I have all that in place, with legal documents, with planning documents with you as far as the business side, where I know beyond a shadow of a doubt that my clients will be taken care of.
April: That's right.
John: That is a tremendous, tremendous peace of mind. Because I worked for 45 years developing a clientele. It's like a shepherd protecting a flock. I want to make sure that my flock is taken care of.
April: Okay.
John: The people who just left us, it's like family. You see people, it's a big hug and kiss on the cheek, "Hey, how you doing? How's the family?" That's important.
April: That's very important. Yes. In a lot of those meetings that, even especially with the clients who just left, talking about social security was always part of the planning that we did with them.
John: And we talked about it today.
April: And we talked about it today. We're going to go through a lot of information today. I'll be honest, in the 45, 50 minutes for our webinar today, we just don't have the time to go through everything that there is to cover in social security. From time to time, we have full-blown seminars on both social security and Medicare. They're an hour-and-a-half long, and we go into more detail than we're going to get into today.
Our next social security seminar is scheduled for January 23rd. That's in about two weeks. There will be an email going out next week, announcing that. But for those of you on the call, you kind of get a heads-up notice that we're going to have a social security seminar on January 23rd. Then in February, February 20th, we're going to do one on Medicare. I'm glad that we're doing them separate. We've tried to do them together beforehand, and it's too much information. I'm glad we're going to do them separately.
I would encourage you that if you're in the Tallahassee area to attend both of those sessions. But again, we can't really cover every question and nuance. But if you have some questions, feel free to put them in the chat box, and we'll get to them as we can. I also encourage you to contact us to schedule a phone appointment or a face-to-face meeting. We have clients all over the country. John is based in Tallahassee. I'm based out of Jacksonville. But I come back to Tallahassee every, about two to three weeks, for client meetings and our events.
If you are interested in scheduling a phone appointment, you can call our office. Our phone number is (850) 562-3000. Here, I'll repeat that really quick. (850) 562-3000. That way, you can get to anybody on the team.
All right, well, let's roll up our sleeves and get to work and talk about social security. What we're going to talk about today is how social security works, what you need to know about the program, different payment scenarios and then also some issues around the program.
Since 1935, American workers have been counting on social security as a future source of income. The Social Securities Trust Fund is primarily funded from the taxation of wages earned by the current work force. That's very important. We're going to get into why that's important later. Then, these funds are used to pay out the benefits to the program's beneficiaries. Average monthly benefits, as of January 2020, the average monthly benefit is $1,503. We're going to talk about also what the maximums are in a little bit, too.
Qualifying for Benefits
April: To qualify for social security and Medicare, you have to earn credits. You have to earn 40 credits, and then you and your spouse will qualify for social security and Medicare. You earn four credits per year. Let's just assume, if you have 10 years of working history, then both you and your spouse would qualify for both social security and for Medicare.
The benefit amount that you'll collect once you do start your benefit is determined by averaging your highest 35 years of salary. But if you do not have 35 years of salary, they will average in zeros to fill in any gaps. That's very important. Sometimes we have people who don't, they don't quite have those 35 years, and they may either work a year or two more, just so that they don't have those zeros bringing down their averages.
One of the things we always recommend, if you haven't done so, is go to social security's website and create a login. When you go into the website, you'll be able to pull up a copy of your benefits statement. Benefits statements are no longer mailed. They used to mail them out. They don't anymore. You have to go online to get your benefits statement. You can also see online they have some different calculators that you can use. You can see a history of your earnings record.
It's very important for you to go check that out. The other thing that's important is, social security has an issue with identity theft. They actually have people who will go in and pretend to be you and create their own user name, so that they can go in and access your benefits. So we highly encourage, if you haven't done so, head over to social security's website and create your user name.
John: Let me jump in, April. Just the last weekend, actually Thursday of last week through Monday, I've got no less than seven phone calls, automated calls, same person's voice but a different phone number popped up from around the country. This same person's voice saying that there's an issue with my social security benefits and to call the number they gave to address it.
Social security does not call you and leave that type of message, folks. So if you get a call from anybody saying that there's something wrong with your social security benefits or an account, be very cautious. The calls I've received from social security folks and Medicare, they identify themselves right up front. It was not a recorded message. I got a live person. Just be aware that that's happening and it's just different phone numbers popping up from different parts of the country.
April: Yeah, that's good to know.
John: I noticed one in Maryland, one somewhere in Texas, and I forget the others.
April: Okay.
John: But all around. But just be aware of that. So identity theft and scams, just be careful.
April: Yes, very good to know. Now we're going to go into some of the things that you need to know about social security for your benefit. The year you were born determines your full retirement age. You can claim social security benefits early. You can actually claim them as early as 62, and you can also delay your benefit to age 70.
We're going to get into some more details on that in just a minute. But the year you were born determines your full retirement age, when you receive your full benefits. For example, if you were born in 1960 or later, then your full retirement age is 67. Very important to know this when starting to talk about social security and when you're going to claim.
As another example, let's pretend that you are, your full retirement age is 66. You would have been born between 1943 and 1954. Again, your full retirement age is age 66. You get 100% of your benefit. You could claim as early as 62 and you'll receive 75% of your benefit. That benefit then is reduced at that 75% mark for the entire time that you collect it.
Very important to think that through when you're going to collect early. Also, if you delay taking social security past your full retirement age, it will increase eight percent per year. If your full retirement age is 66 and you delay to age 70, your benefit then would actually be increased to 132%.
John: Let me jump in here for a minute, April. We talk about when people should take social security. I get this question all the time. I've been hearing this for years. For me, I chose to take it at age 66. So January of last year, 2019, I started my social security benefit. I chose not to wait until 70. You and I discussed this several times-
April: We did.
John: After looking at literally hundreds of plans for clients. Time, value of money, I chose to take it now. I shared this yesterday with you, kidding around. My social security deposit was made yesterday, direct deposit, and I used that money to pay for a portable building that I wanted to have on my property up in Jefferson County.
April: Right.
John: I'm choosing to use the social security benefit today either to do things that I want to do, take care of children or grandchildren, or save or invest it. Time, value of money, I wanted it now. Not everyone should do that. Some people should defer until age 70, because they need or want the higher income later in life, or because they've not done as good a job perhaps planning a survivor benefit.
Maybe they don't have a pension. Maybe they don't have enough life insurance. Because the longer you wait, the benefit, instead of being $2,800 a month, is $3,700. That would continue to the surviving spouse.
April: Right.
Taking Benefits Early
John: So there are a lot of reasons to consider taking it early, full retirement age, or later. Most people that I talk with decide to take it at full retirement age, because they want the money today. If you live to normal life expectancy, it's pretty much an even. If you look at it, the average is about to age 83.
April: Yes.
John: It just depends on your circumstances, how much money you've saved, how much life insurance you have, what other benefits would continue to a surviving spouse. But it's important, folks, not to just look at social security in a vacuum and say, "This is what I'm going to do." You need to look at everything you've got and treat it like any other valuable asset, because it is a huge asset.
April: Right. Right. There's no perfect age to retire. It's all individual. It's all based on your individual, personal circumstance. Just know that that is something that we can help you with as well, to help determine the appropriate choice, when to claim.
John: Let me put it in perspective. At age 66, the maximum benefit is $2,861. In order to provide that benefit, either to you as your investment account or to a survivor, it would take $858,300 earning 4% interest to give you that. How did I calculate that? $2,831 times 12 is $34,332. Let's just assume a 4% withdrawal rate. You divide it by 0.04. It would take $858,300 to provide that same benefit. Even though you can't get that money lump sum, folks, I want you to understand that the capitalized value of that retirement benefit is almost a million dollars.
April: Right.
John: If you had a million dollars sitting in a bank account or a mutual fund, you could check on it occasionally. But most people don't check on social security until a few months before they retire.
April: Right.
John: It's important to check on it now, not wait. At least learn more about it. If you're on this call, I commend you for being there. For those who come to our seminars, they learn even more.
April: That's right. Good. Talking about, again, the delayed retirement credits is what they're called when you delay taking your benefit until age 70, so that also depends on the year you were born. If your full retirement age is 66, and you delay to age 70, then your benefit could increase to 132%. But if you're like me, and full retirement age is 67, and I delayed it until age 70, then my benefit would only increase to 124%. It's 8% per year, and that's going to depend on when your full retirement age is, and how long you can let it defer.
This is why it's also important to look at your statements. Because on your statements, it's going to show you first of all what your full retirement age is, and what your benefit would be at full retirement age. It's going to show you your benefit at age 70 and at age 62 and then also, the survivor benefits. A lot of people don't realize all the survivor benefits and the disability benefits that are eligible to you for social security. So it's important to review those, as well.
John: It also talks about Medicare.
April: Yes.
John: Because what you have with social security is not just a retirement benefit. You could have a disability benefit, although it's difficult to qualify for social security disability. But it's there for many people out there. Then the survivor benefit is like having life insurance, because the government is providing a benefit that, if you didn't have that, you'd have to have more life insurance. Then of course, we're all concerned about the cost of healthcare.
More and more people my age are concerned about, okay, in retirement my biggest expense is my health insurance and health insurance costs are higher than the inflation rate, maybe 5% to 7% I have to assume. So that's a very important issue, too. April, just think about how many times we have discussions with clients, and their biggest fear is, "How do I pay for my health insurance when I retire"
April: Right.
John: I'm worried about what it's going to cost me.
April: We just had that conversation yesterday with some clients.
John: Yes.
April: That are about to retire. Very big concern.
April: Your social security benefit does have a cost of living adjustment. It may increase, but it's not guaranteed.
John: Key word is may.
April: May. Sorry. The cost of living adjustment for social security is tied to the CPIW, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers. If there is an increase in the CPIW, then we'll see an increase in social security benefits. But the CPIW is not the inflation rate that's quoted in the media. It's a different basket of goods that is calculated for the CPIW.
For example, in 2020, the cost of living adjustment is 1.6%. Benefits will go up this year 1.6%. But you'll see that in the last 10 years, we've had several years where there's been no cost of living adjustment: 2010, 2011 and then again in 2016.
John: Let's talk about that increase, that COLA. I'm retired on paper. I'm collecting social security and I'm on Medicare. So I get a 1.6% increase, but also my Medicare premiums went up.
April: Oh, yes.
John: Another thing that, it's not Medicare topic today, but you need to understand folks, when you retire and you take whatever retirement accounts you have, pensions, 401(k), whatever, and then you add social security to that, but then you find your income tax level, you may find that you have to pay a extra tax called IRMAA on top of your Medicare Part B premiums.
April: Right.
John: We had that conversation with those clients yesterday afternoon.
April: We did.
John: You may find that you have not only the Medicare Part B premium to pay, but you have I call it the tax on top of that, because of your earnings level. These are things that people don't know about. Frankly, I didn't really pay attention to it, April, until about three years before I became 65.
April: Right.
John: More and more clients ask about it, so as usual, you go dig and learn to help that person, now you've learned something that will help hundreds, if not thousands, of other people.
April: That's right. Yeah, and the Medicare, especially with IRMAA, we're going to talk about that in our webinar, in our seminar in February on Medicare.
John: Yes.
April: I'm going to have some more information about that. Let's talk about taxes and your social security benefit.
John: Do we have to talk about that?
April: Unfortunately, we do.
John: Yes.
April: You may owe taxes on your social security benefit. This depends on a few things. One is your filing status, so do you file individual or do you file a joint return. Then, it's also the amount of your combined income. Your combined income, this is your adjusted gross income, plus non-taxable interest, plus half of your social security benefit. You total all three of those together, and that's how you get your combined income, which you'll need that information to know if part of your benefit will be considered taxable.
If you are filing a individual, a single return, and your combined income is between $25,000 and $34,000, then 50% of your social security benefit will be considered taxable income. Then, if your combined income is over $34,000, 85% of your benefit will be considered taxable. Now let's look at if you file a joint return. If you file a joint return, and your combined income is between $32,000 and $44,000, then 50% of your benefit will be considered taxable. If your combined income is over $44,000, then 85% of your benefit will be considered taxable.
Social Security Benefits DO Get Taxed
John: I've been doing this for a long time. I'm still amazed at the number of people who do not realize that when they retire, that their social security benefit will be taxed and we've even seen people that don't realize that their retirement accounts would be taxed. At one time, social security benefits were not taxed.
But in the '80s, under President Reagan's administration, social security was given its first major overhaul since the '50s and '60s, and some things changed. That's where we started having the cost of living adjustments. We also had the increase on the annual earnings level, to determine how much of your income would be taxed for social security.
April: Right.
John: So a lot of things have happened that most people, unless they're doing this stuff every day, they just don't know about.
April: No, they don't. John, we just had a question come in. Is that income before or after retirement? I think we hit two things here with this question. Good question, Judy. Thanks for asking that. That is going to be considered income in that year that you're claiming. Let's say it's 2020. When you go to file your taxes for 2020, they're going to look at your combined income for this year, and then they're also going to base it off of your social security benefits for this year.
John: Correct.
April: But it's also important to know, because we've been talking a little bit about Medicare and you mentioned about the Medicare premiums, is they do a two year look back. When they're calculating what you're, if you have a, the IRMAA tax, as we call it, for 2020, they actually look at your income from 2018. So for Medicare, they do a two-year lookback.
John: You know what's going through my mind as you're covering this, is all the moving parts to retirement planning.
April: Yes.
John: That you and I take for granted, because we do this every day, four, five, sometimes six times a day on the days we see clients. There are so many pieces. Add to this, whatever you're doing within IRAs, state deferred comp, 403(b)s, SEP plans, SIMPLE plans, any retirement plan that you have. When you are forced to take money out of those because of your required minimum distributions, which the SECURE Act made some changes in
April: Yes they did.
John: Doing some educational, there are just so many moving parts. It changes all the time.
April: Yes.
John: Because it's part of tax packages and the folks in Congress, when they work, they actually find ways to collect more of our money in the form of taxation. We'll get into some of the issues later. I'll talk more about taxes and what I think's going to happen in the future. But this stuff is important. We can't just blindly assume that what we get today is going to be the same as we get in the future. It could be higher. It could be lower. It could be taxed, not taxable
April: Yeah, that's a great point. It is, it's very complicated. There's a lot of moving pieces, and it's very ... again, it's individual to everyone's situation. That's why I like the retirement rehearsals that we do for clients.
John: Yes. Take a moment, we got time. Take a moment and share with people what that means and what we actually do.
April: Yeah, so with a retirement rehearsal, what we do for clients is, we will actually project ... if you haven't retired yet, we're going to project you forward to retirement. We're going to take a look at everything you have in your financial world, and we're going to look at all of your retirement income streams. We're going to look at social security, so what will your social security benefits be at 62, at full retirement age, at age 70, both for you and your spouse, if you're married?
We look at, do you have a pension and do you have different pension options and what will those be, and how will that impact your retirement? We look at different pension options. We also look at, how will you draw income from your other assets? As John mentioned, do you have IRAs, 401(k)s, deferred compensation? How are you going to draw income from those when you get to the distribution phase of your claiming? And then, when do you have to start taking those?
So whether you're a requirement of distributions, and with the changes to the SECURE Act, if you are not 70-and-a-half by December 31st, 2019, you now can delay taking money out of your retirement accounts until age 72. Very important to know. We have to make sure that we follow those rules. There's some hefty penalties if you don't. So we want to make sure we follow those rules.
But really, with a retirement rehearsal, we project you forward to retirement and look at all your retirement income streams, and we can play what if. What if this happens? What if that happens? We can build it together. We also look at the threats. What threats do you face, both now and in retirement, to your income? Very important.
John: Yes.
April: We do have another question about, would it be better to file individually? That's just going to depend on the individual situation, in my opinion.
John: I agree totally. We don't hold ourselves out to be tax experts or legal experts. But I will tell you that it comes down to income levels, what assets you own, how those assets are taxed. Is it a rental income, investment income? Things like that. We can't give a specific answer to that. But for most people, what we're seeing is they do. If they're married, they do file jointly. Rarely do we see people filing individual that are married, but we do see it occasionally.
April: Right, and you got to take into, again, we're not tax experts, but you've got to take in the full tax picture, and not just how much of your social security benefit would be taxed.
John: Correct. We all owe taxes. Let's talk about the future. We see so many people that tell us that when they retire, they'll be in a lower tax bracket.
April: Yeah.
John: And we're not seeing that. We're seeing people in the same bracket, in some cases, higher, because again, all of the money that you accumulate, if you're doing a good job of saving money or you have an employer doing it for you, the day comes when that money has to come out.
April: Right.
John: Either because you choose to do it, or the IRS says at 70-and-a-half or 72, with required minimum distributions, you have to take it out. When you were doing the introduction, you talked about my focusing in on R&Ds and inherited IRAs. There's another issue that people don't talk about, that some day, we're going to die.
John: When we die, any monies we leave behind in retirement accounts is heavily taxed. If we leave it to a spouse, spouse can take income and not have to pay tax on the amount left behind. But if we're leaving it to a non-spouse beneficiary, the rules just changed with the SECURE Act on that. It used to be that my beneficiary, son, daughter, grandkid, could spread it out over their lifetime.
Can't do that anymore. It's got to be paid out every 10 years. People don't know about that. That's not being talked about very much. So taxes could end up being much higher than you think, either for you or your ultimate beneficiary. It's important that if you're doing any type of planning that you project into the future in thinking what the tax impact would be.
April: Right. Very good. Let's switch gears a little bit, John, and talk about if you're still working.
John: Let me say one more thing. I don't hold myself out to be a tax expert, but I will tell you this, when I was getting my Master's degree in financial services, we spent one entire course, not a class, an entire course, just on the history of the income taxes in the United States of America. It has been a very complicated system throughout. When it first started in 1913 with the passage of the Sixteenth Amendment, it was pretty simple. There were six tax brackets, okay?
Now, it's more complicated. Congress makes it more complicated. Whoever's running for president always refers in there taxes from the standpoint of, "We're going to do this, or going to do that. I'm going to raise taxes. I'm going to lower taxes." There's no way of knowing, for sure, what your tax rate is going to be 10, 15, 20 years in the future.
April: Right.
John: All we can do is look today, look at history, and try to get some idea of what it may look like. But it's important not to ignore this. Any time we talk about social security, what I've learned from my own experience of working with people and from my own income and investments, is that I get surprised occasionally with taxes, and I know this stuff. My CPA and my tax attorney, they say, "Look, you know this stuff as well as we do." I say, "No, I don't." But I do understand the focused part that I deal in, every day.
April: Right.
John: The rest of it, I don't know and don't want to know. It's why I pay them for their coaching and their advice.
April: Their expertise. That's right. Good. Good, good, good. Okay, why don't I switch gears and talk about if you're still working and your social security benefit? Because this is very important. Some people just kind of ... can trip them up.
John: Like me.
April: Like you. You're still working.
John: I'm still working. Like I said earlier, I'll never fully retire, as long as I am relevant and people want me and I'm healthy and can do it, I don't see any reason why I would quit.
April: That's right, good. If you are still working and you're going to collect your benefit, there's a couple things that you need to know. If you collect your benefit early and you're still working, there may be a reduction in benefits. At age 62, for this year 2020, there's a number of changes, but any wages earned over $18,240, your social security benefit would be reduced one dollar for every two dollars over this limit. Very important if you're still going to be working in some capacity and collecting your benefit. You need to know if your earnings, your wages, will be more than that earnings limit.
John: That's why you'll hear some of your friends say, "Well, I can only work part-time when I retire and take another job, because I don't want to earn more than $18,000." If you hear that, what they're referring to is the reduced ... the reduction of their benefit if they earn more than that $18,248.That's what they're referring to.
April: Yes. There's some nuance here with, if you start collecting your benefit in the year that you reach full retirement age. If you start collecting your benefit in the year that you turn full retirement age, but you haven't ... it's not the month yet, then any wages that year earned over $48,600, again, that's for 2020, then your social security benefit would be reduced one dollar for every three dollars over the limit. But if you start collecting your social security benefit in the month you turn full retirement age, there is no earnings limit, 100% of the social security benefits will be paid.
April: Let's use you as an example, John. You turned full retirement age, 66, last December, December of 2018.
John: Correct.
April: If you had started taking social security earlier in the year, you could have had a reduction in your benefits, if your income, your wages, had been over this limit?
John: Correct.
April: But since you started, you actually started the January after you turned full retirement age, now there is no earnings limit and you will receive 100% of your benefit?
John: Correct.
April: The key here is to look at if you are going to be working, most times you do not want to start your benefit until the month you hit full retirement age. Someone just asked a question about spouse's earnings, do they add into this total? The answer is no.
John: Correct from that perspective. However, where it does count though, is total income. If you're looking at total income, it could impact you in different ways. But as far as your social security benefit, no.
In the example April was just giving, maybe my income, I started early, before the month that I turned full retirement age, I can be penalized. But if she's collecting her benefit, it would not be an issue. Right, very good. Good questions. Keep them coming. Carol just asked, does it go back up if you start, say about six months early? I assume you're saying then you take your benefit and you're working maybe for six months, and then you fully stop working, is how I'm going to take that.
John: If that's the case, then yes, there is an adjustment. But you would have to get the social security folks to do the calculation for you. But yes, there is an adjustment. Once you reach full retirement age, then you would not have that problem.
Different Ways to Claim Benefits
April: Right, exactly. Yeah, good. Good question. Okay, now we're going to talk about some different payment scenarios, and different ways to claim your benefits. The first that we're going to talk about is a spousal benefit. As we talked about earlier, when you have reached 40 credits, again, that's 10 years of working history, then both you and your spouse qualify for social security and Medicare. Under a spousal benefit, your spouse qualifies for 50%, half, of whatever your benefit is under your earnings record.
Now, they'll also have their own earnings record, and social security has now what's called deeming rules. If the two of you go to claim social security, social security now will automatically pay you and your spouse whichever is the highest of the two benefits. Let's give some examples. Let's say that John and I are married. John's benefit is, just for easy math, $1,000 a month. Let's say that I did not work much outside the home, so I have very little on my own personal record. I would qualify for a spousal benefit under John's record. In that case, my benefit would be $500 per month.
social security would automatically pay me the higher of the two. If I had, John and I's earnings records were very similar, and we both, our benefits were both $1,000 a month, then I would just automatically get the $1,000 per month, because it's the higher of the two. Okay? Let's look at some different scenarios. There is a widow and widower's benefit. The way that the widow or widower's benefit, I'll kind of make this a little easy, is that you get the higher of the two benefits.
Again, John and I are married. Let's say that his benefit, again, is $1,000 per month and mine is $500 per month, and John passes away. Then I do not get to collect both anymore. But I'd get to collect the higher of the two. In that situation, the $500, I would just collect $1,000 per month. Again, I get the higher of the two benefits, for the widow and widower's benefits. We did have another question. Wouldn't it be beneficial to point out then, the case of a married couple, the higher wage earner should wait until age 70 to claim their benefit. John, would you like to address this question?
John: Absolutely, and it goes back to what I was saying earlier about, do you take it at full retirement age, or wait until 70. That truly comes down to a personalized, individualized scenario. If I have very little life insurance to go to my spouse, or I have very little assets, then I would probably be more inclined to wait until 70.
In my case, I have a lot of life insurance over the years, and I have assets that will continue income stream. So for me, I chose to take the benefit at 66. But, the answer is, yes, it does make sense for some people to do that. Back to April's example, she would collect all my benefit, but if I wait until 70, it'd be even higher.
April: Right.
John: But I might not want to wait that long. In my case, I did not do that. I'm now divorced here, I'm going to get into some things here about people who are divorced in a minute, but I'm divorced. So my ex-wife is collecting on my benefit record. She is collecting half of my benefit. Had I waited until 70, then that benefit would be higher for her. Again, if I feel like I have a deficit in planning elsewhere, then maybe I would do that.
April: Right, yeah. It depends on, again you mention it but, other assets that you have and when you're going to fully retire and step out of working and do you have assets to replace that income? Those are all the scenarios that we look at at retirement rehearsal. If you are going to delay taking social security, and you're not working, where are we going to fill in the gaps for income?
John: Correct. A lot of people don't agree with what I'm going to say, but I'm to the point in my world where I don't care so much about large the account balance is. I want to make sure that there's a steady stream of reliable, preferably guaranteed and reliable income that reappears every month.
April: Right.
John: Every month it's there. It just shows up. You can do that with a pension. You can do that with social security. You can do it with other planning tools, products. But it's important to understand that it's not just how much money we have in the account, but it's more important once we retire, because if we want to or have to, because of medical reasons, that we have streams of income that are reliable.
April: Right.
John: That's why we spend so much time talking about social security.
April: Yes, very good.
John: Because it is the base foundation that if you are a U.S. tax payer and worker, you are probably going to have social security. There's some people who will not, but the majority will.
April: That's right. Good. John, there are other survivors' benefits. For lack of time, we're not going to go in too much detail on these, but just know there are some other survivor benefits: widow/widower's, disabled, and for minor children, as well. Again, all that information can be found on your statement.
April: Okay, for divorced spouses, so if you were married for at least 10 years or longer, but are now divorced, you can still claim a benefit under your ex-spouse's record. Again, it works the same way, where it's 50% of their benefit. We get this question a lot, it does not impact their benefit in any way. If they're remarried, it doesn't impact their current spouse's benefit in any way. But if you're married 10 years or longer, then you'll have a spousal benefit available.
John: I have a question for you that we get occasionally in seminars. So I'm divorced. I get re-married and I'm married for 11 years to the second spouse.
April: Yes.
John: Then we're divorced, or I die. What happens then? Do both people get the benefit?
April: Yes, both people get the benefit.
John: Right. For me, I've never understood that. If we have a crisis with social security, how is it that we have that in place? I'm glad it's there for people who need it. We've got clients where that applied to them when somebody died, the spouse died. But I look at these things, and I wonder sometimes, is that another area where Congress some day is going to say, "Whoa wait a minute. Maybe we don't do that anymore."
April: Right.
John: There are a lot of issues that we could get into from a standpoint of, what might they do to keep the system more solvent? If there's time, we'll get into some of that
April: Yeah, they talk about the changes quite a bit. So we'll probably get into that a little bit here. Good thought. Okay, speaking of changes-
John: Yes.
April: It's perfect timing. There were actually some changes with social security back in 2015. So I'm going to hit this matter quickly.
John: I want to make a comment before you do.
April: Yes.
John: What April is about to cover, in all of my years in business, since 1975, this is the fastest that we've ever seen Congress act on social security. When they called it the Bipartisan Budget Act, it was bipartisan. It was all the people in Congress were on board with this, because it was the first time that we saw something happen literally in weeks, weeks of being proposed. I'll turn it back to you, April.
April: Yes, no. I mean, it was within two, maybe three weeks. It was first proposed, a lot of use were scrambling to try to find, get as much information as on this as possible. A lot of us thought that it would take a while to be passed, and they passed it very quickly, and then the changes happened also very quickly. It impacted two claiming strategies: the restricted application and the file and suspend. The file and suspend is no longer available, unless you were already file and suspended prior to April 30th, 2016. I'm not going to go into too much detail on that strategy.
John: I don't think you need to spend any time on that one, actually.
April: That's something, we can talk about that offline. The restricted application, though, is still available. But you had to have been 65 as of January 1st, 2019. The restricted application says that this is, again, this is for spousal benefits, that you could claim a spousal benefit and receive your spousal benefit, but delay taking yours. Let's use, again, another example.
April: Let's say that my benefit is $1,000 per month and John is going, again, we're married in the scenario, so John is going to take a spousal benefit on my record, so he's going to get $500 per month, and then he's going to let his own earnings record grow and defer and delay it until full retirement age at age 70. So while he's delaying taking social security on his own record, he's now collecting a spousal benefit from mine.
John: That might be what the person was indicating earlier about to age 70. I'm not sure. So if that's what you were thinking, then that would be part of the strategy. I would collect, and then in this scenario, April would delay until 70, and then start collecting.
April: Correct. Okay, and again, restricted application is still available, if you were 65 as of January 1st, 2019. So if that applies to you, please get with us offline, and we can run some calculations for you.All right, let's talk about some issues around the program. The first issue we're going to talk about is that the trust fund is running out of money. This is not necessarily new news. We've been hearing about this for several years. But part of the problem is that there's a lot of people, Baby Boomers, are leaving the workforce, and are activating their benefits. So it is putting more strain on the system.
John: Yeah, about 10,000 of them per day.
April: Per day. I'll give you some examples, just to paint the picture for you. Back in 1945, there were 40 workers per each beneficiary. Now, social security estimates that by 2035, which isn't very far away by the way, there's only going to be two workers per each beneficiary. Very important. That's why the social security administration also estimates that by about, the years change a little bit, usually 2033, 2034, that the trust fund will actually be exhausted. If that happens, and no changes are made with social security, then they'll only be able to pay out 77 cents per dollar of scheduled benefits.
John: A comment here. I would encourage everyone who's listening to this, whether it be live on the webinar now or recorded later, go to the social security website, download, print out hard copy, the trustee's report, and read it. They give good, open, honest information there.
April: Yes.
John: They don't hide this. They're making it clear that there's a problem. For those of us who choose to ignore that, we should not be all upset when our benefits are lowered in the future. Because they're telling us loud and clear, this is a problem. It must be addressed. If it's not addressed, we're going to see a reduced benefit, or could see it, in the future.
April: Right.
John: We can talk about the impacts of that later, if there's time.
April: Yes.
John: But I just wanted to jump in and share that.
April: I do believe that if things continue on this way, then they will make some changes. They'll have to. What those changes look like, there's a lot of theories around that. Different things have been proposed. But I think that they'll make some changes.
John: I want to make one comment here before we leave this section. I'm tired of people using fear to convince people to make decisions about social security. We have people come in to us, say to us, "I'm taking mine at 62, because this thing's going broke."
April: Right.
John: Folks, be careful of that. I don't think the social security system's going to go broke. It's not going away. You'll see some changes in the future. They should have already been made. People never should have been allowed to take social security at 62. It was never intended for that. There's a lot of things that we could talk about that should not have been done, but they did it. Those things will be addressed in the future. But don't let anyone use fear to try to convince you to do anything. If they can't explain it and justify it and make it make sense for you and verify it, then, get away.
April: That's right. Good. Again, we have hit some of this, but some of the other issues around the program is that it's subject to political agendas.
John: Nah.
April: Yeah, just a little bit. Then also, that cost of living adjustment being tied to the CPIW. They talked about changing that, like the CPIE, which is the Consumer Price Index for the Elderly, which makes more sense. But I'm not sure if they're going to do that, or not. But again, it does get ... how do you put it sometimes? It's the political football that gets passed back and forth.
John: That's right.
April: Yeah.
John: Passed or kicked.
April: That's right. John, before we go into recap, are there anything else that you want to add about the issues around the program?
John: I just want to talk about what I think we're going to see happen in the future, and I'll keep it brief. But it's obvious to me that taxes of all type must be increased in the future. If you look at the spending that's going on, you look at what's happening with ... just look at the candidates running for office. I don't care if you're Democrat, Republican, or Independent.
I don't really care what your views are on politics. I look at the numbers from the standpoint of planning. If you take a look at our income tax history, our highest bracket was over 90%, then 70, then 50, then 28% under President Reagan's administration. But while tax rates dropped to 28%, they also took away tax deductions. So very few people actually paid less tax, because there was an offset of what they couldn't deduct.
John: Then, we had tax rates go back to 40%, 49.7. Then down, and now we stand at 37%, top bracket. So tell me how, with all of the spending going on and the condition of social security, Medicare and other programs, how tax rates can stay as low as they are? They're low right now, compared to history.
April: That's right.
John: I'm convinced that tax rates will go up. I was just looking at my Medicare
stuff earlier. The IRMAA tax on that is called a surcharge. That's a tax. Not just a surcharge, it is a form of taxation. Taxes are going to go up. Just because your income today is X amount, and you think it's going to be less when you retire, that might not be accurate.
April: Correct.
John: You could have the same income as today, and be in a higher tax bracket, if they raise the tax rates. The good news, so far anyway, about taxes is, we know what's coming well in advance. So far, they've not ... they haven't done that in two weeks.
April: Right.
John: As we see things, we do webinars and seminars, get emails out, and let people know. But just understand that down the road, we're probably going to pay higher and higher social security tax. You would anyway if your income goes up, because you pay the same tax rate, but it's on a higher income each year.
April: Right.
John: Don't get lulled into this thing about, "Well, when I retire, I'll be in a lower tax bracket and it won't impact me."
April: Very good. Good. Well, let's recap quickly here. Social security is funded by the taxation of wages. It averages your highest 35 years of wages to determine your benefit. If you have 10 years of working history, then you and your spouse should qualify. Then also, make sure to go online to get a copy of your statement.
April: Your full retirement age depends on the year you were born and how old you are when you activate your benefit, also determines your benefit amount. Because you can claim it early, and have a reduced benefit. There is a cost of living adjustment, but it's not guaranteed. Again, it depends on if that CPIW goes up every year. You may owe taxes on your benefit, and if you work while you've claimed your benefits, but you're not full retirement age yet, your benefit may be reduced.
April: There are different claims scenarios. You have different spousal benefits, widow/widower's benefit, survivor benefits, divorced spouses, and then also, there is the delayed retirement credits and spousal benefits that we talked about.
April: Issues around the program, there's funding issues for future benefits. It's political agendas. Then while this is not necessarily an issue for the program, it's more of an issue for just overall retirement planning, but social security was never meant to replace all of your income in retirement. You have to have other sources.
John: For those who come to our seminar, we will get into some of the thinking that, going way back to the 1930s, about social security and what it was intended to do. I always like to talk about President Roosevelt's thinking at the time in these things. But I'm going to make one promise here. I read and study and stay on top of what people in Congress are thinking about social security and Medicare as much as I can. I read and study everything I can get on it. So as we know something, we'll make sure we get that information out to everybody that's on our email list, and we'll send it out.
April: Very good. Good, well, we thank you for joining us today, and encourage you, if you have some questions you'd like to schedule a time for a phone appointment to talk about your individual situation, maybe some of the questions that came up today or if you have some additional questions, you can contact us directly.
Our main office number is (850) 562-3000. You can also reach me over in Jacksonville on my cell phone at (850) 544-8464. With that John, I say thank you for taking the time today for us to go through some social security, and I look forward to our next webinars and seminars on Medicare and retirement planning.
John: April, you're welcome, and I thank you for putting this together. You get all the credit for making sure these things get done, pushing me, say, "Okay, I need you sitting here." It's always fun to do it, so thank you for taking control and getting it done.
April: You're very welcome. Glad to be here. All right, thank you everyone.
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John H. Curry, CLU, ChFC, AEP, MSFS, CLTC, registered representative and financial advisor of Park Avenue Securities, LLC (PAS). Securities products and services and advisory services are offered through PAS, a registered broker dealer and investment advisor. Financial representative of the Guardian Life Insurance company of America, New York, New York. PAS is a wholly owned subsidiary of Guardian. North Florida Financial Corporation is not an affiliate or subsidiary of PAS. PAS is a member of FINRA and SIPC.
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