Ep #167 - Social Security - One Decision and a Whole Lot of Dominoes

[00:00:00] Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now. 

All right. So today do something a little bit different, Adam. We're going to talk about a very popular retirement planning topic, Social Security. But let's, do it in more case study form. And what I mean by that is let's actually invite people into the thought process here, because I think Social Security's so interesting because we could talk about it being a math problem, and we do this math around a breakeven age. 

You know, show me the math and I'll know what to do, and sometimes it can be very straightforward. But often there are so many dominoes. Like one decision around Social Security now can have a domino into many different other things. So let's take this episode, let's do a little bit of a case study, which by the way is this, this scenario is like something we've been working on in the conference room uh, for the last week or two, and I think it'll just be a good... 

I'm hoping it'll be a good, useful tool for whoever's listening that hasn't made this decision yet to go, "Okay. There are a lot of different things that I need to be thinking about here." 

[00:01:24] Adam Werner: Yeah. Yeah. And when we say case study, I think this is maybe more in our world where, you know, there's trainings or just when we went through the whole CFP exam process, like you're given a case study, you're given all these, you know, facts, quote unquote, about a client situation and how do you navigate that to get to some sort of answer. 

So we'll kind of lay that out, maybe not... This is maybe in our world, maybe not so much the client world of what the hell do we mean by case study. But we'll just-- we're gonna, we're gonna create this hypothetical, hypothetically real scenario 

[00:01:56] Ben Haas: The name- the names won't be real. How about that? 

[00:01:58] Adam Werner: Correct. For we've protected the anonymity of our clients in that way. 

That was a hard word. So in this scenario, we'll call him Jim, is sixty-four years old, ready to retire, planning to retire imminently, being let's call it tomorrow, essentially. Wife Susan, maybe a year younger, call it age sixty-three, and anticipating working for a little while longer, maybe a year or so. 

They've been great savers their entire lives. They've accumulated enough in terms of savings and investments that they don't necessarily need to start Social Security right away, which I think is key in this whole case study, right? It's we don't need it, so what makes the most sense? They can clearly live off of their portfolio comfortably while delaying Social Security. 

That is an option. But I think a very typical scenario where Jim, the husband here in this instance, his Social Security benefit is meaningfully bigger than Susan's, making his decision maybe a little bit more critical in the grand scheme of planning, right? The whole survivor benefits when it comes to Social Security. An important caveat in this scenario is they do care about leaving money to their kids and grandkids. Not necessarily, you know, maximizing what is left to go to their heirs, but it is an important factor. They want to be able to leave something meaningful behind. And one last little caveat, there is some existing life insurance that Jim has that he is flirting with. 

Do I need to continue this? Is... Are we past the point where I actually need it? Can I save some of these dollars or leverage some of this cash value in a different way? So a lot of moving pieces, which is why, you know, when people get tired of us saying maybe or it depends to certain questions, I think this is going to maybe illustrate a lot of how we think through these different dominoes and why the answer is often it depends when it comes to specific or I should say too broad generalizations and questions. 

[00:04:09] Ben Haas: Oof. Okay. So where to start? I think. Let's just put it here, because I think the initial place that we would go to is just do they really need the Social Security to live on? And the, the answer here is no, right? When people have accumulated those assets, then the initial argument for delaying is pretty compelling, right? 

Because the math will tell you if... And look I guess maybe we should start here too. We make the horrible joke, and it's like we shouldn't even make the joke anymore because it is horrible. But if somebody can tell us the day that they're gonna die, like we'll maximize Social Security for them. 

Mm-hmm. In the absence of knowing that, the math is always gonna tell you to delay, right? Because if we're assuming you're living past that, we'll call it just age 80. If you live past age 80, then you delaying your benefits because you didn't need to be taking it to actually live off of, you're gonna have more lifetime benefits if you live to 85, 90, 95 years old. 

So because he has the assets, that essentially becomes this bridge. They can spend some of their own assets today in exchange for these larger Social Security checks later. Except, I mean, they tell us one of the things you shared in laying this out is that leaving money to their children or grandchildren is important to them. 

So now what? 

[00:05:29] Adam Werner: Well, and not only going back to your point on, you know, delaying is almost always going to be the financial, the best financial decision, assuming they live a long and healthy life. But it also there's the domino of the survivor benefits, which maybe we'll talk about in subsequent sections. But there is that idea of just maximizing it, not just for the per- for the individual, but then for the household. 

So that absolutely plays a role here too. But to your point, yeah. So now, they say we wanna preserve some of our assets for kids and grandkids. How does that factor into do we start Social Security sooner or not? The intent to leave something may mean maybe we should take Social Security earlier, because every dollar by delaying, we're gonna be pulling from investments. 

We're gonna be pulling from certain accounts to bridge that gap to continue to be able to delay, and we know that yes, Social Security will... There is the survivor benefit for spouses, but it does not pass to adult children, and it certainly does not pass to grandkids. So yeah to what degree do we weigh this? 

That is, yes, you could delay Social Security, but that may now be counter to wanting to preserve as much in assets while you are living. And again, this scenario where we're building like multiple what-ifs of we're kind of going into this with we're assuming you're going to live a long and healthy life, and let's start with that as plan A. 

But we don't wanna discount, okay, but what if, something unexpected happens, and Jim in this scenario passes away prematurely? What are those other dominoes that we would want to kind of factor in? That is, again you don't start Social Security right away. 

You're starting to pull from assets, and now you pass away. Would it have been better to start Social Security, at least get something out of the system and maybe preserve some of those, those more liquid savings and investments for later? 

[00:07:30] Ben Haas: Right? Because that is, that adds another domino here, right? That the longer you could be collecting two paychecks, hopefully the more money you're getting out of the system, then after the first person passes away, it's important to share the education. You only get to keep one of those paychecks. Right. 

So when we say maybe they should claim earlier because now we'll preserve our assets, but what happens if Jim dies first? Claiming earlier, you said this, it may mean that now there's not only one paycheck coming in, but the paycheck of the survivor might be lower because you started it earlier, right? 

So now we're talking about a whole nother scenario here where, again, my crude joke, tell me the day you're gonna pass away and we'll maximize benefits. We can't know that going into it, so it's almost as though we have to look at this through those different, very different timelines of, well, what if I passed away real early in retirement versus what if I passed away later in retirement? 

So now if we're focusing a little bit more on those survivor benefits, right? Potentially because wife, we'll call her Susan here, you know, may- maybe she survives him for 10, 15, maybe even 20 years, then the higher earner delaying would've maybe been better for her. Except- Yeah ... you know, I'll toss it back to you. 

[00:08:48] Adam Werner: Yeah 

[00:08:49] Ben Haas: You sh- you shared this in this client situation that we're actually replicating here. Jim's got this life insurance, so now what? 

[00:08:56] Adam Werner: Yeah. Which was started at a much different point in time where maybe there was a mortgage or there were kids at home, and yeah, that, that need for some sort of life insurance made sense. Now they are basically on the cusp of retirement. They have enough assets to last their lifetimes, we believe pretty confidently. 

So the... it makes the insurance more of a want than a need. However, that does play a role here in the Social Security decision. If there is-- if we're now putting some of these pieces together, right? And I think it really comes down to the, the key component of we want to make sure we leave something for the kids and the grandkids. 

That leans us towards, well, maybe we should start Social Security sooner than later to help preserve our assets. But then to your point, now we're potentially leaving some Social Security income on the table over the lifetime for the couple. How does the life insurance now play a role in maybe easing some of that potential negative outcome of, God forbid, he starts Social Security tomorrow and passes away very young at this point, and now we'll shoot. We wish we would've delayed. It would've been-- We would've been able to continue to grow this benefit, and Susan, as the survivor, will get more over now her lifetime. 

But there's all of these dominoes, right? Now, having this life insurance can maybe provide, maybe it's not fully replicating what would have been received from Social Security if we continued to delay it, but it does play a role in helping make that decision, I think, a little bit more comfortably to say, we're fine to start Social Security sooner because if God forbid, the worst does happen, then at least there is some sort of life insurance death benefit that can offset that future lower benefit coming from Social Security for the survivor 

[00:10:50] Ben Haas: So what you're saying is take it earlier. No, take it later. Nope, take it earlier. Yeah, let's throw another domino in here because, okay, so let's... Ugh, right? We're gonna have to figure out what they prioritize, but the other domino in here is when you are recreating your own paycheck then, right, if it is to delay, then where is that money coming from does matter. 

Because let's say, you know, this couple has built a lot of their wealth, like many people, inside of these retirement accounts. Like I socked money into my 401k. Now I've got this IRA. Well, if I'm going to have to rely on that in the absence of social security paychecks, well, that's fully taxable as income to me. 

So now I'm not only having to consider my tax bracket and, okay, I'm taking this earlier, so maybe my benefit isn't as high. I'm gonna have to take out more than I may have thought about taking out, because I'm also gonna have to take taxes and make sure that those are paid. Which, by the way, has a whole other domino when it comes to what am I paying in Medicare premiums, because that is based on your income in retirement. 

So a whole nother domino here of am I taking social security, which by the way, isn't fully taxable, or am I pulling it from some sort of retirement account? And one more domino, how is that affecting my Medicare premiums? 

[00:12:10] Adam Werner: Yeah, huge one. So, so then we should take it? Not take it? But then we find out, right? And then this, the, the next domino may be... Jim says, Jim uses the word retired, but using the word retired is not the same thing as I'm not going to earn another dollar in my lifetime, right? We've certainly seen enough clients kind of go through that transition to say, "I don't-- I am retiring from this position or from this job, but that doesn't mean I'm just gonna stop doing anything to earn income moving forward." 

So now you add into this equation, okay, maybe I'm not... In this scenario, Jim is 64, not quite full retirement age, so now there are other dominoes when it comes to the Social Security rules. You're able to earn up to a certain limit, roughly twenty-five thousand right now can be earned while collecting your full Social Security benefit or your haircut of a Social Security benefit, right? 

There's a reduction if you're claiming before full retirement age. But you wouldn't, again, want to now r- go over that limit and feel like, well, now I'm missing out on some Social-- some of my Social Security benefit because I'm continuing to work in some capacity. But I guess it's important to note here too, there, there is that fear in people, and we've heard this very recently from other clients too, that is, I know this is the earnings limit then, and I can control that to some degree so that I can continue to receive my full Social Security benefit. 

But it's not as if those benefits are just lost, right? If I earn over and above that limit, Social Security's gonna withhold some of those that I am entitled to. It just means that either I'm going to fully, quote unquote, "retire" and not earn, and then my benefit will be updated accordingly. Or once you hit full retirement age and those earning limits are removed you'll get that increase essentially at that time. 

So it's not a... It's not that you're going to lose it, it's that you're basically delaying some of that. But it is a real factor here. If somebody does intend to work or earn or consult, we've certainly seen that, where the consulting income feels less predictable, f- on the client side, right? It's I'm going to do some work or my company's coming to me and asking if I want to do this amount of work for a couple of months, and that may now push them over those limits. 

It's just another variable or another domino to just be aware of when making that Social Security decision. 

[00:14:42] Ben Haas: Yeah, especially if you don't have some sort of clarity around that, that can really handcuff us on, hey, you know, to what degree should we put emphasis on that as a domino? 

I'll share one more domino and then maybe we can wrap this up. How people think and feel about things does matter, right? 

It is our job to do the math. It is our job to go through these different variables that we're talking about here. How they think and feel about-- Let's talk about the elephant in the room. Is Social Security in itself going to be around or in the same iteration, and for how long? Yeah. Right? It is public that the Social Security trustees report that comes out you know, based on this trust fund that's out there to pay these benefits, that's gonna be exhausted within the next six years. 

And at that point now, we're paying out these benefits, we as a country, are paying out-- Yeah, global we. We're paying out these benefits through payroll taxes, and payroll taxes, workers versus those on Social Security, the estimate is 75% of those benefits, maybe 80% of those benefits, you know, could be paid after that reserve is depleted. 

So how Jim and Susan feel about, "Look, a bird in the hand today, maybe I'm just gonna take it," their feelings on that matter, and that's just one more domino in this whole equation. 

[00:16:02] Adam Werner: Yeah. And it's not that we're going into this decision, you know, assuming the worst and that we should just assume that Social Security is just gonna go away. But we also don't want to just ignore the fact that the rules could change. They've already changed rules on Social Security, right? They've bumped back the full retirement age. 

There could be adjustments coming down the road and that would not surprise us. But I think as we've talked about in other iterations too, the expectation around that, though any potential changes I think are going to affect the next generation of people claiming Social Security and not those that are maybe already on the cusp or already receiving. 

I think that would be a very difficult change to be made legis- legislatively. But it is something to be mindful of. So after all of this, have we identified, you know, the, the one specific claiming age? 

[00:16:55] Ben Haas: probably not. 

[00:16:56] Adam Werner: probably not 

[00:16:57] Ben Haas: but here-- so here should be the takeaway, right? We don't wanna leave this as some sort of like cliffhanger. But the point here is that our job is to educate, our job is to understand these different variables and present some math, right? We are financial planners. But what somebody values the most is probably what we should be focusing on, right? 

So for this couple, we don't know Jim and Susan, we made them up. For the couple that we have in mind, you know, they have really a pretty well-defined statement of financial purpose. Like the m- the purpose of money in my life is to do X, Y, and Z. And when that includes family in the next generation, I'm not gonna be surprised if they choose to take Social Security earlier, not because that's gonna maximize their lifetime benefits. 

In fact, I hope they live a long and healthy life, and it would've paid to wait. But those dollars that they would be spending from their portfolio in these next couple years, hopefully are just gonna compound and compound in a way that's not only gonna serve them, but hopefully serve their next generation 

[00:17:57] Adam Werner: Yeah. And maybe just adding one more little point here. You know, you said it, right? What do they prioritize or what do they value the most? A different way of kind of thinking about that, if there isn't necessarily a, a very clear answer to that, well, I want, I wanna focus on this, or this is what I value the most. 

Sometimes it's taking the flips the opposite approach of which... If I chose this option, which one would feel worse, right? Which one would I absolutely hope to avoid? And that in and of itself can maybe point or steer people in a, in, in the direction of, okay, well, maybe this is then what I prioritize because I absolutely want to avoid this, this outcome over here. 

So just another potential way of thinking about it if that value or my priorities aren't crystal clear, sometimes it's okay to just think, "But what would I want to avoid?" And you can start to cross off maybe some of these different options. 

[00:18:51] Ben Haas: That’s just it. We have-- You have to start by isolating something. 

[00:18:55] Adam Werner: Mm-hmm. 

[00:18:56] Ben Haas: But yeah, there's a reason we say it depends. Everybody's got a little bit of a different feel, so hopefully this was helpful. Again, there's a lot of dominoes that go into a Social Security election 

[00:19:05] Adam Werner: Yeah. Key point being if you're facing this decision and maybe feeling like you're being pushed and pulled in different directions, reach out. Talk to a financial planner who can help you navigate these different scenarios and like you said earlier, just educate you on your options so that and this is our standpoint, right? 

We just wanna give people enough education and enough confidence to make a decision that they're gonna feel comfortable with at the end of the day. 

[00:19:30] Ben Haas: Well said. As always, thanks for being you. 

[00:19:34] Adam Werner: And you. Bye 

Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.  

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