Ep #11: Winning The Social Security Game
- Timing - breakeven analysis
- Reviewing Social Security Statements
- Working while collecting - could be loosing
- Taxability rules
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Benjamin Haas 00:03
Hi, everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:26
Benjamin Haas 00:31
Good to be back. My favorite time of the week? Not sarcasm. I enjoy doing this.
Adam Werner 00:40
Okay. Well, that's something I learned about you today because I really thought that was sarcasm or really sad for the rest of your week. So on that note, we're going to talk about the super exciting topic of Social Security.
Benjamin Haas 00:58
It is exciting. It can be exciting.
Adam Werner 01:00
It can be. We're approaching this from the standpoint of, we get a lot of questions around it, certainly. The common theme being what can I do to maximize it? What do I need to do to feel like I'm winning the game? So I'll throw it to you. What are what are some of those things that we would point out or frame the conversation on what we would look out for when it comes to social security?
Benjamin Haas 01:25
Social Security is far more complicated than I think people believe and we talked about that a couple moments ago when we're getting prepped up. There's just a lot of variables that go into it and there's a lot of nuance to it. It's an uncertain time and I think that's why we're getting some of these questions. It's government budgets, it's rule changes from a couple years ago, so if people want to try to maximize things, we're all about it. We're financial planners, we want people to be efficient, make the right decision for them but it is a gray area. So I think the first thing that we usually get the question on as people are preparing for retirement is the timing. When should I start taking it? Maybe that's more sensitive now if people are starting to hear whispers or rumors on what's the sustainability? Should I take it sooner rather than later? I don't know. Let me throw it back to you in that in that timing camp, we often call it breakeven analysis. I know I've got a super cool spreadsheet that helps us do some of this math but let's talk about that breakeven.
Adam Werner 02:32
I think just to give the disclosure, everything we're going to talk about is situational. Everybody's situation is different. Their earnings history, the timing, whether they're married or divorced, all of those things are going to factor into whether it makes sense to take it at this age or at that age. In the grand scheme of what we're looking at is the breakeven analysis. It’s the very first piece that we analyze and look at thinking, if I'm going to get a lower benefit at age 62, am I better off waiting until my full retirement age or at any point later knowing that my benefit is going to grow in the meantime, and then how long do I have to live? If I wait to collect at a later date and get a higher benefit, I'm going to be giving up maybe a couple years worth of benefit that I could have been receiving on the front end. How long do I have to live for me to get paid back on the back end? We certainly see that those averages, it depends on which ages you're comparing but if you're looking at age 62 and age 66, let's call it as the full retirement age, that breakeven age is usually late 70’s. More often than not if you can outlive that, then it makes sense to wait, maybe.
Benjamin Haas 03:57
We admit it's a horrible joke to make but people usually have their own feelings on their own mortality or health and things of that nature. It's a bad morbid joke but you tell us the day you're going to pass away, and it makes this whole breakeven analysis decision a whole lot better to make if you tell us that you're going to die, we'll tell you what to do. I do think it adds context for somebody based on their own feelings of - okay, that's a large hurdle or it's not but I think it also comes back to situational planning of, if you are able or want to forego that income, what are the other assets or savings that are going to fill that gap for you? I think that's one of those situations where somebody may feel like they're winning based on a breakeven analysis. Oh, I've got longevity in my family, I'll wait to take it but now they have to tap into a retirement assets that are fully taxable to them that may have been producing income later in life. It's not that simple, right? We want to know, we have this cool spreadsheet, here's the number. It's probably not that simple if the other assets of the savings structure is not supportive of that decision so it's not black and white.
Adam Werner 05:10
It's certainly not black and white and even in that scenario where someone wants to collect because it's a bird in the hand is worth two in the bush. If I started to collect at 62 and I've paid into the system for the last 35-40 years of my life, whether I need it at this point or not, that's irrelevant. I want my money back out of the system is a common refrain that we hear.
Benjamin Haas 05:37
But there's this. 50% of people take it early.
Adam Werner 05:44
So going back to wanting to win or beat the system, the government and the IRS and the Treasury, they would love for you to collect it early because they're paying you out a smaller amount on the front end. Again, it's like an insurance company to me in that sense that it's all actuarial based. They want you to collect earlier because they're going to knock your benefit down by a certain percentage point. We don't want to get into the weeds there though.
Benjamin Haas 06:19
I think that what we often talk about is the problem with the statements that they put out in our mind because they are making certain assumptions based on earnings. They are making certain projections based on cost of living adjustments and that's something that actually comes to fruition every year. We need to factor that into planning. Is this benefit actually growing or not? I think the timing thing is the number one thing that comes to the decision making process of wanting to do it.
Adam Werner 06:54
On that note, I just looked at one for somebody recently and it was, I'm going to get $2,000 at age 62 or if I wait until my full retirement age at 66 and four months, I could get $2,700 a month. Well, an extra $700 a month is a nice chunk of change but that's assuming that this person is going to work up until full retirement age earning what they're earning plus the cost of living or the inflation that Social Security is assuming. If you've retired anywhere shorter than full retirement age, what's showing on your statement is not going to be a perfect reflection on what you can expect in the future.
Benjamin Haas 07:36
Let's stay there because I think we can actually rapid fire here. Hey, you want to think about winning the game? Maybe we need to understand the other nuances here to kind of come to that conclusion. If you retire early and choose to wait on benefits, we would talk about tax stability and working while you're not full retirement age. So let's lay out just really quickly here, if you are trying to collect benefits while then still working in some capacity, there are rules to that or not?
Adam Werner 08:14
Of course, it's the government so there's rules. So yes, if you're collecting before your full retirement age, there's a cap on what you can earn before Social Security starts to essentially claw back or withhold some benefits from you. It's like for every $2 that you would earn over $18,000, I think is the limit in 2020. For every $2 over and above that you would earn, they would withhold $1 in benefit. Now those caps get higher in the year in which you turn full retirement age but there are still caps in that year. Once you hit full retirement age, you can collect your full benefit and you can earn as much as you want. There's no restrictions, but it's for those who are earning and collecting before they turn that full retirement age.
Benjamin Haas 09:03
So here's what I heard as a financial planner that you said: If you were able to potentially retire early or as we're seeing more frequently now, people are phasing out of work. Maybe they're reducing their hours, maybe they're going to a more consultative role, or maybe they're working from home and that's something that can continue and that's a benefit to them and the company. Now all of a sudden, this whole idea of well, I'm going to collect but also earn, you may not be able to just stack your income here and that be the reality of my cash flow. If there are these rules with social security on clawing back some of those benefits in the same way we talked about taxability to how much Social Security is taxable is based on your other income, is it not?
Adam Werner 09:48
There again, there's rules and there's a formula and it's like anything; it's complicated but the minimum is 50% of the benefit can be taxable of your Social Security benefit. That can go up to 85% to your point based on their other incomes and those hurdles are pretty low. To be fair, it's not hard to get above those hurdles, it's like $34,000 as a as a single taxpayer, anything above that, then you're paying 85%. I think for married filing jointly, it's like $44,000 or somewhere in that range but they're very low hurdles to get to if you have a couple social securities and maybe some pension and investment income.
Benjamin Haas 10:33
That brings to light then too this whole idea of in my mind, winning is not just that timing discussion, it's not just how long you're going to live. We've now talked about taxability. We've now talked about earning while you’re working. Let's also put to rest some of the winning of the past with this whole idea on you can play the relationship game. There are spousal benefits out there, God forbid widow or widower benefits and there are divorcee benefits. This whole idea of I can game the system, that died a couple years ago. Let's talk about that.
Adam Werner 11:12
That was when we were new to the business. However many years ago, 14 years ago, that I distinctly remember in certain presentations talking about Social Security, here's what you're going to do. Collect on your spouse's benefit, allow your own benefit to continue to grow, and then at the optimal point, you'll flip the switch, and now your benefit will be higher and you can collect that for the rest of your life, no impact to you, in the short term. Everybody wins but the government and you should take advantage of it. Well, the IRS or the government in 2015, passed the Bipartisan Budget Act or whatever it was called and they pretty much shut those windows, painted them shut. I can't see a world where that's going to open back up because the state and maybe you hinted at it already, the sustainability of the social security program, they need to preserve as much of it as they can. Closing some of those loopholes and making it fair moving forward for all parties or maybe it's not fair expense, I look at it. A lot of those loopholes have since been shut so that when you go to file, you can't cherry pick, I want my spouse's benefit or I want my own and allow the other one to grow. As soon as you apply, it's as if you're applying for any and all benefits available to you and you're going to get paid out the highest one but there's no gaming the system in that aspect anymore.
Benjamin Haas 12:41
The only way that still works is with a widow or widower, that does allow you to collect on the deceased spouse and delay your own but you know that case in point there used to be these things that would feel like, hey, I can beat the system. It's getting a little harder these days, so if I could kind of button some of this up. I think it is for us to articulate, look, we're with you. Financial planning is about finding these efficiencies and maximizing that benefit. It's just not as black and white, I think, as some people may believe and that's where conversations with friends, conversations with co-workers, or with articles that you're reading. There are the different strategies, it really does come down to an individual's plan and what is available to them and what is not. Security is one part, one leg of that stool on where your income is going to come from in retirement and you have to consider everything else.
Adam Werner 13:40
This is definitely one of those areas where one size fits all advice to when to start collecting. It just does not fit it as there's so many variables, there's so many nuances, and everybody's situation is different. Us as planners, we're taking all these puzzle pieces, making them fit together in the most efficient way possible for that situation but more often than not, it is hyper specific to what you have saved, where you haven't saved your earnings, what you need, all the other fixed income that you have coming in. There's so many moving pieces that you have to try to get general advice and what your coworker or your neighbor or your family friend is doing probably doesn't apply to your situation or if it does, it still needs to be reviewed to make sure that it does fit overall.
Benjamin Haas 14:34
All the assumptions that we've made in order to come to that conclusion for you in planning may need to be re-evaluated. Then something is going to have to happen with social security. Changes are going to have to occur, whether that's sooner or later, it will have to happen and that means that this is the spirit of financial planning. We need to kind of put the plan in place and then be ready to pivot when legislation changes, taxes change, whatever it's going to be. The decisions today may still be additional decisions that have to happen in the future based on changes. So anything else that you want to add?
Adam Werner 15:13
Yeah, as we were talking, this went through my head and I will see how this goes through compliance because I'm sure they'll want us to add a disclosure, but the only way to beat the system when it comes to social security is to wait as long as possible and live forever.
Benjamin Haas 15:35
Because it is a lifetime payment.
Adam Werner 15:36
That is right.
Benjamin Haas 15:40
Okay, everything else gray area. All right, sir. Thank you for your time.
Adam Werner 15:47
Benjamin Haas 16:00
Hey, everyone, Adam, and I really appreciate you tuning in. Please note that the opinions voiced in this show 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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