Ep 17 - Decoding Social Security for Retirement Planning

Voiceover: [: 00:00:00

Now your hosts[00:00:30]

t. How you guys doing today? [: 00:00:45

Eric Wymore: doing well.

Jeb Graham: Thanks. Doing good. Middle of summer. It's, it's hot out there. We got a little bit of rain this morning, which is good.

so, yeah. Well, hey, today, [: 00:01:00

Pretty much every single one of our clients at some point, uh, start to try to figure out how and when [00:01:15] to take Social Security. Uh, it's obviously a huge piece, uh, of the, you know, US economy and, and how people, uh, in this country retire. Uh, to give you a couple stats, 67 million Americans will receive a social security [00:01:30] benefit in 2025.

claim their social security [: 00:01:45

So, um, you know, obviously social security is just a huge, huge piece of, uh, the US retirement puzzle. Uh, and they say that for. [00:02:00] 40% of retirees that Social security can make up more than half of their total income. Uh, and, and when the, so the system was designed, social Security was actually designed to replace about 40% of, of [00:02:15] retirees, uh, income that they had during their working years.

start talking about it. So. [: 00:02:30

First off, Ethan's gonna take us through kind of how, how, what is social security and how does it work? Uh, and then Eric's gonna take us through some of the rules of social security. And then I'm gonna talk a little bit about, you know, when you should [00:02:45] claim benefits and how to decide when to claim benefits.

So, so Ethan, let's talk about what it is and, and how it works.

eneficiaries of the program. [: 00:03:00

So we'll kind of dive in a little bit deeper today and, and kind of uncover what it actually is. So the biggest question we, well, there's a ton of questions [00:03:15] around it, but one that we usually get asked is how is, how is it funded? How does this money get into the social security system? So. When you get paid by your employer, whether you're a WW two employer.

-employed. Some form of your [: 00:03:30

12.4% of your pay if you're self-employed, goes into the social security system. Uh, it goes into a trust [00:04:00] fund. Um, and, and Jeb made a good point about, uh, the trust fund itself. Earlier when we were having a discussion around this is it's not this massive fund that's invested, that spits off dividends and just, it's just this huge endowment, like all these big, uh, [00:04:15] institutions have.

paid into the program. So a [: 00:04:30

And while it is healthily funded, I'm not sure if that's the word, it's funded healthy. Um, it's not this massive pool of money that that's just sitting there. Um, a big concern we get is so people [00:04:45] around my age, in their thirties and forties. Are really concerned that social security is not gonna be there when they go to retire.

I continue to do this? Well, [: 00:05:00

Um, it's 2025, so that's right around the [00:05:15] corner. Um, that's, you know, one or two presidents away that social security could be depleted. Um, after that benefits may be reduced, so it wouldn't entirely go away, but you might get about 77% of what you would've gotten if it would've been fully funded. [00:05:30] Um, there's a lot of little fixes that can occur.

% you pay into that up to [: 00:05:45

And if we can maybe take that wage base from 1 76 up to 200 or to 2 25, that'll just further secure Social Security for the next decade or two decades. So little [00:06:15] nuances there. And if you're making two 50 mm-hmm you should be okay paying just a little bit extra in social security tax up to your wage base to help fund that.

general, by the way, and I, [: 00:06:30

So this has been kind of something that people have known about forever. [00:06:45] And I do feel like where it is, there is a problem, there is a shortfall and, and if you think about it. It's because you've got all these baby boomers, right, that are retiring and they're collecting benefits and the workforce is smaller.

pay into the system for that [: 00:07:00

Obviously, like some of those stats we gave in the beginning that, you know, how think how many people are pulling social security and how many people are so dependent on it. It, it would be political, suicide, you know, to just get rid of the program or I'd say even to cut, cut benefits. So, so you [00:07:30] talked about the wage base, they can raise the, the wage base, they could also just raise FICA taxes, right?

ng toward the fact that that [: 00:07:45

Eric Wymore: Yeah, absolutely.

kick in, you know, every one [: 00:08:00

You know, the last time they made a major change was 1984. Uh, that's when they, you know, they made, they extended some of the full retirement ages and all that stuff, and, [00:08:15] and that lasted 50 years. So, I mean, yeah. I think it's certainly, you know, precedents to show that we, we will make some kind of a change to, to extend the benefits

Jeb Graham: Yep.

to have a bunch of retirees [: 00:08:30

Eric Wymore: Yeah. No, absolutely not. And so, well, let's talk a little bit about the rules or the, you know, kind of the basics of, of social security and the social security program.

eligible, uh, an individual [: 00:08:45

That's where usually a lot of times people will say it's 40 quarters, well, it's 40 credits and you [00:09:15] can earn four of them per year. Uh, but for every $1,800 you earn a credit. So for once you hit $7,240 in, in a year, you've earned your four credits for that year. So [00:09:30] most individuals. You know, if you have a full-time job, I would say that most individuals have their four credits for the year, you know, by the first, you know, by the end of, uh, end of the first quarter of that calendar year.

Um, so [: 00:09:45

Uh, for, for one of the changes in 1984 is they kind of added some different full retirement ages. But [00:10:15] if you were born in 1958, your full retirement age is 66 and eight months, so it's coming up 1959. Your full retirement age is 66 and 10 months. And anyone over 19, uh, [00:10:30] born 1960 or older, your full retirement age is age 70.

but if you draw your social [: 00:10:45

Um, and again, how are those benefits calculated? [00:11:00] Well, it takes those, it takes your highest 35 years of earnings. So as Ethan mentioned earlier, you make, you, you, you know, you have earnings, you 6.2 goes from you, 6.2 from the employer [00:11:15] goes into that fund. You have those earnings tax and all up to your income up to $176,000 goes into that trust fund.

for most individuals, those [: 00:11:30

But what you're doing is [00:11:45] you're replacing those years when you're in your twenties. And thirties and just kind of starting off and having a lower income. So it is important to kind of generate those higher dollars towards that get calculated towards your retirement benefit. Um, and [00:12:00] then also another thing that that happens for your benefit is every year there's an a cost of living adjustment.

%. [: 00:12:15

Um, couple [00:12:30] more things. There is also what's called a, a spousal benefit. So, uh, if your spouse, let's say that individual stayed home, you know, state, right? You know, stay was a stay at home mother, stay-at-home father. [00:12:45] Uh, was out of the workforce for a number of years and then maybe got back in later. And their benefit is, it's a benefit, but it's not quite up to 50% of their spouses.

ouse draws on their benefit, [: 00:13:00

Well, this spousal benefit will allow for her benefit to be bumped up $500 to equal 50% of John doe's benefit. It's an enormous benefit [00:13:30] and everybody should be taken advantage if, if they, if they don't quite meet that 50%, uh, uh, barrier.

Jeb Graham: Yep.

Eric Wymore: Um, and I'm gonna touch a little bit on taxes. You know, that's a big thing.

ill say, all right, well, or [: 00:13:45

It just means that 50% of your benefit could go into your taxable income. Same with 85%. So there are some numbers that you [00:14:15] wanna make sure you know, that you're just aware of. If you have other income, retirement income, part-time job income, that it could affect your, retire your taxability on your social security [00:14:30] for

Jeb Graham: sure.

which is, um, you know, our, [: 00:14:45

So, [00:15:00] um. So let's, let's talk about when to claim benefits. And this is something that we work through with clients constantly. Um, and it's, you know, it's unique for every single client. But first and foremost, let's talk about, you know, kind of what, [00:15:15] what the cost of taking it early versus late and stuff like that.

. So you're, because [: 00:15:30

Um, like Eric was saying, full retirement [00:15:45] age for most, between age 66 and 70 67. Um, so if you take it early, that's, you know, at age 62, that's a 30% reduction from full retirement age. Every year from age 62 on that, you wait, you get an [00:16:00] 8% increase. Okay. So meaning, you know, if you take it at at at age 63, it's 8% more than it was at age 62, so on and so forth, all the way up to age 70.

ink we want to clarify today [: 00:16:15

Okay. Meaning if you took it at age 62 versus age 70, when would you break even on the amount that you've taken outta the Social Security system? Well, that number, a little bit different for each person, but typically it's gonna be [00:16:45] in your very late seventies or very early eighties. Okay? And what that means is, again, if you take it at 62, 65, 67.

ou, if you're taking kind of [: 00:17:00

And again, that break even is gonna be around that age 80. Now, where we as financial advisors, what we're much more concerned about is how are we maximizing your portfolio value over time and [00:17:30] how are we maximizing the utility of social security? So a good example of that is we have, and we, we deal with this.

ether they should take it at [: 00:17:45

And we're gonna show them a side by side of taking it 62 versus taking it at 67 [00:18:00] versus taking it at 70. And what a lot of people don't think about is if you're gonna, if you're gonna retire at age 62 and you're gonna wait till 67, well that's five years there that you're gonna need to pull money outta your portfolio, right?

n order to live. Whereas, or [: 00:18:15

So for instance, if you have to take an extra $150,000 outta your portfolio over that five years, well then we need to know when your portfolio catches back up to that $150,000 that you took out. A lot [00:18:45] of times that break even could be in your mid nineties, late nineties, or even over a hundred years old.

ead and take it early. Okay? [: 00:19:00

Doesn't mean that [00:19:15] you don't want to take Social Security, but it does mean that we need to account for that in the plan and still see, you know, what the numbers show and, and what's more beneficial. And then the other thing is, is we have a lot of people that do retire early and then they work part-time.

Okay? If you're gonna [: 00:19:30

So you're kind of getting double whacked there, if, if that makes sense. Mm-hmm. Because you're, you're taking a smaller benefit and part of that benefit is getting eliminated. So I think just to kind of put all this in [00:20:00] encompassing, is that the most important thing is. Is that it's not, it's unique for everybody, right?

financial advisor and to put [: 00:20:15

Some strategies [00:20:30] there. That might, uh, increase, you know, your overall financial health down the road as

base or income, you might be [: 00:20:45

Um, yep. If you're widowed, there's survival benefits. There's a lot of little nuances, um, that might not affect everybody, but they're available to everybody, so. Just to dovetail off, Jeff, [00:21:00] have the conversation with your advisor.

Jeb Graham: That's a great point. Yeah. And, and by the way, in this podcast, we've probably touched on 10% of Okay.

Yeah. Really the, the intricacies of social security. And we do go much more in depth, you know, when we, when we

eson: have a client in here. [: 00:21:15

So if you're listening to this, call [00:21:30] it, we, I love it when I get those unsolicited social security statements. I'm like, Hey, great. Thank you for the update Cost of living hit you, cost of living adjustment. Hit your, your wage wages. We'll, we'll update your plan. So if you're thinking about it or listening to this, just do that today.

[: 00:21:45

Jeb Graham: And for sure, like. We talked about this earlier too. I, I think it's so important for them to, to print off a statement. Our system will estimate it. So when we do an e-money plan for somebody, it will estimate [00:22:00] it based on their income.

'em and mm-hmm. And we love [: 00:22:15

Uh, I think, you know, half hour here talking about social security. If you have any other questions about social security, certainly give us a call. Um, 'cause we'd love, we'd love to answer 'em. And it's something that we spend a fair [00:22:30] amount of time. Time studying up on and, and learning more and more about, 'cause it's, it's, it's always changing.

odcast and we're signing off.[: 00:22:45

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