There are a lot of questions people have about Social Security, and the biggest problem with learning about Social Security benefits is that there is a ton of information out there. Most of it says the same thing: wait as long as possible to start collecting benefits. Supposedly you’ll get more money if you wait until you’re 70 years old.
Many of us nearing or at retirement age believe that for every year we wait to start collecting Social Security, our benefits will increase by 8%. However, this belief is misguided, and there are many misconceptions about Social Security. Let’s explore some of these misnomers.
Misconceptions of Social Security
People tend to think that Social Security is going bankrupt, but there’s no real trust fund. It’s just a debit in the books of our United States Treasury about what Social Security owes. However, Social Security is set up as pay-as-you-go, which means that I’m still working and paying into Social Security to finance the benefits of those who are already collecting it. So, if you’re collecting social security benefits now, there’s not some large pot of money sitting around for you to collect from. You’re actually collecting that money from the workers that are currently working, and that’s just how it works. So, for those of you that are under the impression that Social Security is going to go broke by the year 2032, that’s not really how it works.
We do have a demographic issue where there aren’t enough young people to finance all the benefits that have been promised. For instance, I’m 60 years old, but it’s highly likely that Congress won’t continue to approve Social Security benefits. Why? Who votes the most? The people that vote the most are retired. Retirees are the biggest voting block and believe me, politicians know where those votes come from. So, it’s unlikely that Social Security benefits will be cut or will not be able to be financed for at least a little while. It could, however, cause a problem with taxation. Now, I have a son that’s 32 years old. He’s my oldest. I have four boys. The youngest is 23 years old. I’m telling them, “Don’t count on Social Security. Don’t plan for Social Security. Do your own retirement planning.” But if you’re over 55 years old, I don’t think you have to worry about getting your Social Security benefits.
Let’s back up to some of those misnomers I talked about a little bit earlier, the fact that you should always wait till your age 70. That is not the case, but part of that has to do with a lot of factors. One of them being, how long are you going to live? If you’ve waited until age 70 to collect Social Security and you die at age 72, you’re going to leave a lot of money in the system. So don’t pay attention to those magazines in the grocery store that tell you everybody should wait until they’re 70. That is a mistake.
Social Security is an Asset
Now, here’s the most important thing you need to understand about Social Security: Social Security is an asset. You need to look at it just like another account in your whole financial picture.
A few years back, I did a calculation on the value of what my Social Security benefits are, and the value is about $400,000. Now, don’t think of it that way because then you think, “Well, I’m just going to get a monthly check.” But if I looked at how much money I would need to pay out that monthly check that I’m promised based on my life expectancy?: It’s $400,000. And if you had an account with $400,000 sitting in it, obviously you would look at that as an asset.
So, we want to make sure that we view Social Security properly. It’s not just this monthly payment, that’s how it manifests itself, but it is an asset and it’s very important that you look at Social Security with that in mind.
Withdrawal Strategies
Withdrawal strategies are also important to consider and there are a number of factors that go into determining a withdrawal strategy. Life expectancy is one of the most important factors to consider. Another question you might have is: when should benefits be taken out? And if married, should both spouses collect at the same time?
You need to think about how you want to withdraw the money, and when. This is partially based on my life expectancy, but it’s also influenced by the fact that my wife, Wendy, is three years younger than me. That means if I start collecting at age 62, she can’t yet collect because she’s not at age 62. If I wait until age 70 to start collecting, when can she collect?
Should Wendy collect at the same time I do? Maybe not. She could collect at 62. We don’t really need the money, but if we want to trigger getting some money out of the system that we’ve paid in for so many years, maybe she should collect at age 62. Maybe I should wait until age 70.
Why? Remember, if I die first, she gets my survivor’s benefits. And statistically speaking, if we’re both in approximately the same health and were both the same age, she’s going to outlive me by seven years. So maybe I want to give her the biggest survivor’s benefit possible by waiting to collect. But she could collect under her own benefit and then get my survivor’s benefit if I die first, or just get a benefit calculated on mine once I start collecting.
It gets a little complicated here. But again, the point is: don’t just walk in blindly to this and say, “I ought to wait as long as possible.” That’s not necessarily the case. Now, let me just say, some of you have heard about these withdrawal strategies called File and Suspend, and so-on and so-forth. For most of you listening to this, it’s too late to do that. Those rules changed when we went back and we had some law changes just a few years ago, and you can no longer play this game. It wasn’t really a game; It was a strategy. But you can no longer play this game where I file for my Social Security benefits, then I say I don’t want my benefits, but then Wendy files based on my benefits and gets her own check. And then later on, when I collect my benefit, she switches over to my benefit. Sounds a little confusing, doesn’t it? Well, it was, but there was sort of a workaround of the system that Congress closed the gap on a little while back. So, we can no longer do some of those sophisticated strategies.
When to Collect Social Security
Now, the biggest issue is: When am I going to collect? And am I going to collect for both me and my wife at the same time? Or should one of us wait? The next thing we want to talk about is when we should collect Social Security.
But let’s get back to that life expectancy issue. See, a lot of people think “Well, gee, if I wait, I’m going to get a check that’s 8% higher or 7% higher.” That’s not really how it works. And let me give you an example. Let’s say I was to collect my benefits at age 62 and let’s pretend my check is going to be $1,000 per month at age 62. But if I waited until age 66, let’s just say to keep the math simple, my check was going to be $1,200 a month. So, I said, I’m going to wait until age 66 to get my $1,200 a month. It seems like I’m getting a bigger check, right? But I gave up four years’ worth of checks, so I might have to live until age 78 or 80 to make up for all that time. I waited, getting the smaller checks. Does that make sense? I gave up four years of $1,000 checks just to get a bigger check at age 66. Why is this so important? Well, it’s important because if you don’t live long enough, to about 78 or 80, it doesn’t make any sense. It does not make any sense to wait. So, again, this is where we get into this life expectancy issue. It’s different for people.
It also different depending on how much money you have. For instance, the wealthier you are, maybe you should collect early because you don’t need Social Security to take care of you when you’re 80 or 90. And you might not want to leave that money in the system, which, by the way, is very important.
Let’s pretend for a minute right now you’re sitting there, and you’ve been retired for a few years. You need an additional $3,000 a month of income and you haven’t taken Social Security yet. So here I’ve got this choice. I can either take it out of my 401(k) or I can take it from Social Security. Which should you take it from? My theory is, and I’ve seen this bear out over and over again, is you have a lot less control over Social Security than you do over your 401(k).
So, I would lean towards taking it from Social Security. Go in against that wisdom that says to wait as long as possible. As you can tell, this gets a little bit complicated. And I know for some of you, I might have lost you because we’re talking about a lot of details here. But I want you to understand that Social Security is a very important asset. The decisions that go around it need to be taken very, very seriously. It needs to be looked at in the context of your whole financial situation.
People make the mistake of looking at Social Security like it’s this isolated thing. Should I collect? Should I not collect? Should I wait? Should my spouse collect at the same time as me? Don’t look at it like this isolated incident. Look at it as part of an entire financial plan.
Taxes on Social Security
What about taxes? None of us like to pay more taxes than we’re supposed to. And yet, many of you are. Social Security can be taxed if you collect it before your full retirement age. For most of you and myself included, again, I’m 60 years old. My full retirement age is age 67. If I collect Social Security before 67, I’m going to pay this penalty tax if I’m still working. So, this is one of the kind of taxes and again, I said it’s going to be taxed if you collect before your full retirement age. There are other taxes in here. But right now, what I’m talking about is penalty tax. If you’re still working, you probably shouldn’t collect Social Security early, because if you make more than approximately $18,000 a year and you’re collecting Social Security, you’re going to have to give some of that Social Security back. That’s something I’m calling a tax. They call it a penalty, but in my mind, it’s a tax.
The other piece of Social Security that’s taxed is if your income is a certain level, you’re going to pay taxes on your Social Security. And people say, “Hey, I already paid taxes on that money.” Well, yeah, you might have paid taxes on that money, but you’re going to have to pay taxes on it again. If you are a married couple and your provisional income is over about $50,000, including Social Security, you’re going to have to pay taxes on that Social Security. You want to try to reduce those taxes. Again, this is part of putting Social Security into the context of a full financial plan.
Social Security as Part of a Financial Plan
We started by talking about how Social Security is an asset. The mistake people make is they look at Social Security in a silo. They don’t take into account their other assets. Maybe it’s a pension, maybe they got several for one case. Maybe they have an inheritance coming. Maybe they’re a beneficiary of a trust fund. Maybe they want to give money away to their kids while they’re alive. Maybe they want to put money in an irrevocable trust and lose control of it for the benefit of their kids or grandkids.
There are so many different moving parts here, and we’ve got to look at Social Security as part of a full financial plan. If my Social Security is worth $400,000, I better be careful the way I take that money out. I want to minimize taxes. I want the timing to be right, and the only way to do that is talk to a financial professional that knows all the ins and outs.
Working With a Financial Professional
One of the big advantages of working with a financial professional – let’s just take our firm, but we’re not the only firm out there. There are plenty of good firms. One of the big advantages is they’ve seen people just like you retire over and over, person after person.
You only have one retirement. A good financial firm that specializes in people that are about to retire has seen, perhaps, like us, 1,000 to 1,500 families retire. We know what your life is going to look like three years from now, five years from now, and ten years from now from a financial standpoint. We don’t know exactly what it’s going to look like, but we have a lot of wisdom because we have so many clients that have gone through that. So, it’s so important to talk with a professional, get that timing right, and make sure your other assets and your other accounts coordinate with your Social Security.
