Ep. 5 - Unlocking Social Security: Timing Your Benefits for Maximum Value

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome back to the Good Steward Law and Wealth Podcast. We've got our favorite guest, Ian, here again. Um, this is one of those short-form episodes where I just wanted to give you some digestible, uh, material and some takeaways, um, on a technical topic. You know, we did the last one on revocable trusts, um, and probate. So this one is more financial side. I wanted to learn a little bit more about Social Security, um, and if you listen to Ian's last episode, he hit on it a little bit. He talked about the word provisional income that everyone's going to ask their advisors. So really, I just, I don't know anything about Social Security, although I mean, I know we get it, or hopefully we're going to get it. And I have a lot of clients that somehow make more now in retirement than they did when they were working because of they save well and they get Social Security. And really, I just thought when you turned a certain age, you started getting the checks, but there's more that goes into that decision. And that's what I wanted Ian to talk about. So, the floor is yours, Ian.

Let's do it. Well, this is a topic that I'm passionate about because there are some decisions in retirement that can have significant impacts on the quality of your retirement and really what you keep in retirement. Retirement runs on income is one of the phrases that I say. And so, how we create income in retirement, which enables you to be retired, is really important and it, in my opinion, deserves a lot more thought than some folks give it. And so, Social Security for most Americans is going to be the backbone of their retirement income strategy. And if it's not, it should be. Okay? And so, Ledly Jennings, you referenced in our episode previously, and I just want to say this again in case someone hadn't listened to that one, you know, when you're approaching retirement and you're thinking about taking, when to take Social Security, a good test of whether or not the advisor that has gotten you to this point is the right advisor to get you through the next period is the provisional income question. And so, in our previous episode, if you haven't listened to it, go back. I talk a whole lot, but there might be a couple of good things that you could learn in there. But there's a calculation related to Social Security that determines how much of it is taxable. Very important because if your Social Security could be not taxable, you would have more Social Security. This is an important question. And so, there's two types of advisors. There's really advisors that focus on growing money and there's advisors that focus on preserving and distributing money, creating income. I'm a specialist. I focus on primarily, I focus on the retirement phase of life, which is preserving the wealth that you've created and turning that into income. And there's a different skill set here. And so, if you're not sure if you're working with the right advisor, this is what I tell people to ask. And I'll explain why this is so important in a second and answer the question about Social Security. But in your next review meeting, when they're talking about sectors and funds and this, that, and the other, and your rate of return is up, go, "Hey," and do this in person. Don't do it via email. Do it in person because you need to watch what happens to their face. Say, "Hey, I'm getting ready to retire. How is provisional income going to affect my retirement?" And just— and this is hard to do, but don't say anything. And their response and their reaction is going to tell you whether or not you have the right advisor. Because if their face goes blank and they get red and they stutter, very respectfully, I want to tell you, find a new advisor. Because if they're the ones that are advising you on Social Security, and they cannot articulate how the taxation of Social Security will affect your retirement income, you're going to pay hundreds of thousands of dollars in tax over your retirement just to keep a relationship with a guy or a lady who is really nice. And very transparently, your money is more important than that. You're the only one that can care about your money that cares that much. And so, you need to have the right team around you. I said all of that to start explaining Social Security. But I think that question is that important. The decision of when to claim Social Security is a really important decision. And we basically only get to make it once. There's some caveats, but we basically only get to make it once. And it can be the difference between a couple hundred thousand dollars of income over your lifetime. And so, this is an important decision. And the way Social Security works very quickly is you get credits for working. And so, really, you need 40 quarters or 10 years of working full-time in order to be eligible for Social Security or your spouse, your legal spouse needs to be eligible. And most people in one of these situations are. And there's two numbers that you need to know. So, to simplify it, I want people to go and find their numbers. Get your numbers, you got to know your numbers, okay? The two numbers you need to know, the first one is your primary insurance amount, your PIA, okay? And what this is, is this is the amount of Social Security that you're going to get at your full retirement age. And this is your other number, your FRA, your full retirement age. And it's based on when you're born, okay? So, if you haven't, we're almost at the point where it's 67 for everybody. For some folks who are a little bit older, it was earlier, but for most people, it's going to be 67. And so the reason we need to know these two numbers is depending on when you claim Social Security, the actual benefit amount that you get could be higher or lower. And so if you claim at 62, you're going to get a reduced benefit, okay? Or if you claim at 70, you're going to get an increased benefit. Benefit. And so, very simply, what we want to figure out is when is the optimal time to claim? And most people reduce it down to just a break-even analysis. And I think that's not helpful. Okay? And so, typically, the numbers people throw out is about 82, 83. If you make it to 82 or 83, that's where the lines cross is sometimes the way you'll hear it on a graph. And really what that means is If you claim at 62, you've got 8 years of additional benefit, maybe it's $1,000, $2,000 a month that you got even though your benefit at age 70 would be higher. And at age about 82, 83 is where those numbers are the same. Now, if you live longer, then waiting to claim on paper is a better thing. Or if you don't live as long, heaven forbid, then claiming early would get your money's worth out of it. Now, I don't think that that's as helpful as people think because there are other issues, provisional income being the primary issue, which is how much of your Social Security is going to be taxable. And so, there's a calculation that determines whether you pay tax on your Social Security. That was put into place in the '80s. Think Reagan administration when this happened. And it hasn't been indexed for inflation since then. Okay, so this is a big issue. And so if we don't plan well, our Social Security will be taxable in retirement. Now, the calculation is fairly straightforward. You add one-half of your Social Security, yours plus your spouse, plus any other income. So income from IRAs and 401(k)s, if you take withdrawals from that, income from annuities, capital gains or qualified dividends. Mortgage interest, rental real estate income, even municipal bond income. Technically, municipal bonds can be tax-free at the federal or state level depending on the situation, but they still go into your provisional income calculation. And so, what we do is we add all those numbers up, half of your Social Security plus all your other income. And if you're married and that number is over $44,000 for the year, $44,000 has not been indexed for inflation. Then up to 85% of your Social Security will be included in your taxable income. So, the bad news is, in some cases, there's not much we can do about it. The good news is, if we plan ahead and we're proactive, we can potentially get it to where you don't hardly pay any tax on your Social Security. Now, there's one type of income that I didn't mention that is not included in your taxable income. Distributions from a Roth IRA or a 401(k) or loan proceeds, if you borrow against an asset, are not calculated in the provisional income calculation. Isn't that interesting? And so, the translation, here's what I need you to hear. If you hear nothing else, if we plan ahead, we can get into the 0% tax bracket in retirement if we plan ahead. That's what I want people to hear. You can be in the 0% tax bracket for the bulk of your retirement if we plan ahead. And so, typically, What people's claiming strategy is, is going to be, you know, there's two strategies and I'm going to tell you there's a third that's more important. There's the brother-in-law strategy, which is, you know, their brother-in-law or their neighbor heard that the Social Security trust is going to go bankrupt or maybe they saw it on the news. And so, they want to claim at 62 to get as much as they can. Okay? Transparently, yes, they're bankrupt. Our friends in Washington spend money like it's going out of style. But what they're going to do is they're going to tax— Ledly Jennings, they're going to tax you and me a little bit more to make sure that it doesn't stop. Okay? Let's just be real. If I can be transparent. So, that's one answer. Now, is that a good way to base one of the most important decisions in your retirement? What you think, what your brother-in-law says or what they say on the news? Probably not. You should have a more customized approach. The second approach, and I have heard this recounted to me so many times from clients that I say this, and this is the sloppy advice. Advisor approach. Okay. And when I say this, when I am helping people through retirement planning, one of the questions I ask is, what's your strategy for claiming Social Security? And that's a really important phrase because I want to hear what their ideas are and we'll figure out what is optimal for them. And if they have an advisor, one of these advisors I talked about at the beginning, typically what they'll say is, they'll say, well, our advisor told us to just claim at our full retirement age. 'Cause then if we're still working, we don't have to get a reduction in benefits. That's a whole nother show. And I go, "Oh, okay." So, that's the primary. And typically, they'll say, "This is what we tell all of our clients." So, in both of these scenarios, this is a cookie-cutter answer. One is a fear-based answer and the other one's a cookie-cutter answer. If you want to make decisions based on fear or if you want to make decisions based on what the Joneses are doing, That's up to you. In my opinion, and I think for our clients, that's suboptimal. There is a customized answer for you that we need to determine. And so the final answer is, or you could look at your entire situation and figure out what's the most important way to do it. But Social Security is a really complex topic. There's a lot of misinformation. There's a lot of confusion about it. But, and there are some claiming strategies left that are really important. And so the primary thing is that we've got to figure out is, when is the right time to take it based on your entire situation? And really what drives that is what other monies do you have? What is your income strategy in retirement? If you have to take money from a 401(k) or IRA, we need to be thoughtful about this because we might have to take more money out of the 401(k) than you think because we've got to pay tax on Social Security. It's a bit of a snowball issue here. And so I hope that's enough of a teaser. Is that okay? As always, I'm long-winded, but Um, I hope that gets us started.

Yeah, that's perfect. That's exactly what I wanted to drive home because I'd never heard other advisors talk about this until I did a seminar with you and heard you speak about it. So yeah, that's exactly it. I think the takeaway is, um, plan ahead, and it's not always the right answer to take it a certain date. You've got to look at your holistic situation, and solutions can be account structures, whether it's a Roth or a regular where you put your money and age and income, all that. But the takeaway is to plan ahead, and that's kind of what I wanted to see, that it's not just a, yeah, I'm gonna turn this age and start taking my Social Security.

You can do better, much, much, much better. Well, anyway, as always, Ledly Jennings, thanks for having me on. Always fun to chat.

Yeah, thank you. And this was the Good Steward Law and Wealth Podcast. Um, see you for the next episode.

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