The X’s & O’s
There are a lot of myths and misconceptions about Social Security and how to collect it. So this week we’ll cover some of the fundamental concepts on Social Security. We’ll talk about how to find out what your benefit amount is, the pros and cons of collecting at different ages, and is Social Security taxable?
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Brent Pasqua, Matthew Theal and Joshua Winterswyk
Brent Pasqua: Fire up that music, Matthew.
Matthew Theal: You guys ready to start the show?
Brent: Yes, yes.
Josh Winterswyk: Yes.
Matthew: Welcome to the Retirement Plan Playbook. I’m Matthew Theal the certified financial planner, with RPA Wealth Management. A fee-only investment advisory firm in Rancho Cucamonga. I’m joined by certified financial planner, Josh Winterswyk. Josh, how’re you doing today?
Josh: Doing well, Matthew.
Matthew: Also joining us, as always, the president of RPA, and social security expert, Brent Pasqua. Brent, how are you?
Brent: Doing great, and very excited to have this conversation about social security today.
Matthew: Yeah, sorry I called you the expert, I know you don’t like it, but Josh and I always joke with Brent, that he’s AARP social security strategist of the year. So, to us, this is a special show on social security. Some interesting things about social security, it was actually started during the Great Depression. And what happened was, there’s economic ruin during the Great Depression, and the older generation, and older meaning, late 50’s, early 60’s, couldn’t find work anymore. They were farmers, and the farming industry was dying in the United States.
Matthew: So, the government started a program to give them money, a retirement benefit.
Josh: Yeah, and that great introduction to social security, Matthew, and that benefit was signed in by Franklin D. Roosevelt in 1935, and the first tax for social security was collected in 1937. Brent, do you know when the first payment was actually issued?
Brent: The first payment was actually issued in 1940, and I think one of the things that is actually really interesting about social security, is when they signed that in, in 1937, do you guys know what the life expectancy was then?
Josh: No, what was it?
Matthew: What’s the life expectancy right now?
Brent: Life expectancy right now, according to social security I think, is somewhere around 82 for a male, 84 for a female. It also depends on the year that you were born. So, they have different life expectancies, sort of tables.
Brent: I mean obviously, when they signed it in, people were not living as long, and they were not going to be collecting for very long.
Josh: That’s a pretty big gap.
Brent: Yeah, it’s a completely different system than it was before.
Matthew: Something interesting about social security is, it’s been adjusted over a hundred times since 1935, with real big, sweeping changes, I believe, is it 2015, Brent, when the Obama Administration issued the new rules, or was it ’16?
Brent: So the bipartisan bill from Congress was signed in under the Obama Administration on November 3rd of 2015.
Matthew: Okay. Yeah, so 2015.
Matthew: And then finally, another interesting fact is, currently 1/6th of the United States population is collecting social security. That comes out to about 62 million people. And, I haven’t done any research on this, but my guess would be that increases with the baby boomer generation retiring.
Matthew: Brent, if I’m a baby boomer, or even a Gen Xer and I want to find out if I qualify for social security, how do I do it, what’s the qualification process look like for social security?
Brent: So, in order to qualify for social security, you have to complete, and obtain 40 credits from social security. You can essentially earn one credit per quarter. In order to receive a credit, you would have to have $1360 in earnings during that quarter to earn that credit. The most that you can earn in credits per year, are four. One per quarter, a total of four.
Matthew: So, can we simplify that a little bit? If I’m hearing you correctly, each quarter I need to make at least, roughly $1300, and if I do that I get one credit?
Brent: Absolutely. And you have to have 40 credits in order to then eventually, in the future be able to qualify for social security.
Josh: Now do those credits have to be consecutive? So, consecutive quarters?
Brent: No, people jump around jobs all the time. They could be going from a private sector job, to a public sector job. People move around, and go under different systems, so, they do not have to be consecutive.
Matthew: So, I’m going to assume that most people have probably been working, and they … I’m average Joe, I’ve been on and off jobs, like Brent mentioned, how do I find out if I’m qualified for social security, and Josh, what are the steps?
Josh: Before the internet, social security would actually mail out a statement to everyone, every year detailing not only your earnings history that was reported to social security, but if you qualified, and what the amount you qualified for at your full retirement age. Now, they’re not sending those letters out as frequently. You probably have noticed you haven’t got a letter in a while.
Josh: So, the fastest way to download your social security statement, is to visit ssa.gov. You’re able to actually download your statement, you’re able to see if you do qualify, and what your earnings history is. And Brent, I wanted to ask you, why is that important to log on, and to see if you’ve qualified?
Brent: One of the most important reasons, I think, it’s important to log into social security, is just to make sure they have your income correct for the previous year.
Brent: After your tax returns get filed, the social security, at some point will then upload your income from the previous year onto your social security. You want to make sure that’s correct. I mean, if you made $75 000 in earnings for the previous year, and they’re only posting $30 000, that obviously can impact the benefit that you’re going to receive when you’re retired. They have made mistakes many times in the past, people need to be aware to make sure that that doesn’t happen to them.
Brent: One of the things also, Josh, that … To piggyback on what you had said, that I thought was important is, starting at age 25, social security will send out your statements every 5 years. So, you’ll only get a statement every 5 years, up until age 60. From age 60, and then on, you’ll get a social security statement every year. So, you could potentially be going 5 years, I mean, it would be hard to remember what you made 5 years before, to know if your social security statement was accurate, or not.
Matthew: Yeah, the old … Aren’t they white and green, social security papers that come in the mail?
Brent: I think they may be. I just know that your full retirement age is in big, bold letters, and black at the top.
Josh: Yeah. The last one I got was in white and green, Matt. And I haven’t seen one in a really long time. It’s probably time for me to check my earnings history too.
Matthew: Me either. I feel like I’m a few years away from getting my next social security statement.
Matthew: Brent, you mentioned something really interesting to me, it’s a word I hear often. Full retirement age. And I’m sure all the listeners, you hear that as well. What is a full retirement age?
Brent: Full retirement age, is the age in which a person may first become entitled to their full retirement benefit. What that means is that, they’re entitled to 100% of their monthly benefit, based on their averaged indexed monthly earning.
Matthew: What age does that typically happen at?
Brent: So, the age ranges based on the year that you’re born. If we look back in history, people were able, actually, to collect social security at their full retirement age at a younger age. And that’s where a lot of the misconception comes in, when people are like, well, I want to retire at 65. Well, 65 isn’t really when people are now entitled to full retirement benefit.
Brent: If you were born in 1937, or earlier, full retirement age was 65, and if you were born from 1938 to 1942, full retirement age was 65, and an increasing number of months, you had to be a certain months into your 65th birthday. If you were born from 1943 to 1954, full retirement age is 66. And if you were born from 1955 to 1959, full retirement age is 66, and an increasing amount of months.
Brent: So, for example, if you were born in 1956, your full retirement age is 66, and 4 months. But if you were born in 1960, or later, full retirement age is actually, 67.
Brent: Now, I don’t know, Matthew, what your thought is, but if there is somewhere that could be changed, do you think that they’ll extend full retirement age beyond 67 for the future generations?
Matthew: Yeah, most likely they’ll keep pushing it out. I mean, I would assume my full retirement age is going to be 70 something. So, they’ll push that out, or they’ll raise the taxes collected on social security. Or, who knows, maybe we’ll get one of those universal basic income systems, and that’ll make social security irrelevant.
Matthew: Josh, anything to add on FRA’s?
Josh: No, it just seems like there’s a common theme with life expectancy, and full retirement age, and I think that downloading your statement, and understanding what your full retirement age is, is really important, then, it sounds like.
Josh: To knowing when you will receive that 100% of your benefit.
Brent: Absolutely, and I think, it is so important to know when you can collect, what your different options are, and times that you can collect, and what those different ages are. And I do think, obviously, a lot of people have fear that the system’s going to run out, and that’s for a whole other conversation that we can have at some other time.
Brent: But I think one way that they can obviously fix it, if life expectancy is increasing, then why not extend full retirement age to a later date. It is one, probably, pretty easy fix. But that wasn’t part of that bipartisan bill we talked about in the beginning.
Matthew: So, after I establish my full retirement age, I know what the amount is. Let’s call it 66 for today’s episode. I’m entitled to 100% of my benefit. How does it work if I want to collect my benefit at 62, or 63? Is my benefit less? Is it taxed more? What’s happening here.
Brent: So, if you collect your benefit earlier, if let’s say, your full retirement age is 66 for today’s show, but you decide to collect your benefit at 62. Your benefit would be reduced by about 30%.
Matthew: That’s a ton.
Brent: For the rest of your life.
Brent: So, basically, you’re going to receive 30% less than what your average earning says that you should earn for the rest of your life.
Brent: Now granted, you are going to be collecting early, and I guess, that’s something that you guys can add to is, is it worth it to collect early, and take the 30% reduction, versus collecting, waiting a few years, and getting a much bigger check.
Matthew: I mean, to me, the only way it would make sense to collect early, is if you’re impoverished, or you have some kind of terminal illness.
Josh: Yeah, I would agree. It’s based on need. It would only have to be an extreme need for you to collect that early.
Josh: And just to clarify, Brent, so, when people are looking at their social security statement, when they see, let’s say, a thousand dollars at their full retirement age, 66 for our example, then it’s 30% less of that number that’s on their statement.
Brent: Correct. That’s correct. And 30% of all people, according to recent data, collect at actually, at age 62.
Josh: That’s a lot of people that are collecting that early.
Brent: And some of the top reasons why people collected early, was what you had mentioned, poverty, health issues, those kinds of things. But 38% of people actually wished they had waited, and filed later.
Josh: Yeah, that’s a lot of people also to regret that decision. That decision is a big decision at 62, whether you’re going to file, or not file.
Brent: I mean, when do you guys think that somebody actually looks back, and is like, man, I wish I would’ve filed later, and not … When does that regret set in?
Josh: I guess, especially later in life. When you get into 70’s, or you didn’t think you were going to live that long, and now your social security benefit was reduced by 30% when you’re 75, 80 years old.
Brent: Right. Or you’re 72 years old, you can’t go back to work, or you don’t want to go back to work, your social security check isn’t cutting it anymore, you’ve drained some of your assets, and you still have just that small check from social security.
Josh: Yeah, or your assets run out.
Josh: Matthew do you have anything else to add to that?
Matthew: Well, so, we’ve been looking at the case of early, 62. Josh, what happens if you don’t collect your benefit between, after 66. For the year 67, 68, 69, 70, 71, 72. What’s going on there?
Josh: Well, if you wait after 66 to collect to benefit, it does grow. Brent, what’s the growth rate after 66?
Josh: Perfect. So, every year after, if their social security statement says a thousand dollars, that thousand dollars is growing at a guaranteed 8%, every year you delay your social security from 66 to 70.
Josh: Now, when you hit 70 though, great question about it. What happens at 71, or 72, and I’m still working. Well, at 70 you’ve maxed out. That’s the most you can get. I believe, Brent, correct me if I’m wrong, about 132% of your benefit is the max you can receive … ?
Josh: From social security. So at 70, it would make sense to make sure you file, because you’re not getting more out of the system after that date of birth.
Matthew: Yeah, funny story about that. Back before you were working at RPA, Brent and I were doing a social security workshop, and we met a man who was 74 years old, and he was fairly wealthy, and well off, and he hadn’t collected social security yet. He had just let it pass by, and so, he had 4 years of checks that the government was just keeping in there, essentially, the social security trust fund, and he’ll never get that back.
Brent: Yeah, and it seemed like he just said, I don’t need it, why should I even collect it? But at the end of the day, he missed out on 4 years of payments at his highest rollout period, and he’ll never be able to go retro back that far.
Matthew: And even if he doesn’t … If you don’t need it, I mean, give it to charity.
Matthew: Would you rather have the government disperse your money, or would you rather get to choose, and disperse it out to charity?
Josh: That’s a great point.
Matthew: So, Brent, if I decide to collect social security at 64, that’s the age that seems right for me, it’s a little bit before my full retirement age. How long do I have to change my decision?
Brent: You have 12 months to be able to change your mind. If you do change your mind, then you would have to pay back all of the benefits that you’ve received in one check, and then you could change your election, your filing election.
Matthew: So, let me get that straight. I could take it back, I have one year, 12 months, but I have to write a check to the government, to pay back my benefits, is that correct?
Brent: Absolutely. And then you can change the way that you filed, and the time that you filed for your social security.
Josh: So, if I have regret about when I collected my social security, I hope I didn’t spend all that money, because I have to write that check back to the government, to then reelect my social security date.
Brent: Yeah, and let’s talk a lot about times that that actually can happen. So, let’s say that you’re 63 years old, you retired, you went and filed your benefit earlier. And then all of a sudden you decide … Your company calls you back, and says, we want you to consult with the company now, so, they hire you back on. You don’t really want your social security, because your social security’s going to roll back up at that growth rate. You’re going to have earnings again, and you don’t want to pay taxes on your social security, so then-
Brent: You get hired back from your job, and then, next thing you know, your benefits start rolling back, but you got to pay that back in one lump sum check.
Matthew: You mentioned something really interesting, we haven’t touched on it yet. And this is one of the more common myths I see when I’m working with clients. You said social security is taxable?
Brent: Yes. So, social security is taxable based on different earning limits, most people don’t know, but yes, your social security is, and most likely will be taxable depending on how much money you earn?
Matthew: So, they’re taxing my paycheck …
Matthew: Right now. And putting my money into a trust fund.
Matthew: And then they’re dispersing that money out to me, and taxing me again on it?
Matthew: I love America.
Brent: I mean, it’s the old double taxation.
Josh: And it’s funny, because I think that, whenever we work with clients that are, maybe not as close to collecting social security, and we talk about social security taxes to them, when we’re projecting their social security, and income, a lot of people don’t really know that. Would you agree?
Josh: With your experiences about social security, and them being taxed?
Brent: Yeah, and the biggest misconception is, is that, let’s just say that your full retirement age amount on your social security statement is $2400 a month, most people think that they’re going to get $2400 a month. But then you got to deduct your Medicare payment, and then you have taxes on your social security. So, you’re really not going to receive $2400 a month, that’s going to be a reduced amount.
Brent: We could probably have an entire show just about how social security taxation works, and those limits, those requirements, because there’s so many factors to that, but if you are taxed on social security, it will most likely be reducing your benefit.
Matthew: Besides regret over-collecting your benefit, because obviously, if you do it at the wrong age, you could have some serious regrets, and cause some serious financial problems, which is why collecting social security is really serious. Are there any other mistakes, or myths out there that you guys see?
Brent: Most people will think, or many people think, that the time to start collecting to receive your increase, you have to wait ’til the next year, of your next birthday. For example, you do not have to wait ’til your next birthday to receive your increase in you social security. Each person can collect social security 96 different times, from 62 to 70.
Matthew: That’s a lot of times.
Brent: Absolutely. And every month you’re delaying your benefit, you would be locking in a different monthly benefit for the rest of your life.
Matthew: That’s incredible. Josh, anything to add? Social security sounds like one of the better annuities money can buy, right? It’s the same concept.
Josh: Yeah, yeah. Absolutely. Just with a lot of guarantees. But I think, to answer your question that Brent just answered too, one of the biggest mistakes that, I think, we’ve all talked about, and that I really feel strongly about, is making sure that you watch out for all of the advice out there. Whether if it’s from family, whether if it’s from friends, or colleagues.
Josh: Just because social security, as Brent mentioned too, has so many laws, so many different times to collect, so, just making sure you’re getting your social security advice from a reliable source, is one of the mistakes that I definitely see working with clients.
Matthew: Friends and family advice is my favorite kind of financial advice. I love it when a client comes into my office, and say, hey, my buddy or co-worker, across the street, he said I need to do this, or do that with my money. So, I’m going to do this.
Josh: Yeah. It always seems wrong, for some reason. They’re always wrong.
Matthew: Yeah. Don’t take financial advice from your friends, family, or even co-workers.
Josh: Let’s put some numbers on this real quick. So, let’s say, that you were going to collect social security at 66, and your statement for your full retirement age amount was a thousand. So, you’ll receive a thousand dollars a month, for the rest of you life, if you’re going to collect social security at 66. Just a baseline, easy number to go off of.
Josh: But let’s say, you decided to collect early, and you started collecting social security at 62, you would approximately collect $750 a month, for the rest of your life, by starting early. So, about $250 less per check for the rest of your life.
Josh: If you waited ’til 63, you’ll receive $800. If you waited ’til 64, you’d receive $867. Now remember, you do not have to wait ’til your next birthday to collect, or get that higher amount. Each month you delay, you can collect a higher amount. So, it continues to roll up. Now, if you waited to 66 to 67, you would receive 108% of your benefit, because you get that 8% increase, and you’ll receive $1080 a month. If you waited ’til 70, you’d receive $1320 per month, guaranteed for the rest of your life.
Matthew: Yeah, that’s great to put some numbers behind it. In my opinion, it’s beneficial if you’re of the means to wait to collect social security to at least your full retirement age. And then, after that, from the ages of call it, 66 to 70, I mean, you’re getting an 8% guaranteed. Find me an investment that gets you 8% guaranteed.
Josh: Not in this interest rate climate.
Matthew: Yeah, there are none. They don’t exist. I mean, maybe they do on a Sirius XM Radio ad, but it’s not today’s investment climate. Josh, what are five key takeaways from today’s show?
Josh: I’m going to start with the first key takeaway is, knowing your full retirement age. We talked about logging into ssa.gov, or looking at your statement. That’s always going to be the first step for when you’re making that social security decision. I think secondly, is going to be understanding your spousal benefits too, and I think, we’ll probably talk a little bit more about that in a future episode, about spousal benefits, and how, a spouse can collect off each other, and that whole process. But understanding spousal benefits is another key step in that social security decision.
Josh: And, you don’t need to stop working to collect social security benefits either, I think that’s a common misconception about social security is that, you have to be retired, or stop working to collect it, that’s also not true.
Josh: And then delaying your claiming can pay off. So, you talked about that guaranteed roll up, so, understanding the roll up percentages with social security benefits, and when you need it, and to plan around that, because those roll up percentages can pay off long term.
Josh: And then lastly, just understanding the taxes behind it. Those are our key 5 areas that we like to focus on with our clients, but also, just are very important for anyone making that social security decision to be mindful of.
Matthew: Brent, any parting thoughts?
Brent: One of the things, I think, also, that’s important to know is, social security calculates your benefit based on your averaged index monthly earnings. It’s during the 35 years in which you earn the most. They use a formula to calculate, how they calculate your full retirement age amount. But that is an important factor, it goes back into what we originally talked about in the beginning, making sure your income statements are correct on your social security benefit statement, because you want to make sure that when they’re calculating that formula, you’re going to get the amount that you’re actually deserved, and what you paid into the system.
Matthew: Yeah, so, essentially what you’re saying is, make more money, get higher benefit, correct?
Brent: That is absolutely true.
Josh: I agree.
Matthew: Well, that’s a great way to end today’s show. Thank you for joining us on the Retirement Plan Playbook, I’m Matthew Theal, certified financial planner. I was joined by Josh Winterswyk, certified financial planner, and as always, our social security expert, and president, head honcho, Brent Pasqua.
Josh: Thank you, Matthew.
Brent: Thanks, Matthew.
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