Today, Rick Bloom is joined by Scott Whyte of the Bloom Asset Management Team. Scott walks us through all of the ins and outs of social security, explaining:
As always, Rick answers listener questions. Today he tackles the idea of using cash on hand to pay off a mortgage, and whether it's OK to leave more of your estate to some of your kids, and less to others.
As always, if you have a question for Rick, you can email him at:
Find Bloom Asset Management on the web at http://www.bloomassetmanagement.com/
Rick: Hello and welcome. I'm Rick Bloom and welcome to Rick Bloom Talks Money. I'm an attorney certified public accountant. Financial advice. You guys are the goal of our podcast is real simple. To help you make better decisions with your money. Cause I believe money looks better in your pocket than it does anywhere else.
Independent financial advice. That's what you're going to get from this podcast at all times. And no geek speak. We always talk in simple, plain English. So you can understand always, I remember that on our podcast. Okay. It's for you. If you have questions, email me, Rick at Rick Bloom talks, money dot com is our address.
And at the end of every show like this Swan, we're going to take some of your questions. We all know that the COVID has had an incredible impact on our society. And one of those impacts, many people have lost their jobs, and many people are continuing to retire at an earlier age because their job situation.
And that's why I thought it was important. So talk about social security to make sure that you understand, because it is important that you have a game plan when it comes to social security. And when it comes to social security and office, our co two guy is Scott Whyte. Scott sits on our investment committee, which means he's actively involved in all our strategies and.
Selecting the funds in our portfolio and the management. And so when it comes to social security, we always want to talk to Scott White Scott. Good afternoon. And thanks so much for joining us today.
Scott: Oh, sure. Thanks a lot for having me join Eric.
Rick: I think you would agree right off the bat. Social security is so important to people that you just can't do.
What your next door neighbor does. You have to have a strategy for yourself that works for you, not what works for everyone else.
Scott: True. And, I'll tell ya the reason for it is that there's, variety of working parts, as you mentioned, if your next door neighbor has the same exact situation to you in almost all aspects of their life, then maybe it would make some sense.
But I find that most people, even if they work with the same job and are roughly the same age, there's going to be a lot of other various factors that impact when they should draw social security and what makes the most sense for them. So it truly is an individualized.
Rick: And one of those things is health.
your health situation certainly enters into deciding when you take social security. So it's important that you take a variety of things into consideration. And Scott, what I want to do is go through some of the general concepts about social security for people to understand. And one of them is full retirement age.
It used to be, you turn 65. You automatically that's when you collected social security, but it's not that way today. So can you explain what full retirement ages?
Scott: Sure. So full retirement age, it's basically a bit of a moving target. Based upon when you were born. And so to me, there's really a couple of brackets to look at, which is for those folks born between 1943 and 1954, this tends to be the bulk of people that we run into in our business.
The full retirement age is 66 years. And what's interesting about that is this is really the last year. Where it will be cut and dry like that for people. In other words, if you're 66, you're essentially turning full retirement age in this year for sunburn now back in 54 and then where it gets different and will be more interesting.
I think next year is that for people born between 55 and 59, it varies. So it's basically 66 and two months for each year, between 55 and 59. So you could range from 66, from two months, all the way up to 66 and 10 months. And then for folks that were born in 1960 or later, Like myself, I, the full retirement age of 67.
And so there really is a bit of a range there. And, the reasoning behind it, I think is important to look at is that as people have aged, there's one way to look at it, or health has improved the social security administration found that it was important to set that full retirement age just a little bit later to acknowledge the fact that longevity has been increasing for people.
Rick: Let's raise facts when social security was implemented back in the thirties, I believe 65 was looked at a good long life. Today. We look at 65 and say, round two.
Scott: Oh, sure. And the importance of full retirement age, which I don't think I really said that, that's when you're really going to get, what's considered your full retirement benefits from social security.
And it's an important issue because you can take social security earlier than your full retirement age. In fact, you can take it as early as age 62 on the one month. the first full month that your age 62, but there's ramifications to drawing early. So if you were to draw it early and as early as 62, for those people that were born earlier, you're going to have a reduction of 25%.
The only benefit that you receive from that full retirement benefit. And that's a reduction for the rest of the time that you're receiving it on the flip side, if you were to go the other way, and instead of taking out full retirement, you actually delayed. You can earn what they called delayed retirement credits all the way up until age 70.
And if you do delay until age 70, instead of seeing a 25% reduction in your benefit, you're going to see a 24% increase in your benefit. And here again, that increase is for the rest of the time you received the benefit
Rick: inner also can affect your spousal benefits. It's also a factor. How much of a cost of living adjustment you get.
So when someone takes it at 62 and let's say, they're like you, Scott, their normal retirement age would be 67. Their full retirement age would be 67. They're only going to get 70% of their benefits. If they waited till age 70 to collect. They get like 124% of the benefit. Correct. So it is a substantial difference.
And that's why it's important for people to know what their full retirement age is. But also to know the consequences of either delaying your social security or taking it early. There is a significant financial impact. One of the other questions that always comes up with social security is the idea is can I work and collect social security?
And that's always a little different as well. It's not the same rules for everyone.
Scott: No, it's true. typically what I suggest if someone is planning on working is that they really delay drawing social security, but it partly depends on how much they're going to make while working. So in other words, If you are below your full retirement age and you start collecting the benefits, you're going to lose a dollar of those benefits for every $2 that you earn.
If it's over a certain threshold amount in 2020, that amount is $18,240 a year. I looked at it and say, if someone was 62 and they're earning say $40,000 a year, Generally, that's the kind of scenario where I'm going to recommend that they don't start collecting because realistically they'd lose a significant chunk, having so much in earning above that threshold.
The numbers are a little different though in the year that you turn full retirement age, you can earn up to a higher threshold in the months prior to reaching your full retirement age without losing any benefits. For 2020, that amount is 48,600. So it's a pretty substantial amount, but it'll make a difference where your birthday falls during a particular year.
it's interesting as I looked at it and say that someone has a January or February birthday really doesn't make probably as much of a difference what they are. And they're going to be below that amount. Someone who was born in December on the flip side is really going to have to watch that.
And then once the worker reaches their full retirement age, They can earn whatever they like, and they're not going to lose a penny of benefits after that.
Rick: And that is significant. It's also important just to bring up when we talked about, those benefits increasing. After 70, your benefits don't increase if you delay your social security.
So really for most people, there's no reason to delay their social security past the age of 70, because it's not going to increase your battery.
Scott: I would agree with that completely. And it doesn't matter whether you're single or have a spouse or, married, divorced you name it. It's all is going to make sense to, as soon as you hit age 70, if you've delayed that long.
So start collecting. Otherwise it's just money that's lost and frankly, you're never going to get it back.
Rick: a lot of people say, I'm going to take it at 62 because I'm going to collect more in the long run. If my life expectancy is normal life expectancy. And that's really not the case because when you do the math, break even is somewhere in your late seventies.
And for most people. They're not old in their late seventies. And so I think for the majority of people, they should be delaying their social security, at least till full retirement age to be exceptions for those. Obviously, if you're in a situation, you need the income. But also, as I mentioned earlier, life expectancy, if you have issues and your life expectancy is.
Below normal than it probably does pay to begin collecting a SoulCycle.
Scott: And that's an important point. Rick, that's probably the one or reason where I might suggest. In fact, I have in a case or two suggested that someone dropped before their full retirement age is where they had significant life threatening conditions going on.
But otherwise the break even age, delaying from 62 to full retirement age at 66, tends to be about 1876. In other words, what that means, or by that point, you'll have reached enough benefits that you've received to make up for the fact that you've skipped those prior four years. And for someone that delays all the way until age 70, the breaks even it's on the bubble, right?
Between age 78 and 79. What's important to consider with that too, is we didn't really talk about this much yet, but Cola or cost of living increases apply with respect to social security. most pensions don't have that. And to me, it's one of the most valuable benefits of social security. The fact that it is going to rise during your retirement when you're receiving the benefits.
And when you draw early, you have to think about that your base is smaller from which Cola is going to add to when you're delaying all the way until 70, that base amount is significantly higher. So in other words, I had a client that I spoke with earlier this week, when we were way on the numbers.
And we showed that if she drew as early as she could at age 62, she would only be entitled to about $2,000 a month. And yet, significant jump at full retirement age of 66. But if she delayed all the way until age. 70 for benefit would increase to 3000 a month. So there's literally a thousand dollar difference.
And again, when you think the call was, even though the percentage increase might only be two or 3% a year, it starts to add up over time when your base is significantly higher. To start that from
Rick: no question. And for a lot of people, I tell them, even if you have to take from your portfolio to reduce that somewhat.
It is worth it to delay your social security until you get full retirement benefits, because you're getting an 8% increase per year on your benefits by delaying between 62 and full retirement age. And that is a substantial I'll tell you one situation where I recommended someone take it early is we had a client and they were diagnosed with Lou Gehrig's disease and their life expectancy was not that great.
And so at that point, I said, we should take sole security cause there's really no downside to it.
Scott: Oh, it makes a lot of sense. and we talked about, the idea of drawing early. Sometimes people do draw early and then, they might've just made up that decision on their own today. I want to take it early and then sitting down with an advisor like us.
We say, maybe that wasn't the best option. And the good thing is which many people don't know about is there is an option to actually reverse that decision as far as drawing it early. But there's a real key to that. You can change your mind if you claim to relate, but it has to be within the first 12 months of claiming your benefits and the way that works within that 12 month window is that.
You can essentially turn the benefits off as if you've never taken them, but you have to pay back the social security administration, every penny of what you received up until that point.
Rick: And that could be a problem for lots of people.
Scott: It could be, especially when you think about it, if they've spent that money already, that could be a challenge.
And so if they felt like they made a mistake and they missed that 12 month window, And they're still below full retirement age. Believe it or not. There's a second chance because what you can do is once you reach full retirement age, you can choose to spend your benefits. And so as an example, so you start drawing benefits at 62 and you meet with an advisor and one 64, and they say you shouldn't have done that.
two years later, 66 you can suspend. And in some ways earn back that mistake. Now, when you suspend at age 66, you don't have to pay back anything. Use feed. You would stop receiving benefits and then it's time between then and age 70. You can turn them back on, but by having blades, once again, you're getting those delayed retirement credits.
So it's interesting. When you think about it, somebody draws a 62 feels, they made a mistake. Doesn't get it in the first 12 months. So they decide to suspend a 66. Okay. Spend all the way until I'm 70. They're basically right back when you do the math on it. So works out to be that added seven days North central received their full retirement benefits.
So it's interesting. They won't have gotten as large of a benefit had they just delayed all along, but at least they can get back to some reasonable number.
Rick: So for those of you who took social security at 62 and realize you made a mistake, there is opportunities to correct it. And to put yourself in better footing.
Know, Scott, a lot of people are confused with social security. You mentioned about the give backs, one for every $2 Ernie, give a dollar of benefit back. But that's separate from the tax issues. People sometimes forget that social security is subject to income taxes.
Scott: Correct. And I don't want to play a convoluted, but it's a real weird sort of approach that they use with that because unlike most tax situations that there's some indexing over the years, there really isn't when it comes to taxation on social security now the right side.
That no one is going to pay tax on more than 85% of their social security. So right out of the gate, you get a nice break. Instead of being taxed by 100%, it could be a lower amount, but it depends on what your combined income is. And so what the tax folks look at is combined income is essentially your adjusted gross income plus.
Non taxable interest. So think of muni bonds, muni bond interest, plus half of your social security benefits. So you add those up and then depending on where you fall is going to determine how much of it's tax. So for someone who's single head of household or qualifying a widow or widower, 50% of the benefits are tax.
If their income is above 25%, 85% of benefits are tax. If their income is above 34,000 and for married filing jointly, similar arranges, 60% of the benefits are taxed. If your income is above 32,000 and even 5% of benefits are tax. If your income is about 44,000,
Rick: and it's always important when we talk about these rules of social security, they're not immune to change.
They can change and they have changed over the years. And so it is always important that you stay current with changes in social security. And that's certainly something that we will keep you informed on this podcast. As social security rules change, we will certainly update you on those because it is important.
And again, I always tell people you don't ever want to let the tax tail wag the dog. You don't want to make decisions just for tax reasons and tax reasons alone, but taxes are important and you have to be aware of them when it comes to social security. Scott, for as long as I've been in this business, which is longer than I want to think about right now, everyone has said social security is in trouble.
It's going out of business. People should take their benefits early because they're going broke. And I've heard that for last 40 years. It just seems that gets overblown because they're not going to let social security go
Scott: wonder. Oh, that's true. I don't think they will at all. If you're looking at the social security statement, but benefits statement that you received, it will typically mention a couple of dates in there.
And what's interesting about it is they have a date for when the social security fund will be depleted. it's generally 20, 30, six or 2037, but. That big time and getting moved out. I remember when the depletion date was in the 20, 20 it's only a few years from now. And what happens is that the fund is funded through con workers.
And so the more workers we have, the more that can fund into it. And then it's obviously drawn down by the number of folks retiring, but I feel fairly confident that because of the changes in Piper withholding, that'll tend to continue to stave off this essential depletion base. So when you looked at it, there's a cap right now on earnings, so that if you make, over roughly about 135,000.
You no longer are paying into the social security fund. So it's only, from dollar one up until that amount. And then, over that amount, you basically get a break. They're not paying FICA and that number has continually moved up because it is getting index. And so what I'm finding, I don't remember.
There was a time when that, like the limit. It was well below a hundred thousand 75 or $76,000 at my earliest remembrance of it. And so I looked at it and say, it's grown significantly just during my career. And I expect some penalties to happen for things like that will push off. when social security is depleted.
But I think also that from a political standpoint, social security is one of the few government programs that works very well. And I think that. our politicians bottom line and we'll find a way to keep it going for a longer period. Potentially know, increasing that cap amount or other things.
But I think for most people that are in their fifties, sixties, seventies, the older, they really have nothing to worry about when it comes to getting the benefits they feel they deserve and are entitled to coming from us. when I look at forties and thirties and younger, might be a little bit different, maybe some of the things the politicians will make could be.
reducing some of those benefits or even pushing back the full retirement age further. Like it would not surprise me if instead of a, age 67 being a full retirement age, they might come up with a further date for folks that are in my kids' generation, who were born in the nineties. And the two thousands would not surprise me one bit.
Rick: I agree with you a hundred percent and I will tell you this. According to the government, 87% of people on sole security needed to pay their bills. The government's not going to fail those 87% of the people. So I would tell you for those of you who are getting ready, thinking about collecting social security.
Don't make your decision based upon that social security is going out of business. That doesn't make sense.
Scott: And I do hear that a lot. Rick, it's surprising even to this day, I hear people will say that a lot. When we start talking about social security. Scott, I want to take it as early as possible because it's going bankrupt.
And then we get into this whole conversation that now you shouldn't worry about that.
Rick: Scott probably where it makes huge difference with social security is on spousal benefits. And I think there's all sorts of confusion. Can you explain how spousal benefits work when it's a non-working spouse and when there's a working spouse?
Scott: Absolutely. Yeah. A lot of people aren't aware of, the ins and outs of that, but it's fairly straightforward in that poor a non-working spouse to receive benefits. The number one requirement these days is with the spouse that they're applying against their work record. That spouse must be receiving benefits already.
So there was a time when that didn't need to be the case, but these days let's us call him or her worker spouse. The worker spouse means to be receiving benefits and then the non-working spot, or it may even be the spouse that was owning lots. They can at full retirement age, apply for a benefit that is equal to 50%.
Of the working spouses benefit and it doesn't take away from the worker spouse's benefit. It's just how they calculate that number. And they can also draw for a spousal benefit as early as age 62. But again, there's a permanent reduction that goes into place. So instead of getting 50% of the battle, the non working spouse would only receive 35%.
So even if you're applying for a spousal benefit, There is that incentive to wait until your full retirement age to maximize it. There used to be what they would call a restricted application. It's still available for those born, before January 1st, 1954. So there's a few situations that I run into where, restricted application allows a spouse that may be on left.
So it couldn't be a non-working spouse. Would it have to be a spouse with earnings, but what they might do. Is file a restricted application when they reach their full retirement age and collect the spousal benefit online. And what they're doing with that strategy is they're allowing their own benefit to delay until age 70, getting those, additional delayed retirement, my credits.
And so where that can work out for a couple, it could be age 70 benefits. It's going to be more than 50% of the spousal benefit. There's definitely a scenario where that works. In other words, you can say, Hey, I'm going to get at least something between age 66 and seven days, but I'll get my maximum benefit by waiting until I reached age 70.
Yeah. So the interesting thing about that, as I said, it's only available to those born prior to January 1st and one then back in 2015, and that's, I think what caused a lot of confusion, but it'll get a lot simpler. One of the things that I look forward to is 20, 24. And the reason for that is that anybody who is eligible for that restricted application, We'll have a doubt.
In other words, reached 70 at some point in 2023. And so in 2024, we won't even be talking about restricted application and it'll just be real simple. There's the spouse that you're applying against receiving benefits, then yes, I can do it. And then it's a matter of, do I want 50% at full retirement age or less?
If I draw sooner? And in
Rick: today's worlds, it's possible that with both husband and wife working that their benefits are really the same pretty close. And you could do a strategy where one takes at their full retirement age and the other one delays till, 70. So couples can. Work together to make sure they're getting the most, social security benefits they can.
But Scott, what happens when someone passes away?
Scott: So that's a great question. And we tend to encounter it most, thankfully when both spouses are already collecting social security and when that's the case, it's very straightforward of the surviving spouse. Just collect the higher of the two benefits and.
Of course benefits the lower one. If that's the case just goes away. So higher earning spouse passes away, lower earning spouse. Yep. But, and I'm going to put those away lower earning spouse passes away. That benefit just disappears. Hi, Ron. Expose who's the survivor just continues to collect their own benefits.
There's really no change there now. If they weren't already both collecting social security and we see this, rarely, but it does come into play. We have to decide whether you want to pay a survivor benefit earlier. Most of the time I'm recommending the people again to wait until full retirement age, but you can draw a widow or widower benefit if you happen to be below age 60.
at the time of that death, you can get that benefit as soon as a 60, but you're subject to a permanent reduction. So it's a sliding scale that is 60 a to draw. You're only getting 71 and a half percent of the survivor benefit all the way up until full retirement age, where you'd receive a hundred percent of the survival benefit.
Rick: And it's also possible for an ex spouse to collect through their old spouse.
Scott: There is. And the key to that, there's a couple of issues, but the most important one that I think is worth noting is that you have to have been married for at least 10 years. And as long as you were married, at least 10 years to the ex spouse, And you're currently on married.
You can then apply for that X powerful survivor benefits in much the same way.
Rick: the bottom line, Scott, it is important that you make the right decision was sole security that you have a strategy. Not that strategy. What's good for the next year or two, but really what's good for the next 20, 30 years for your retirement.
And it is important for spouses to collaborate and to make sure they're both on the same game plan, Scott, on that note. Thanks so much for joining me. Any final words you want to say on social security,
Scott: don't believe what you read on the internet most of the time. Cause there's a lot of misinformation.
There's a lot of, I'll say, quote, unquote, advisors that try to make it more complex than it is. We're saying that, there's a hundred thousand different ways to draw social security. It's important to kinda avoid a lot of that noise and seek out advice. If you feel you need it from a qualified financial advisor or professional, that knows what they're talking about, and we're always happy to help anybody with those decisions.
Rick: thanks so much for taking time to join us today.
Scott: Thank you.
Rick: And on that note, what I'd like to do is get to some of your questions that we had, from Tim. Tim says that he is retired and although he works part time just to keep busy social security and pension more than covers all his living expenses.
I have $150,000 in cash, and I don't want to make any other investments. He has enough in the stock market. He likes to keep cash. What his question is, he wants to know, and he knows it's too much to keep in cash. Should he take $95,000 and pay off his 5% mortgage to me, Tim? It is a slam dunk. You should take $95,000 out of your $150,000.
And pay your mortgage off. Think about this. Your cat is getting less than 1% and you're paying taxes on that money. The 5%, your pain, you may not even be writing your interest off anymore. So you look at it purely financial you're increasing your return by, 500%. So I think it is slam dunk. That you should pay off that mortgage.
And I would tell that to anyone who is sitting on a lot of cash, Cassius and pain, anything these days, he should look at debts that you have to pay off. Particularly if you have a charge card debt 18 and a half percent versus the 1% taxable, it's slam dunk. So I would tell you, Tim, without question, you ought to pay that mortgage off.
It's going to increase your cashflow. Every month, you could use our cash flow to put it back in cash and replenish that money. But I think that when you factor in the majority of people no longer write off their interest on their homes. And when you consider that cash in the bank is paying just a fraction of what interest rates on the mortgage for most people.
It makes sense from Joanne. I have three children, two of my children do very well. Financially. One is not doing so well. Is there a problem. If I don't leave money equally to my children, I want to leave more to the child who has less, what's the best way of doing this? Joanne, I will tell you without question, you can do it.
It's your money. The key is to make sure that whether you do a will or a trust, you put that provision in it. It is 100% legal and lots of people do it when I deal with clients in those situations. I always go back to when the kids were growing up and I said, if one child needed braces, you had to spend $2,000 on braces.
Did you put $2,000 in the other kid's account offset it? And of course the answer is no, because you gave each according to their needs. And I think the same way applies upon death. You need to look at what the needs are, the children are, and there's no problem explaining to your children ahead of time, why you're doing what you're doing.
I think when it comes to estate planning, communication is key. But the key to remember, Joanne, you can do that. Again, you should make sure it's clear in your will or your trust. So on that note, I want to thank you so much for, joining me. I enjoyed it. Hope you did too. Always want to remind you if you have any questions, you want me to answer any comments on our podcast and he guess you want me to get, feel free to email Rick at Rick Blum talks, money.com.
Thanks so much for the company by now.