Ep. 4 - Getting the Most Out of Social Security

John Bever |

Deciding when to start claiming your Social Security retirement benefits is one of the biggest decisions you need to make in the year you retire.  In this episode of The Year You Retire, hosts John Bever and Jim Uren will help you discover how you can get the most out of your individual Social Security benefits. With a laid-back and personable tone, they delve into key considerations such as the irrevocable nature of Social Security decisions, the earnings limit, timing of benefit payments, and the advantages of delaying benefits. Offering practical insights, the hosts stress the importance of individual factors like health and life expectancy, while also outlining how delaying benefits can lead to higher retirement income. This episode serves as a valuable resource for individuals nearing retirement age, whether they are just beginning to consider Social Security planning or seeking to optimize their retirement income. Listeners are encouraged to tune in and gain essential knowledge on making the most of their Social Security benefits.

In this episode, you will:

  • Learn how to maximize your lifetime Social Security retirement income.
  • Discover the benefits of delaying Social Security for a higher payout.
  • Understand the key factors to consider when delaying Social Security.
  • Explore alternative income sources to support delayed Social Security.
  • Understand the importance of Social Security in your overall retirement income plan.

The key moments in this episode are:

00:00:05 - Introduction

00:01:10 - Basics of Social Security

00:01:30 - Working While Receiving Benefits

00:03:09 - Importance of Making the Right Decision

00:04:25 - Factors to Consider for Timing

00:14:30 - Earnings Limit and Reduction

00:15:11 - Earnings Limit based on Retirement Age

00:15:50 - No Reduction After Full Retirement Age

00:16:28 - Timing of Social Security Claims

00:17:44 - Financial Impact of Early Claiming

00:29:21 - Importance of Delaying Social Security Benefits

00:30:52 - Alternate Sources of Income Before Social Security

00:32:45 - The Goal of Never Running Out of Money in Retirement

00:33:41 - Reasons to Not Delay Benefits

00:36:16 - When to Start Planning for Social Security

Discussed on the Episode

Social Security Administration – https://www.ssa.gov/

“The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund” – https://www.ssa.gov/OACT/TR/2022/tr2022.pdf

“How Does Media Coverage of Social Security Affect Worker Behavior?” by Laura D. Quinby and Gal Wettstein – https://crr.bc.edu/wp-content/uploads/2021/10/IB_21-17.pdf


2023: What Issues Should I Consider with My Social Security Retirement Benefits?



Jim Uren: This is The Year You Retire podcast for people who want their first year of retirement to be right on the money. Your hosts are me, Jim Uren and John Bever, CERTIFIED FINANCIAL PLANNER™ professionals with Phase 3 Advisory Services. Retirement is one of the happiest times of life, but getting the most out of it requires you to be properly prepared.

Listen along as we explore the financial topics, tips, and strategies that will help you make your first year of retirement your best year yet. Now let's get planning.

John Bever: Welcome to episode four, “Getting the Most out of Social Security: Looking at your Individual Benefits.”

Jim Uren: Yes, so today we're going to, as our title implies, we're going to look at individual benefits for Social Security.  Kind of the 101 of Social Security. We'll do a future episode on benefits based on other people's work history that would apply to you if you're married widowed or divorced.  But today, in the interest of time, we're going to focus on the basics.

So what we're going to cover today, we're going to cover a number of things. We're going to cover the basics; like how do you know if you qualify for benefits? How much will you receive? When can you start receiving your benefits? And how much those benefits will go up or down depending on when you start.

We're also going to find out if you can work while receiving benefits, and if so, how much can you earn? We're going to discover when most people do start to choose, when most people do choose to start their benefits. We'll find out how to know exact, the exact day of the month that your Social Security check will hit your checking account.

We're also going to discuss the taxation of Social Security benefits and something called the tax torpedo and how you can help protect yourself from getting hit by this pretty hefty torpedo. And we'll discuss, uh, some of our views on the timing of starting your benefits and what factors you should consider when deciding when to start Social Security.

And then we're also going to share with you how you can get a copy of a flow chart that'll help you think through issues that you should consider when deciding when to start your Social Security benefits.

So, John, for people in that first year of retirement, the year you retire, Social Security is a really important decision.  Why is that?

John Bever: Well, it's very important because once you make the decision, you're done. You do have a small window of time where you can change your mind, but for the most part, this is an irrevocable decision. So you've got to get it right the first time.

Jim Uren: Absolutely. And, and you're right. There is something called the withdrawal of application.

So if you do make an election, you can undo it within 12 months, but you have to pay back everything you've taken out. And John, as you know, 60,000 employees, roughly, work for the Security Administration. And how many, tell our listeners, how many of those 60,000 employees can legally provide you advice on how to maximize your benefits for your situation and goals?

John Bever: I think the exact number is zero?

Jim Uren: Exactly. None. Exactly. So, they can tell you the forms you gotta fill out to do something, but boy, they are not legally allowed to give you advice that would actually help you maximize your particular situation. So, you can't undo it once you make a decision, really. And no one there can really provide you some good advice, so really it's on you to make sure that you know what's going on and, uh, and help you make the right decision.

And when we crunch the numbers, uh, provided to us by the Social Security Administration, we find out that on average, most people are missing out on tens of thousands of dollars over their lifetime in these benefits based on the decisions they make. So I'm sure you've run into that, John.

John Bever: Yes, I have.

In fact, uh, one of the most interesting things is we can't even show people in black and white. Here's the difference, if you claim this way versus that way, you'll have more money. But for some reason, there are those situations where people just have an emotional tie to a particular age when they want to start Social Security.

And, uh, so it's been an interesting topic to see. No lack of information. There's plenty of information out there. So what we really try to do is distill that down into a very easy decision that people can make. And it does change. Health can affect the time when you collect your Social Security.

Jim Uren: Yeah, it's not a one size fits all, but there's some general principles that we'll get into today that can help you decide when you're going to turn on those benefits. And as most of you probably know, I mean, Social Security has been around a long time. It was originally signed into law in 1935 by President Roosevelt.

It was hard to think, John, that we're not too far from the 100th anniversary of Social Security.

John Bever: Right, yeah.

Jim Uren: And of course at that time you had to turn 65. And life expectancy at birth at that time was actually less than 65. So, you know, most people... Um, didn't necessarily, well, most people, yeah, didn't live till age 65 based on, you know, birth.

But even, I was trying to look at some numbers, and even I think people in their 20s. I just thought, well, what about people who were in their working years?  Because theoretically they should have a larger life expectancy. The numbers I found still had life expectancy for working adults also still less than 65.

So at that time, you know, this was not a lot of people who were likely going to ever see a Social Security check. But, uh, it, it was designed to obviously provide a need for those who are particularly old. Imagine 65 being so old back then.

And of course, at that time, mostly it was men in the workforce.  Primarily women stayed home and that's why there was a benefit provided to spouses who didn't work. And so we're not going to get into that too much today, but that's a future episode, but something to, something to keep in mind. So, if you're ready, John, we can hop into the meat and potatoes.

John Bever: Yeah, let's go ahead and get rolling here.

You know, it's interesting if we followed that same principle, I guess we would be claiming Social Security around age 82 or 83, something like that.

Jim Uren: That's about what it would be.

John Bever: Yeah. Fortunately, it's less than that. So Jim, how do you actually qualify for benefits?

Jim Uren: So you need what are called 40 quarters or 10 years. So four quarters in a year, of what's called qualified or covered employment in order to qualify for benefits. Covered employment simply means most jobs where they're going to withhold Social Security taxes from your paycheck. Again, that's most jobs.

Exceptions would include sometimes government positions.  So for example, some teachers in states like Illinois, do not pay into Social Security. And so any work that they do in that job does not count towards their 40 quarters. Now, to earn a quarter, in 2023, you only have to earn $1,640. So if in 2023, let's say this year you worked a job and you earned $6,560 over the course of the year, that would count towards four credits.

So you don't have to earn a ton of money. You don't have to work full time. Even part time employment can help get you those credits to qualify.

If you are one of those people who did have a job for a while that was not paying into Social Security, it's important to understand that there's something called the Windfall Elimination provision that could apply to you.

And that simply means the benefits as stated on your Social Security statement may not be quite accurate because it assumes that you did not have another government pension. But if you've got a government pension coming in, you need to adjust that. We're not going to get into the specifics of that today, but if that does apply to you, you need to be aware of that.

John Bever: So I don't have to work all four quarters in a year, as long as I reach that $6,560?

Jim Uren: Exactly. So if you could get that in one week of work, uh, then you've met your four quarters.  You've actually earned four quarters for a year. It's based on dollars, not hours.

John Bever: Okay. Dollars, not hours. Yes. So how's my benefit determined and where can I get an estimate?

Jim Uren: So the benefit is really based on the average of your highest 35 years of lifetime earnings, and it is adjusted for inflation. You know, so that job you had when you were in high school, we know it didn't pay much compared to what it would pay today. So they do bump that up.

Inflation increase, by the way, in 2023, was 8.7%. And that was the cost of living, because your benefits that you receive each year, you do get a cost of living adjustment. So recipients in 2023 got a pretty big boost compared to most years.

Now to get an estimate, the best place, of course, to go is to the Social Security website which is ssa.gov. You can request your benefit statements. We do encourage you to look at those every year and confirm that the earnings listed were correct. If for some reason there's a year it doesn't show you worked and you did, it's better to contact Social Security and get that error fixed because, of course, it's based on the average of your earnings, and if you've got a missing year, that's going to bring down your average.  So make sure you check each year to make sure there are no errors.

John Bever: I had a client many, many years ago that when we checked his history, there were four years that were missing. Turns out his employer never turned in the Social Security taxes. And we were able to find that by looking at his work history.

Unfortunately, Social Security goes back three years to change any errors, but that was very important for that client to find that out.

Jim Uren: Yes, and that's a big error, and that's why it is important to check every year to make sure you're getting those credits.

John Bever: So, Jim, when can I retire under Social Security?  What is my full retirement age?

Jim Uren: So, not an easy answer. It does vary based on, of course, the year you were born because they've made changes along the way. But if you were born in 1960 or later, your full retirement age is 67. That's when you, is what's considered your full retirement. That's your normal retirement age.

If you were born before 1955... Your full retirement age is 66. Now you've noticed some missing years there. So if, if you were born between 1955 and 1959, your full retirement age is a little bit more complicated. It's going to be somewhere between age 66 and 67. You can kind of look that up, but that just gives you an idea of what your full retirement age is.

John Bever: So, uh, here's a little quiz for the listeners to just think about. My full retirement age is 66 and 10 months. What year was I born? So, when can I start my Social Security retirement benefits, Jim?

Jim Uren: So, although your full retirement age is going to be somewhere around 66 to 67, you can actually start as early as age 62 in most cases, and you can delay starting as late as age 70.

Now there is one exception. If you're a widowed spouse, you can collect benefits based on your deceased spouse's work history as early as your age 60. That's a pretty unique exception, but based on your own work history, you can start as early as age 62.

Now, why wouldn't you just always start at 62?  Because of course you don't receive your full benefit. So as an example, if you had a full retirement age of 67 and you started your benefit at age 62, they're going to reduce your benefit by 30%.  A 30% reduction. And that reduction applies not just that first year. That reduction basically will continue on for the rest of your life.

Now, on the flip side…

John Bever: That's a big penalty.

Jim Uren: It is a big penalty. It lasts forever. And if on the flip side though, you go past your full retirement age, they’ll actually increase.  They'll give you a bonus for delaying. Now that bonus is 8 percent per year that you wait, up to age 70.  After you hit age 70, there's no point in delaying benefits any further.  You're just literally giving up free money. And so, but by delaying, you can actually see a boost.

So as an example, let's say your Social Security benefit was $2,000 at your full retirement age of 67. So if you start at 67, boom, you're going to get two $2,000 a month. Now, if you had started though, if you decide to start early at 62, that $2,000 is now only $1,400.  So you're going to get $1,400 every month.  Now you still get a cost of living every year, but you still are going to be down a lot of money every year.

Now on the flip side, if you have a $2,000 benefit and you wait until age 70 to start, your monthly benefit at age 70 is going to be $2,480 roughly. That's over a $1,000 difference between someone who starts at 62 and 70.

And yes, you do end up collecting eight years earlier. And so for a while you're ahead, but most of our analysis shows that your break even age is somewhere in the early 80s. It's earlier than most life expectancy. In other words, most people are better off delaying benefits and we'll get into that a little bit more later in the show.

John Bever: So what if I'm going to collect my benefits, but I still want to work Can I still work if I'm receiving those Social Security benefits?

Jim Uren: Well again, our favorite answer is it depends.  So there are some circumstances in which your Social Security retirement benefits can be reduced if you're working while receiving benefits. And again, this is working income. It doesn't apply if you've got other sources of income like, you know a pension coming in or interest on your portfolio, that sort of thing.

So I kind of think of it in three phases. The first is the years before you reach your full retirement age. So the years before you reach your full retirement age, you're allowed to earn about $21,000. It's $21,240 in 2023. That number does. increase for inflation each year. But if you start to earn more than that amount, they're going to start reducing your Social Security benefit.

They're going to reduce it a dollar for every 2 above that limit. So if you earn, let's say $31,240 this year, and you had started your Social Security benefits, they're going to take that $10,000 earnings that you earned above the threshold, and they're going to dock you $5,000 from your Social Security benefits. So that's the years, the years before you retire.

Now you get a little bit more in the year you actually hit your full retirement age.  That year, in 2023, if that's this year, you can earn more. You can actually earn up to $56,520 in the months before you hit your full retirement age. So, if you hit your full retirement in February, You could pretty much earn 56, 000 in January without a reduction.

If you're like John and you've got a late, late in the year, birthday, December, you can still only earn $56,520 in that year of the year you reach full retirement. So sorry, John, you can't earn that much, uh, that year.

And of course, after you hit your full retirement age, this was not always the case, I believe this might've actually changed on the Clinton administration, but once you do hit that full retirement age, you can earn as much money as you'd like. There's no more reduction in benefits and that doesn't matter whether you, um, you know, started benefits early or not. Once you hit that full retirement age, earn as much as you want. So that's what you need to know if you're going to claim benefits while working.

John Bever: So when do we find that most people actually start their Social Security?

Jim Uren: So it does vary, but the Social Security administration publishes data for us every year. And it's interesting, but in the last roughly 20 years and looking at it on average, about 38 percent of people actually start as soon as possible at age 62.

Now, some years it's been as low as 25%. It's actually been a little lower lately. Some as high as 50%. It seems to fluctuate a little bit sometimes based on what's happening in the economy. So you can imagine, if things are not going well and people are getting laid off, they're more apt to start.  But generally speaking, a good chunk of people take the money immediately.

Now, only about half. wait until they're full retirement age to start collecting. So although a bunch of people take it right away at 62, you still have some more people taking it at 63, 64, 65.  Half wait till full retirement age.  Very few wait beyond that.  The latest numbers, maybe up to 5% will wait until age 70 to delay.  So very few people do it. Most people start it early. 

Now, I did crunch some numbers, so based on the average Social Security benefit, which is around $2,200 in the latest, the latest numbers. Based on that number, and based on when we see people take their benefits, I'm estimating that the average person misses out on between $50,000 and $100,000 of benefits over their lifetime, kind of depending on how early they start and their gender.

So women, you know, women tend to live longer, so getting a penalty for early, early starting Social Security actually is a little bit more costly to a woman than a man because you're more likely to live longer and that penalty would apply longer.  But anyway, that's a pretty significant amount of money over your lifetime, fifty to a hundred grand.

And there is a study that I looked at that showed that media coverage can actually lead to claiming benefits earlier. So, if you start to see news coverage on the Social Security Trust Fund maybe running out, that sort of thing, that can start to cause some, some worries.

And we're not going to get into all that now, but there's certainly some, some valid concerns there because in 2021, Social Security started sending more money out than they started taking in. And so, the latest estimate is about 2034, that we’ll theoretically be out of money in the trust fund and the government's going to have to do something otherwise benefits could be cut.  Could be reduced by about 23%. So not an insignificant amount, but, we can do a whole show, a whole podcast series just on shoring up Social Security.

So it's not an illegitimate concern, but the more hype around this, the more it kind of scares people to start taking money right away and that may or may not be. in their best interest.

John Bever: Yeah, there's a lot of solutions out there that could be used so we’ll have to see what happens with that. So assuming they're going to be there and continue to pay the checks, when will my check be deposited, Jim?

Jim Uren: So this is a question we get, because if it's the year you retire, you're getting down to the nuts and bolts here.  When am I going to get my money?

The way it works is Social Security benefits are paid out the month after they’re earned. So let's say you want to start your benefits at 67, your full retirement age, and that you turn 67 in March, uh, of the year, you would receive your first check in April.  So it would hit your account in April. And so you're always kind of a month behind, so to speak, on your Social Security check.

Now, what day of the month do you get paid? Well, it's going to depend on your birthday. So if your date of birth is between the 1st and the 10th of the month, you're going to get paid on the second Wednesday.

If your birthday is between the 11th and the 20th of the month, like mine, I will get paid when I start my benefits on the third Wednesday.

And if you're a 21st or later, which I believe you are, John.

John Bever:  23.

Jim Uren: Well, you're just, you're just getting hurt all over the place today.

John Bever: I am.  I lose again. 

Jim Uren: You’ll get it the fourth Wednesday of the month, John. So you, you're almost waiting two months after you're eligible, but that's how it works. So the Social Security deposits hit on Wednesdays. It just depends on your day of birth as to which Wednesday of the month you get to spend that money.

John Bever: So I get questions on this all the time. In fact, I just had one this last week. The client said, wait a minute, last month I got my check on the 16th. This month. I got it on the 19th. What are they doing? Thinking it was going to come on the same date of every month. No, it's the Wednesday.

Jim Uren: Yep, absolutely.

John Bever: So when I get those benefits, Jim, then how are they taxed?

Jim Uren: So this, this, unfortunately, gets very complicated. So first the good news.  Most states, and I say, most states do not tax Social Security benefits.  However, there are 11 that do. And in looking at which ones, it's kind of an interesting mix. You would think maybe it's all the blue states.  No, it's actually a pretty good mix, some red states, some blue states.

Illinois, Indiana, Wisconsin, in which we have a lot of clients, those states do not tax Social Security benefits. So, and of course there's a lot of states who just don't have income tax, so they're not going to tax anyway. But the upshot is most people do not have to pay state taxes on their Social Security benefits, so that's good.

Now, this is where it gets complicated. Is there a tax, a federal tax on your Social Security benefits? Well, it depends.

 John Bever: Our favorite phrase.

Jim Uren:  No matter who you are, there is a tax advantage on income from Social Security compared to most other income. And that's because the percent of your benefit that's going to be taxed is anywhere from 0% up to 85%.

So for a number of people, none of their benefits are taxed.  For a very, very wealthy person with lots of other income, only 85% of their benefits are subject to taxation. That's not an 85% tax rate. That just means if you have $1,000 of Social Security benefits that month, $850 would be claimed on your tax return as taxable.

So, now, the taxable portion.  This is where it gets a little complicated, but the taxable portion of your Social Security depends on your individual or, if you're a couple, what's called your provisional income. So, that is basically your modified adjusted gross income plus half of your Social Security benefits plus any tax exempt interest.

So, I'll say that again. Your modified adjusted gross income, half your Social Security benefits, and your, any tax exempt interest you have. That would typically be like municipal bonds. Now, there are thresholds. So, as your income rises above particular thresholds, it's subject to taxation. Now right now, for single individuals, if your provisional income is under $25,000 or if it's under $32,000 for a couple, you're not going to pay any tax on your Social Security benefits.

Which is great. Now, a higher portion of your Social Security income though, once you start getting above those numbers, does become subject to taxation. And it gets a little complicated, but this leads into something that is often referred to as the tax torpedo.

John Bever: And what is the tax torpedo, Jim?

Jim Uren: Well, the tax torpedo refers to a situation, and it's due to the way that Social Security benefits are taxed, where your marginal tax rate can become much higher than your actual tax bracket.

John Bever: Come again?

Jim Uren: Let me try to put that into English, okay?  So, let's say you're single, and you're in a 22% tax bracket. You would think that earning an extra $1,000 would cost you about $220 in federal taxes, right? Cause that's 22% of a $1,000. Unless it would push you in a different tax bracket, but typically that's what we would anticipate.

Marginal tax bracket is basically, the definition of that is what would the tax be if I earned extra dollars, right? So if I earned an extra $1,000, if I'm in a 22% bracket, typically, my marginal bracket would still be 22%. However, although typically that would be correct in this case, that extra $1,000 of income may also increase your provisional income, which means that the IRS is now going to make you take a larger portion of your Social Security benefits and claim those as taxable income.

So in this scenario, that extra $1,000 of income can cause an extra $850 of your Social Security benefits to be taxed. So 22% tax on $850 is $187. So your extra $1,000 of income could cost you the extra $220, which is the normal tax bracket tax, plus an extra $187, which is the new tax on your Social Security benefits, which totals $407 in taxes on $1,000 of extra income.

Now, if you're doing the math, that's a rate of over 40%.

John Bever: Ouch!

Jim Uren: Yeah, that's pretty high, especially for someone who doesn't have a large income. So, you know, the tax torpedo can mean a person earning about $40,000 a year could pay the same tax on an extra $1,000 of income as could someone who's earning $500,000 or more a year, so possibly even more.

And so that's what that tax torpedo is. You think it would be hitting the very wealthy.  It doesn't. It's actually the opposite. It hits that middle class. And so it's very important to understand what that tax torpedo is and what you need to do about it.

John Bever: Yeah, so we actually spend quite a bit of time working with this and engineering the situation so we don't hit that tax torpedo or try to minimize the effect of it as much as possible.

So Jim, what are the techniques that we can use to avoid the tax torpedo?

Jim Uren: So there's a few things that we can do. So one of those is just even delaying Social Security for a while. There's obviously the benefits we discussed in doing that. So that helps avoid the tax torpedo for a while.

Also keeping income under those thresholds that I mentioned earlier. And so what we do is sometimes in retirement, as you can attest to John, although we plan a certain amount of money every year, you get years where there are surprises, right? The roof leaks, you need a new roof. So client calls you maybe they're 69 and say, “Hey, I need an extra $10,000 this year.  Where do I get it from?”

Well, of course, the first thing that we have to be careful of is the tax torpedo. If we say, “Take it from your IRA,” they may get hit with the tax torpedo. So we've got to crunch those numbers and it may make sense for you to take that money, maybe from a Roth IRA, which wouldn't be subject to taxation.  Or maybe from a what's called a non-qualified account, kind of a regular taxable account.  Or out of a checking account so that it's not creating taxable income for you.  That can be another way to avoid the tax torpedo.

The third way we can sometimes do this in the long run is doing some Roth conversions in certain years.  Particularly maybe before you start Social Security, so that down the road we've got more options for income that would not generate taxable income and lead to getting hit by this pretty hefty tax torpedo.

John Bever: Right, and those Roth conversions can be very useful in years way before the year you retire. So it's helpful to plan ahead if you are young enough to be able to do that. Specifically, Jim, how do these strategies work?

Jim Uren: So, and let me just say one more thing about the Roth conversion.  Of course it could do the opposite, right? If you're not careful, your Roth conversion could cause the tax torpedo.

John Bever: Yes, that’s correct.

Jim Uren: And so you just have to be careful. It can be a, both a preventative measure and a bad measure depending on your situation.  Bottom line, the biggest strategy that we like to recommend is delaying benefits as long as possible and this is why.  John, how many investment products out there now guarantee an 8% increase with zero risk that you know of?

John Bever: I think, I think I saw one on the internet Jim.

Jim Uren: Right, right, and I wouldn't give them any money. So, I mean, a guaranteed 8% increase with basically no risk because it's backed by the federal government.  That's a hard benefit to beat. You know, I wish I had a way to generate a guaranteed 8% interest. There isn't such a thing. And so getting that 8% increase by delaying each year is what makes a big difference when we project out your retirement plan. And of course, with Social Security, those benefits last a lifetime.

You may not live to life expectancy, you may live well beyond, right? Life expectancy just means half the people are dead at that point. The other half are going to go beyond that. So, if that's you, if you delay Social Security, that benefit you get, those what are called delayed retirement credits for waiting, those stick with you and benefit you every year the rest of your life. And the longer you live, the more those benefit you.  So that makes a big difference.

The other big perk of delaying the benefits, if you are married, if you've got a spouse who has a benefit lower than yours, upon your death, that surviving spouse, actually, their benefits go away, but they get to keep your benefit. They keep the highest of the two benefits.

And so, when we work with a lot of couples, we take whoever has the highest Social Security benefit, and we have him or her for sure, in most cases, delay starting Social Security. Why? Because whoever dies first, the surviving spouse will get the benefit of those delayed retirement credits. So, that's important.

Another key principle to keep in mind, though, that people for some reason just get confused on, is delaying benefits is not the same as delaying retirement. So I'll say that again, delaying benefits is not the same as delaying retirement. So if we're recommending you turn on Social Security at age 70, that doesn't mean you can't retire at 65, right?

It just means we're going to look at some alternative sources of income. John, what are some alternate sources of income that you use with clients to help make up that income gap between the time they retire, let's say at 65 to the time we're going to turn on Social Security at 70?

John Bever: Well, one source can be non-qualified savings, having a large savings account or a large non-qualified stock or bond account where they can pull from.

Another one might be gifts from parents. If the parents are still living, sometimes they're trying to move money on before they pass on or to plan for potential end of life care. So those gifts could be accelerated if the parents know about that particular situation.

Certainly part-time work. In fact, I have many clients that they get to that retirement age, but they're really not ready to stop, but they really don't want to be, you know, hitting the grind every day with the high intensity work.  They want to do something that they love. In fact, I have, two clients that I can think of right now that they went ahead and got the job at the golf course. Helping the groundskeepers, not making very much money, a little bit of extra income. And of course, it's something that's very fun for them.  And then they get a discount on their golf. So a lot of different possibilities.

Jim Uren: Yes. Almost unlimited options. But I find it can be a mental block for some, right, John, because we're asking them to spend their own money and forego kind of free money from the government. And that kind of, that's hard to do for some folks.

John Bever: Yes, it is. I have a case that I'm working on right now where it's that very thing. And we've shown them how they money in the bank account will last over the next three years and allow them to avoid that tax torpedo.

Jim Uren: Absolutely. Cause it, you know, when we crunch these numbers, which is of course a big part of what we do on a day to day basis for a lot of our clients.

You know, these make a big difference.  And you know in retirement, probably the most common retirement goal for most people is to never run out of money.  I mean, that's kind of the bottom line that, you know, if you do a hundred financial plans probably about a hundred people have that near the top of their list, right?

I do not want to run out of money in retirement.

And with Social Security, that helps you by delaying that.  No matter how long you live you can't run out of that Social Security money.  And it helps actually, even though we were asking you to spend more money in those early years of retirement, it statistically actually makes it more likely for you to spend less of your money over your lifetime. 

And it's, it's a little bit counterintuitive for folks.  But once they kind of see the numbers, most people get it. So a lot of our clients do end up delaying either their own benefit or one of the two spouse’s benefits till age 70. Now John, however, that doesn't make sense in 100% of the scenarios. What are some reasons that someone may not want to delay their benefits?

John Bever: They might not want to delay their benefits if they have health issues. And so they will be able to achieve a higher overall withdrawal, let's say from the Social Security trust fund, getting that money over a period of, let's say that they've got a short life expectancy of maybe 10 or 15 years.

Of course, that does depend if you're dealing with a spousal benefit where you're trying to maximize that dollar amount to the well spouse who will survive that spouse that is not well. That's probably one of the most common ones that I come across where we would perhaps turn on Social Security earlier than expected.

Jim Uren: Yes, and there are of course some folks that if that's literally their only option for income, so you get laid off at 62 you have zero savings that may be your only option. I guess you have to do it. 

Another one that comes to mind and it's pretty unusual, but becoming a little more common, if you happen to be that age of 62 and you still have some children at home who are under 18.

The reason I say that is, when you turn on your retirement benefits, Social Security, if you have minor children at home, they'll pay you an extra benefit for those kids. So it is possible in some scenarios where someone may get more money by starting early because those early years will pay more because of a benefit for a child then they'll get in the later years. Again, unusual, but these are the situations you have to think through.

John Bever: I think I'm going have to talk with my wife, Pam, about that potential.

Jim Uren: Yeah, if you guys could adopt some children, just before retirement, that would be a great way to earn some extra money.

John Bever: Yeah, right.

Jim Uren: Let me know how that conversation goes.

John Bever: Okay, I will. Maybe not.

Jim Uren: So, you know, some other options, if you have a real unusual situation where you've got income coming in later in retirement.  I don't know, maybe, uh, you're part of a business that's going to be sold when you're 70 or 75.  And so you, you just need to cover a gap. It's another possible reason you might not delay Social Security.

And the other one I kind of alluded to, if for some reason your spouse has a higher benefit than yours, there is some benefit to delaying and we'll sometimes still delay both spouse’s benefits, but sometimes we'll still turn on the one spouse’s benefit either at full retirement age or a little bit earlier.  Again, it depends, but you get the biggest bang for the buck by delaying the spouse with the highest benefit.

Anything else you want to add on the Social Security front, John? 

John Bever: Well, just a question here. So when would it be best to start the process of thinking about this and planning about this?

Jim Uren: It's a good question. Of course we would suggest starting the process of thinking through retirement, the earlier, the better, right? I mean, that's probably one of the most common comments we get from people. I wish I had talked to you guys earlier. And so certainly from that standpoint, but yeah, as you approach retirement, you know, once you're getting close to that year you retire, this is a key decision that you need to make, because this is going to determine how much money you're going to need to be pulling out of your portfolio.

And the right Social Security decisions can actually help reduce the stress on that portfolio. So we encourage folks to start taking a look at this as early as possible. You're going to be checking your Social Security statement ideally once a year anyway, even if you're in your 20s, to make sure that they're not making any errors.

And if so, that you get those fixed right away. But we like to start thinking through this pretty early, as early as possible. Would you agree, John?

John Bever: I would, I would. So, uh, don't wait until that year you retire. If you're listening to this and you're still years away from that year, you retire, start planning for it right now.

Jim Uren: for it right now.

That pretty much was getting to wrap up our show, but I do want to encourage our listeners, if you found this helpful, please like this podcast and subscribe to the podcast, The Year You Retire. That is very helpful to us and hopefully helpful to you so you don't miss future episodes.

For any show notes, you can go to our website at phase3advisory.com/podcast. That's phase3advisory.com/podcast. And, uh, in those show notes, we're also going to have a way for you to get a copy of a flow chart, which is going to be entitled, “What Issues Should I Consider with my Social Security retirement benefits.”

So that's going to help you think through some of these factors we discussed in terms of when you want to turn on your Social Security. And of course you can always contact us. John, maybe you can just real quick. We've got some software that we utilize that helps run literally thousands of scenarios for Social Security to help us advise clients on when to take Social Security.  Do you want to just mention that real quick?

John Bever: Yes, it's very savvy. In fact, they've named it Savvy Social Security. And the point of that is to maximize your Social Security benefit. And it's, it's very robust. We would need your Social Security history, excuse me, the income history that is covered by Social Security.  Plug that in and we can actually run a lifetime scenario. We can look at different life expectancies and determine what is the best claiming strategy for your particular situation. It’s very helpful software. Most regular financial planning software does not include a robust feature like that, but this one does because it's using the actual Social Security calculations.

Jim Uren: Yes. And it's very helpful because there's lots of exceptions to rules, lots of different, you know, things that apply to some people and not others. And this software helps us identify those factors that might apply to you and really gives us help as we advise clients on their Social Security timing.

John Bever: It’s been really helpful the last couple of years where there's been a lot of changes in the Social Security system, uh, on several different fronts.

Jim Uren: Well, great. Hopefully it's been a helpful episode.  John, I know we like to close out every episode by talking about what we're thankful for.  What are you thankful for today, John?

John Bever: well, today I am actually thankful for good roads. They're doing a construction out on Lake Cook Road, one of the main roads into our office here, and it's a little bit of a bear right now. And it's easy to complain. And it just made me think, you know, I complain about those potholes that are out there, but when I think about it, we have a really good road system in this country.

And generally speaking, they're in pretty good shape. So I am actually thankful for a really nice road system, and thankful that we can actually get them repaired when they have issues.

Jim Uren: I am thankful for Pickleball. So I discovered that about a year ago. I try to play two, three times a week, if possible year round.  Indoors or outdoors. And, uh, that's just been a lot of fun. I've gotten to know a lot of guys in my community doing that. It's a fun way to get some exercise in. And, uh, and I am getting a little better at it, which is fun too. So that's, that's what I'm thankful for today. And hopefully I'll be out on the court again tomorrow.

Well, thank you all for listening. You can again, find us at phase3advisory.com. We'd love to talk to you and help. And please don't forget to like, and subscribe.

Thank you very much.

Disclosure: The views expressed in this podcast are not necessarily the opinions of Phase 3 Advisory Services and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein.  Unless otherwise specified, show guests are not securities licensed or affiliated with Phase 3 Advisory Services or Osaic Wealth.   Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results.

No strategy can assure profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice.  Securities offered through Osaic Wealth, Inc. member FINRA/SIPC.  Additional investment. and insurance advisory services offered through Phase 3 Advisory Services Limited, a Registered Investment Advisor.

Osaic Wealth is separately owned and other entities and or marketing names, products or services referenced here are independent of Osaic Wealth. Phase 3 Advisory Services is located at 1110 West Lake Cook Road, Suite 265 in Buffalo Grove, Illinois 60089. Our phone number is 847-520-5545. For additional information, visit our website at phase3advisory.com.