Marc Bautis’ newest series covers content from the financial planning workshops that he and his team put on in North Jersey. In this first part, Marc teaches you how to maximize your Social Security benefit and he clears up common misconceptions along the way.
In this episode, you will learn:
- How Social Security adjusts for inflation in the cost of living
- What happens when the cost of benefits exceed the income that Social Security collects as part of payroll taxes
- Why reforms to the system will be what makes (or breaks) the future of this benefit
- About the top questions that clients ask Marc about Social Security
- About the potential benefits of waiting to start collecting Social Security
- How to maximize your Social Security benefit
- And more!
Hello and welcome to the Agent of Wealth Podcast. Today we’re going to be starting a series that will be four or five podcasts long. The entire series is entitled, “Financial Workshop Series,” and it’s based on financial workshops that Marc and his team offer around the local area. Today’s podcast is titled, “Maximizing Your Social Security.”
Aric: Good morning Marc how are you?
Marc: Good morning Aric. I’m great, how are you doing?
Aric: I’m doing well. I know I already explained that this podcast series is based on workshops that you do around the area. Are each one of these podcasts a separate workshop or how does that work?
Marc: Yes, we’re going to correlate the next four to five podcast episodes with the different workshops that we’re giving at local libraries in North Jersey or online for different webinars. The topic of today’s podcast will be about Social Security. We’re also going to have podcasts and workshops about:
- College Planning
- Cyber Security
Aric: Marc how did you pick these topics specifically?
Marc: We wanted to pick topics that are relevant but also ones that are hard to find information on. You can do any Google search and find how to invest a portfolio or how to become more informed on a certain financial planning topic, but some of the topics we picked are definitely topics that people are going through right now and are having trouble finding the best information on them.
For example, I recently saw an article in the USA Today that said there are currently 40 million Americans who work as an unpaid family caregiver.
Aric: That has to be incredibly difficult. There’s a relationship there along with all sorts of mental stress. I would think that there’s even physical stress, depending on what the disability is.They also have to face many emotions. I’m sure it can be very overwhelming.
Marc: It’s definitely overwhelming and the goal of our caregiving workshop is to make it less overwhelming. We want to help people put together a caregiving plan. There’s a lot more that goes into it. You would think Social Security is also a relevant topic and it’s the topic of today’s show.
Aric: Social Security is on the forefront right now because of the baby boomers. I think there’s a statistic out there that 10,000 people a day are retiring, which means 10,000 people a day are aging and are close to needing some sort of assistance at some point.
Marc: Social Security is something everyone encounters, whether it’s as soon as you turn 62, the earliest age you can begin to collect Social Security benefits, or at a later age. It’s also a topic that’s hard to get information on. You can go to or contact your local Social Security office, but they are programmed to provide specific pieces of information. They can’t help you strategize on what’s best to do, they can’t help you make the optimal decision of when to start collecting. You can leave tens or even hundreds of thousands of dollars on the table if you don’t plan when it’s best to start collecting Social Security.
Aric: It’s incredibly important to talk about so let’s get into it. What do you cover in the workshop itself?
Marc: We cover the basics of Social Security as well as what the five most common questions are. These five questions cover areas that people going into retirement have questions about.
We have about ten of these workshops scheduled for this year. I’ve also been given the Social Security workshop for about five or six years and done 30 of them and the same types of questions always come up. I think there’s a lot of misunderstandings that go on with Social Security.
Aric: I’m sure that they also change the rules on Social Security every once in a while too. I know that you do a lot of studying and you keep yourself informed of that, but how confusing can it be for us? If we’re not in the industry and we’re not constantly keeping our finger on the pulse of it you never know when it’s going to change.
Marc: I think that there were some big changes made in 2016 that really impacted some of the strategies that people were using. You’re right, it’s constantly evolving just like a lot of things in the financial industry and keeping your finger on the pulse of it is important.
Benefits of Social Security
I think one of the misunderstandings is that Social Security is actually a great benefit. It’s one of the few income sources that you can’t outlive. Everyone loves a pension or loves an annuity, one of those strategies where if you live to 120 years old it will continue paying. Depending on what your benefit is or how long you live your Social Security benefit can be well over a million dollars.
Aric: Wow. That’s the biggest thing is that everybody loves a pension, but how many pensions do we see these days? Pensions are just a dying breed.
Marc: Pensions are going the way of the dinosaur. Any type of income stream you can have that’s guaranteed to last as long as you live is definitely a good thing.
The second really great benefit of Social Security is that it offers an inflation adjustment. Everyone goes into retirement and thinks, “My monthly spending is this.” They don’t calculate what the cost of their expenses will be in 10 years or 20 years. When planning their budget for the future people forget that the price of everything goes up. They’re going to have to take inflation into account in order to figure out how much money they’ll actually need.
Aric: You said it adjusts but does it adjust along with the cost of living?
Marc: It does adjust with the cost of living, which is one of the benefits of Social Security. Every year there’s a calculation that’s done where it takes a look at a basket of prices that consumers purchase for things and then makes a determination of whether the benefits that everyone receives should increase as well.
As an example, if someone starts out receiving $2,000 dollars per month in Social Security benefits and the cost of living adjustments are 2.6% per year, in 10 years they’ll receive over $2,500 per month and then in 20 years their benefit will be about $3,300 per month. So you see it can rise significantly over time.
Aric: That’s nice because I remember getting one page reports you could order that would would be sent to you by mail. You could order these reports that would show you how much bread cost, how much gasoline cost and how much other items cost on the day of your birth. It was always an interesting snapshot.
I remember my dad telling me that when he had a quarter a week for an allowance he could take the bus for a round trip. He was also able to pay for a movie along with an ice cream cone and popcorn. I mean 25 cents for all of that, that’s fantastic but you know that was back in the 40s and 50s. All prices are going to rise so it’s nice to hear that Social Security benefits increase with it.
Marc: Yes and inflation can be a killer so the cost of living adjustment is definitely a good benefit.
Will Social Security Exist in the Future?
Now we are going to segue into the specific areas that I think a lot of people have questions on. The first one everyone wants to know is will the Social Security benefit be there for them? The media likes to play up that the Social Security trust fund is running out of money and it’s not going to be there and it’s just a system of IOUs.
We do want to look at the health of Social Security, but it’s a lot of misunderstanding and irrational fears about the solvency of the system. Every year the trustees produce a comprehensive report about the long range outlook of Social Security. The way the whole system works is that payroll taxes from current workers go into trusts and are immediately paid out to current retirees.
Right now in that trust fund there is about 2.9 trillion dollars. The government invests that money in the special treasury instruments. As baby boomers start retiring there won’t be enough collected through payroll taxes to fully cover 100% of the Social Security benefits that need to be paid out. The cost of benefits begin to exceed the income that Social Security collects as part of the payroll taxes.
The calculation right now is that Social Security will be able to pay 100% of its promised benefits until 2034. After that if nothing is done to reform the system the income will only be sufficient to cover about 79% of its promised benefits. We want to look at what reforms are being discussed and what the chances are of any of these going through.
The first one that that’s being looked at is increasing the maximum earnings subject to Social Security tax. The way that works is on anyone’s payroll tax or anyone’s paycheck they’re taxed and money comes out. If you look on your W-2 or your pay stub it’s called the FICA tax and everyone is taxed up to $132,000 dollars in 2019. If you earn over that amount you’re not getting hit with Social Security tax. One of the reforms is raising that $132,000 number to a higher number so that more taxes are collected.
The second reform is to raise the normal retirement age. I mentioned earlier that you can start collecting at age 62, but your actual full retirement age it’s either 66 or 67 depending upon when you were born. One of the simplest reforms is Social Security coming out and saying you can’t collect until a certain age, for example age 70. If you can’t start collecting then that just limits the number of years that they would have to pay out benefits.
The last two options are lowering the benefits of future retirees. They might have a calculation based on your earnings where you’re scheduled to receive a certain amount per month, but they might reduce your benefit or reduce the cost of living adjustment.
I think a lot of the reforms that they’re talking about will have very little impact on baby boomers retiring now or in the next five maybe ten years. People retiring after will probably be impacted by some of these reforms, but for now I think baby boomers do not have to worry about it.
Aric: One thing that I’ve discussed with other folks about this specifically is the political side. If you really think about it the politicians that are in office now and the politicians that are going to be in office the next 10, 15, 20 years, as this is becoming more and more of an issue, want to get reelected.
Such a large base of the voting population is senior citizens and they are the ones who vote the most. When they see that their Social Security could possibly be affected I’m pretty sure the politicians are going to come together pretty quickly to fix it so that their voter base is happy with them. I don’t think they’re going to let it fail by any means.
Marc: Reelection is definitely a big motivation for politicians. Interestingly enough Social Security has been a topic that’s been out there for a while and in some cases the politicians haven’t wanted to touch it. It’s definitely a topic that will face a tipping point and the reform will need to be addressed by the politicians. I think the reforms will have very little impact on people who are retired now and people who are about to retire.
How Much Can You Expect to Receive from Social Security?
Aric: What’s the second question you get most?
Marc: There’s a lot of misunderstanding on how much someone will receive for Social Security. Social Security used to send out a green statement in the mail. They’ve gone back and forth between sending something in the mail to forcing people to retrieve it online.
Basically it spits out a number and says if you retire at this age your benefit is this. There’s very little transparency into how they come up with that number. The Social Security benefit number they come up with depends on how much income you’ve earned over your working years and the age at which you apply for benefits.
The way the formula works is Social Security looks at your annual earnings over your lifetime. They index them for inflation and then pick the 35 highest earning years to include in their formula. If you don’t have 35 years of work history the missing years are filled in with zeros. One of the strategies, if you don’t have 35 years, is working an extra couple of years so that you boost up that average.
The highest 35 years are calculated and the formula is applied to them and your primary insurance amount is determined. The primary insurance amount is the actual monthly benefit that you’ll receive at your full retirement age.
What a lot of people don’t realize is if you apply early for benefits you receive a lesser percentage of your primary insurance amount. You can start applying for Social Security benefits at 62 even if your full retirement age is 66. If you start collecting at 62 you’ll only receive 75% of the amount that you would receive if you waited until age 66. That’s a big difference.
On the flip side you also have the ability to delay taking benefits after your full retirement age. If we look at that same example where someone’s full retirement age is 66 for every year that they delay collecting after age 66 up to age 70 they can receive a larger benefit by 8% per year. Social Security is really incentivizing you to delay collecting. They’re doing that by giving you an 8% larger benefit each year that you delay.
When you look at alternatives and want to see where else you can get an 8% return or gain you will see that there’s not many options out there. Choosing to delay when you collect is definitely a strategy that allows you to have that larger benefit.
As I said earlier they used to send out the green statements. They don’t send them out anymore, so a lot of people don’t even know what their benefit is. You can go to socialsecurity.gov. It’s very easy to create an account and download your statement from this website. I would recommend doing this as a first step you so you can figure out where you are starting out.
Aric: There is one thing I do want to add to this piece. When you go there, they’re going to ask questions to see that you can verify your identity. Make sure that you have a lot of your financial information in front of you so that you can answer those questions or else it will lock you out for 24 hours. It happened to me because my wife and I leased a minivan years ago and one of the questions they asked me was what company was the lease held under. I had no idea. It was multiple choice and I felt like I was back in high school. I picked the wrong one and the website said it wasn’t sure if it was me and to try again in 24 hours. Make sure you have some of that information in front of you so you can answer those verification questions and then you can download your documents.
Marc: Yeah it definitely makes sense and to segue, once you get your document the next question to look at or area to look at is when should someone apply for benefits. This is one of the most important questions related to Social Security. However it’s also one of the most complicated ones because we can do all the number crunching and figure out when might be the best age for you to collect but there are other factors that go into making that decision on when to apply.
All of these factors are unique to your own situation and these include things such as your health status and life expectancy. The break even point for Social Security is about 78 years old. That means if you live longer than 78 it would have made sense to delay collecting your benefit. However if you if you die before 78 it would have made sense to collect as soon as you can.
The other factor that’s important is the need for income. We all would like to wait and collect the highest benefit possible. However some of us may need that income as soon as we can get to it, and that would be at age 62. The other thing that’s important is whether or not you plan to work.
Another topic I get a lot of questions on is the Social Security earnings test. This is something that Social Security enforces where if you’re still working and you collect benefits before your full retirement age they withhold some of those benefits depending upon how much income you earn. You definitely want to coordinate Social Security with your work. After you turn 62 you do want to look at what your plan for working is and then correlate that to when you plan to start collecting Social Security.
Aric: Marc let me ask you a quick question on this. From what I’ve heard they actually calculate it on a monthly basis. Is that correct? If you waited four months or six months instead of having to wait for the entire year it will increase your benefit. Correct?
Marc: That’s correct. Almost everything with Social Security is calculated on a monthly basis. You don’t have to wait for a specific time frame or a full year. You can make that decision and you can wait. Every month that you wait or delay there is an added benefit for doing so and yes it is on a monthly basis.
The other thing to consider is survivor needs. The way survivor benefits work is if one spouse passes away, the surviving spouse does not get to keep both Social Security benefits. They get to keep the larger of the two benefits and because of that it may make sense for the higher earning spouse to delay collecting for as long as possible. That way the surviving spouse has the biggest or largest benefit that they can have.
There are some key points to remember about when someone should start applying. If you do apply early your benefits start out at some fraction of your full retirement age amount and they remain that percentage for the rest of your life. It doesn’t go up to 100% once you hit your full retirement age. Once you flip that switch you’re stuck with that decision.
The second key point is that the cost of living adjustments magnify the impact of either collecting early or delaying collecting. This is because the annual cost of living adjustments apply to either the lower or the higher amount. This causes the disparity to increase or decrease with each passing year. You want to look at the cost of living adjustments and how they would impact you if you collect your benefit early or if you delay collecting it.
Aric: Absolutely. That makes sense.
How to Maximize Your Social Security Benefit
Marc: Yes, so segueing into the fourth question is how can someone maximize their benefits. The first strategy is to download that statement we talked about and look at your earnings record. On that statement it will list year by year earnings records that Social Security has for you. You want to make sure it’s accurate and that it is not missing any years. This can especially come true if you own a small business or work in a small business. Larger businesses have their payrolls in-sync a little better. Sometimes you’ll see more errors with how the small businesses’ info gets published up to the Social Security office.
You also want to see if your benefit can be improved by working longer. Earlier we touched on that fact that if you have some missing years you may be able to bring your average up. A lot of people’s highest income earning years are towards the end of their career in their 50s or 60s. You may be able to improve your earnings by working a couple of years longer. You have to look at that in the context of everything else going on with your retirement.
The second strategy is applying for benefits at the optimal time. We’ve made the case for delaying benefits because that will most likely result in the highest lifetime amount that you collect, but there’s no-one-size-fits-all. You really have to look at everything going on in your life and see when it makes the most sense to collect.
The third strategy is coordinating spousal benefits. We didn’t talk about spousal benefits, but the way Social Security offers them is a spouse is allowed to collect either their own benefit or 50% of their spouse’s benefit if it’s higher. For spousal benefits the spouse has to look at where can he or she can get the most money from Social Security. Is it collecting on their own benefit? Or is it collecting a spousal benefit on their spouse’s record?
Aric: In other words, let’s say the family had three or four kids. The mom was a stay at home mom for most of those years and worked part time here and there. Once the kids were out of the house she decided to re-enter the workforce. Although she works she’s going to have less earning years out of those 35. Also, her income is most likely going to be less than her husband’s because he’s been working 18 to 24 years while she was taking care of the kids and being a stay at home mom. It would make sense for her to have 50% of his benefit as opposed to her own, which may not be a very high benefit at that point.
Marc: Yes, that’s correct. In a case like that collecting 50% of their spouses benefit is probably going to be more than their own benefit.
The fourth strategy is to minimize the taxation of your benefits. A common misconception about Social Security is that there’s no tax on it. The way Social Security benefits get taxed is that they’re lumped into a pile with your other income. Depending upon how much total income you have, up to 85% of your Social Security benefits may be taxable. That doesn’t mean your benefit is going to be taxed at an 85% tax rate. It means that you may have to pay ordinary income tax on up to 85% of the benefit that you collect.
You want to see if there is other income that you can lower, that way the amount that gets taxed is not as high. You also want to look at your IRA distributions which may bump you up into a higher tax bracket. The sequence that you take money out of your account or portfolio assets definitely has a bearing on how much of your Social Security will be taxed.
You also want to, if it makes sense, convert some of your traditional IRAs or 401k into a Roth IRA where there are no required minimum distribution. In that case it doesn’t add taxable income nor does it potentially bump you up into a higher tax bracket. That’s another area where you want to look and see if it makes sense to do a Roth conversion.
The fifth strategy is that you want to coordinate Social Security with your overall retirement income plan. You may have pensions, IRAs, 401ks, regular savings account, or rental real estate property so you want to put a plan together that has all those assets working together to produce your paycheck. Take a look at where the optimal place is to pull money from each each year.
In the beginning it may make sense to take money from a non-retirement account where you’re not having to pay tax on it. As you get older and as you begin taking your required minimum distributions you may start having to pull money from different IRAs or 401ks. Your plan should take everything into account including your work.
I’ve talked to a lot of people that say they have no plans to stop working, but sometimes there’s an involuntary reason that someone needs to stop working. You also want to look at the income you will be generating from work and in retirement. Then there are the people who do stop their full time job and they might work part-time, but everything should be looked at together.
Retirement income planning is easy when you’re just stashing money away, putting part of your salary into a 401k or an IRA. When that time comes to convert everything into an income stream you want to make sure it doesn’t run out. It seems like it may be a simple decision on when to start collecting or what to do with Social Security, but you really should take the time to evaluate your different options and figure out how to maximize the benefit that you’re going to receive.
Aric: Yes, there’s a lot to know so I encourage everybody to seek out some help with this. This is not something you want to tackle alone because there are strategies that you just don’t even know about because you’re not in this field and that’s what Marc does. I would encourage you to reach out. What else did we cover today Marc?
Marc: We covered a lot in today’s show and like you said there are probably a lot of questions around things such as when should you apply? What if you keep working? What if you’ve already applied? Is there anything that you can do to improve your situation? How much your benefit will be? How do I coordinate spousal benefits? What do I do next? It could be as simple as that and I’d be happy to answer any of those questions.
You can send me an email through the Contact Us page at Bautisfinancial.com or my email address is [email protected] and you can see a list of workshops or webinars that we have coming up by going to Bautisfinancial.com/workshops. We’ll also do a recording of any of our in person workshops so if you’re not in the New Jersey area and you want to see them they’ll be on our website as well.
Aric: That’s awesome, I appreciate that. Thank you so much for your time today Marc. Thank you all for listening to the agent of wealth podcast with Marc Bautis. If you have not subscribed to the podcast yet please click the subscribe now button below. This way when Marc comes out with a new podcast it’ll show up directly on your listening device, this makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today for everyone at Bautis Financial this is Aric Johnson reminding you to live your best day every day. We’ll see you next time.
Thank you for listening to the agent of wealth podcast click the subscribe button below to be notified when new episodes become available. The information covered and posted represents the views and opinions of the guests and does not necessarily represent the views or opinions of Bautis financial. The content has been made available for informational and educational purposes only and content is not intended to be a substitute for professional investing advice always seek the advice of your financial adviser or other qualified financial service provider with any questions you may have regarding your investment and financial planning.