Assets and Taxes - Social Security 101 | Episode #2

Episode Date: August 29, 2024

Welcome to the second episode of "Assets & Taxes" In this episode, Asset Strategy's Business Operations Manager and Financial Consultant Bill O'Neill, AIF®, sits down with Asset Strategy's Director of Retirement and Senior Financial Consultant Tim Black, to talk about the ins and outs of Social Security. Tim and Bill discuss the qualifications to receive benefits, the importance of identifying your life expectancy, and the individual decisions ahead of each retiree DOWNLOAD OUR FREE SOCIAL SECURITY BENEFIT GUIDE: https://mailchi.mp/assetstrategy/maximizing-social-security-guide BOOK A DISCOVERY CALL WITH US: https://assetstrategy.com/contact/#AS_Discovery_Call Contact Bill: [e-mail] Contact Tim: [e-mail] (00:00) Introduction (01:24) What is Social Security and why is it important (03:05) How are Social Security Benefits Calculated (04:50) When is ‘Full Retirement Age’ (06:27) How to determine when to take social security benefits (08:13) Explanation of “Break-Even Analysis” (10:17) Conclusion Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. This is for informational purposes only, does not represent legal or tax advice does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments. Please consult the appropriate professional regarding your individual circumstance. Content regarding social security is not associated with or endorsed by the Social Security Administration or any other government agency. Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits. Advisory Services are offered through Asset Strategy Advisors, LLC (ASA), an-SEC Registered Investment Advisor. Securities offered through registered representatives of Concorde Investment Services, LLC (CIS), member of FINRA/SIPC. Insurance Services offered through Asset Strategy Financial Group, Inc. (ASFG). ASA, CIS, and ASFG are independent of each other. The data contained in this material was obtained from third-party sources believed to be reliable; however, ASA, ASFG, and CIS do not guarantee the accuracy of the information.

Hi, welcome back to another episode of Assets and Taxes. I'm Bill O'Neill and I'm Asset Strategy's Business Operations Manager and a Financial Consultant. In this episode, I sat down with my colleague Tim Black, who is Director of Retirement here at Asset Strategy. We tackled one of the most critical components of your retirement plan, Social Security. Whether you're just beginning your career, approaching retirement, or already enjoying it, this episode is a must-listen for anyone. We talked about the basics of Social Security, including its significance,

how the benefits are calculated, when does someone become eligible to start taking the benefits, and more. We have a free guide on our website that goes into detailed ways you can maximize your Social Security benefits in today's world. The link to download this guide will be in the description of this podcast. So without further ado, here's Assets and Taxes. Hi, welcome back to another episode of Assets and Taxes here at Asset Strategy. My name is Bill O'Neill. I'm the business operations manager here at Asset Strategy, and I'm here today to talk with Tim Black about the importance of Social Security benefits, when to take them, and how they work. So Tim, today we're going to talk about the importance of understanding when to take Social Security benefits. Let's start with the basics. What is Social Security? Give us a brief history of it and your comments on the importance of it. Hey Bill, thanks. That's a question we get

from our clients all the time. I intend to collect Social Security. How do I do it the right way? Let's remember Social Security has only been in place since 1935 when it was put in place as what's commonly called the old age and survivor insurance benefit. When it was put in back in 1935, the retirement age was stated to be age 65, but average life expectancy was up to age 67 or so. Wow. So from the mathematics perspective, you really only had to pay for about two, maybe a little more than two years of retirement benefits to someone who's collecting a full benefit from Social Security.

And that has a big impact on the program itself and how it's been working. Sure. You look at any political speech nowadays, Social Security is the third rail. You've got to keep it funded. Everybody's counting on it. However, you know, now you're paying in for a 40 year career. You might be drawing out for 40 years as well. If you, if you take full retirement age at 67 and you live to 95, which is not that uncommon anymore, you're, you're, you're in retirement nearly as long as you're in the accumulation or savings phase. Yeah. Creates a lot of stress on the program. I'm sure it sure does. And And then remember back in 35 when they ruled us out, you had over 20 people paying into Social Security for every single person who was taking a benefit out of Social Security.

Over time, with our age wave movement and the baby boom generation, we're now down to close to a two-to-one ratio. Two people paying in for every person taking money out of the program. Wow. What a big, big difference. And how are the benefits calculated? How does that work? It's actually a fairly simple calculation. There's two main factors.

Factor number one is how much did you earn, and you pay a percentage of that into Social Security. Right now that percentage is 6.2% of your earnings go to Social Security. And by the way, your employer pays 6.2% of your earnings go to social security. And by the way, your employer pays 6.2% as well. So if you're self-employed, you're paying 6.2 plus 6.2. So it's how much you pay in, and then it's when do you draw that money down, and have you worked for 40 quarters? So really 10 years worth of earnings history. All right. Explain to viewers or listeners what that means, 40 quarters. I'm an employee. I've been working. What happens at 40 quarters? At 40 quarters, you have hit the equivalent of being 100% vested in your benefit. So you have no benefit if you've only got 39 quarters of working

history. Very few people really are at that low of a threshold. Even if you're a teenager who worked at the ice cream parlor over the summer and you had, you know, four months worth of employment, that was two quarters worth of employment right there. So hitting the, you know, hitting the 40 quarters is pretty simple. The real factor you control the most is what was your highest compensation levels as you were accumulating. So it's based on your highest compensation quarters, your highest 40 compensation quarters. Okay. So those $2 an hour jobs you had when you were a kid versus a full salary job in your

professional life, huge difference. That's going to get you the maximum payout is if you have, they'll base it on the highest quarters paid out. That's correct. The highest 40 quarters, the average payment with the highest 40 quarters. Excellent. And so how does it work? When do I reach the point where I can get social security benefits? What's the full age for a payout? Sure. So, so out there in the real world, everyone drops this number age 65. And for many, many years, that was what we call full retirement age from a social security perspective. Back in the 80s, they began to phase that number from 65 to 67. So almost everybody nowadays, if you're not currently retired, is probably looking at 67. There are some who are just about in their mid 6060s at this point.

It might be 66 and a quarter or 66 and two-thirds, but 67 is really going to be the magic number going forward. You're eligible for your full retirement benefit at age 67. And again, your full retirement benefit is calculated based on your highest 40 quarters of average earnings. But you could start taking it earlier than that if you want to, yes? This is true. Many folks, they retire before age 67, and obviously they need to have income to meet their living expenses. And if they haven't saved enough for retirement,

let's say in their 401k or in their personal wealth, they begin to think about, all right, should I draw down early on my Social Security? Now, if you draw down before full retirement age, you don't get before full retirement age, you don't get the full retirement benefit. So there's a percentage penalty that's taken off the top. It's low single digits, so it's not crazy materially large. But nonetheless, you don't get full benefit if you start drawing early. So I would imagine that is a point of consideration for a lot of people that are reaching this age. What type of advice, is it a general advice or is it more personal advice that you give to somebody who would decide whether I take it at 62 or whether I wait to 67?

And how do you come to that decision? So it is a totally personalized decision. And as you know here at Asset Strategy, our passion is to create, manage, protect, and distribute wealth. And so for each of our customers, we walk through, do you have adequate retirement income to meet your spending needs at the point of retirement? And as you look forward beyond that, now remember life expectancy today, if you're a married couple and you both make it to age 65 There's a greater than 50% probability that at least one of you makes its agent 90 Hmm. So now you're talking about a 30 plus year time horizon that you need to make sure you have adequate retirement income for

So if you're being to take that benefit early You get a haircut on your full benefit and you live too long, which to me is a nice reward. Living long is pretty good. You might have a shortfall. So we work very closely with our clients to make sure that we don't incur a shortfall at the back end of their retirement because we took too much of a haircut at the front end. I would imagine this is a big point of consideration for a lot of investors, a lot of folks out there trying to figure out when and how to take that Social Security benefit. I can't emphasize enough that this is exactly the time you'd want to call in to us. This is what we do and look it's a free phone call. Someone like Tim or someone

on the team can help manage the expectations and help figure out when it makes the most sense and what value you should be striving for either early or waiting till age 67. So Tim, is there a breakeven analysis that you would work through with a client if you were talking with them? Yeah, Bill, that's a great question. Probably the most frequent question we get about Social Security drawdown, when do I start to take it, is, hey, look, I've been paying into this program for 30 or 40 years. I want to get my money back. So I'm going to start drawing as early as possible just in case. I don't live very long.

I want all my money back. We hear that all the time. Sure. But the real question is, again, if you take your distribution or your benefit too early, you're leaving excess benefit on the table. And so if you wait longer, if you wait past age 70 to begin drawing your benefit, every year between full retirement age and age 70, you get a 7% bump to your benefit payment, your monthly benefit check. Now think about it this way. If you were investing out in the stock market, and I could tell you, Bill, that you got a 7% no-risk investment opportunity, that's a pretty good investment. I would take it every time.

So if you can hold off on taking that benefit economically, financially, it makes a whole heck of a lot of sense. Sure. But I think your question was, is there a break-even analysis? That's a person-by-person basis. Again, it's a function of how long do you believe you may live for? If you knew the answer to that, that's amazing. I certainly don't know how long I'll be living for. But the average number tends to be right around 77 or 78 years old. And if you draw down early, you will hit the break-even point of getting all your money back at around age 77. Now, that means no investment return.

This is all your deposits and your employer deposits. Okay. All right. Yep. That's a heavy consideration. So health and life expectancy is a big factor. Those are the big variables. And again, we really can't predict with any certainty. You know, you can look at your family history. You certainly know your own case history of your medical situation. But with the advances in medical technology, we continue to see average life expectancies on a constant upward trend.

Yep. So again, you know, just to wrap it up, it depends on your financial needs and resources, your health and life expectancy, and a whole lot of other factors. There's a host of factors that go into considering when and how to calculate your Social Security benefits and how they're going to affect your retirement. So this is where we would encourage you to have a conversation with us. We truly love having this conversation. We invite you to call us at the number that you see on the screen right now or reach out to any of us, Tim Black, Bill O'Neill, we're all accessible. But we have a team of resources that are available to you you next time.