Motley Fool Money - How Much Makes Someone Wealthy, and Why It Pays to Delay Social Security

Episode Date: August 2, 2025

More people are claiming Social Security early in 2025. Robert Brokamp speaks with Dr. Michael Finke, a professor at the American College of Financial Services, about why he thinks this is likely a mistake for most retirees.Also in this episode:- How much money do you need to be financially comfortable, and how much makes you wealthy?- Which countries’ stock markets are performing the best in 2025-A unique way to measure the stock market’s valuationHost: Robert BrokampGuest: Dr. Michael FinkeEngineer: Adam Landfair Learn more about your ad choices. Visit megaphone.fm/adchoices

How much does it take to be considered wealthy in America and why most people should delay claiming Social Security? You're listening to the Saturday Personal Finance edition of Motley Full Money. I'm Robert Brokamp, and this week we speak with Dr. Michael Finca about the recent trend of Americans claiming Social Security earlier and why most economists think that's probably not a good idea. But first, let's start with our last week in money segment. So I have a question for you. What net worth does someone need to be considered financially comfortable and what net worth

makes someone wealthy? Schwab asked those questions and it's recently published Modern Wealth Survey. And the average responses to those questions were that to be considered comfortable, it takes a net worth of $839,000. And to be wealthy, you need $2.3 million. I first heard about this survey from USA Today journalist Daniel Davise, who asked for my take for an article that he wrote on the survey. And here's what I said. There's no right number for every single person, of course. What really matters is that if you could meet the four criteria for financial

well-being as laid out by the Consumer Financial Protection Bureau, and they are, number one, having control over day-to-day and month-to-month finances, number two, having the capacity to absorb a financial shock, number three, being on track to meet your financial goals, and number four, having the financial freedom to make the choices that allow you to enjoy life. If you meet all those criteria, I'd say you're comfortable. And if you're significantly exceeding them, perhaps by being well ahead in terms of meeting your financial goals, then I think you could consider yourself wealthy. For our next item, I have another question for you. Which country's stock market is performing the best so far in 2025? Did you say Poland or Greece? Well, you're right. I'll accept either answer,

because they both have returned almost 60% this year. Many of the stock markets in Spain, South Korea and Austria, which have returned more than 40%, and the markets in Vietnam, Germany, which have returned more than 30%. Overall, the entire international stock market has returned 18% this year, while the U.S. stock market has returned 8%. And there are a lot of reasons for this year's outperformance of international stocks,

but the biggest probably are that many countries are choosing to invest more in their own economies and perhaps even more important, the decline of the U.S. dollar, which had its worst first half of the year since 1973. And a falling dollar is sort of like a tailwind to international stocks. It is nothing new for international stocks that take the lead, according to a report from Morgan Stanley. International stocks have outperformed U.S. stocks in four of the eight decades since World War II. So we're talking in the 50s, 70s, 80s, and the first decade of the 2000s. And during these cycles, international equities beat the U.S. by a major.

median of 4.9% per year. All that said, last week saw a bit of a reversal of this trend. Trade deals were announced with Japan, South Korea, and the EU that are generally considered favorable to America, and the U.S. stock market responded by having a better week than international stocks and closing near all-time highs, at least as of this taping after the markets closed on Thursday, July 31st. And as the stock market goes up, so does its valuation, which brings us to the number of the week, and it is 218. That is the number of work hours at the current average wage required to have enough money to purchase one unit of the S&P 500, according to the Luthold Group. So they calculated this number all the way back to 1947, and the current figure is the highest

over that almost eight-decade period. In other words, it takes more labor these days for the working woman or the working man to earn enough to invest in a single share of an S&P 5. index fund. Now, this may say as much about whether worker income has kept pace over the decades as it does about stock valuations, and further calculation, Luthold used the average hourly wage of the manufacturing sector, which has grown from $1.4 in 1947 to $287 today. But more traditional stock market valuation measures are also at high levels. Both the trailing and forward price-to-earnings multiples for the S-B-500 are significantly above average. And the cyclically adjusted PE, also known as the Schiller PE after economist Robert Schiller,

is now just about at a second highest level ever, with the highest being the peak of the dot-com boom. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly what I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin. They work directly with safe ethical factories and cut off the middlemen so you aren't paying for brand markups or fancy stores, just quality clothing. Everything they make is built to hold up season after season and is consistently rated 4.5 to 5 stars by thousands of real people like me who wear their clothes every day. The Quince, Mongolian, Kashmir Kroonek sweater may be the most comfortable one that I own. It's light, soft, and was a lot. lot more affordable than you think quality cashmere would be. Stop waiting to build the wardrobe you actually want. Right now, go to quince.com slash motley for free shipping and 365 day returns. That's a full

year to wear it and love it. And you will. Now available in Canada, too. Don't keep settling for clothes that don't last. Go to QINCCE.com slash motley for free shipping and 365 day returns. Quince.com slash motley. You can claim Social Security at age 62, but for every month you delay up to age 70, you'll get a bigger benefit. While most benefits is, beneficiaries still claim in the early to mid-60s or so, more had been delaying, but there's evidence that trend is reversing. Here to talk about why delaying still makes sense is Dr. Michael Finca, professor at the American College of Financial Services. Michael, welcome back to Motleyful Money. Great to be here. So you recently wrote an article for thinkadvisor.com about the concerns

that higher income folks are claiming earlier, which you believe is a mistake. So let's start with why you think some people might be more reluctant to delay nowadays. Well, I mean, obviously some of the messaging about Social Security is scaring people. You know, it's apparently a Ponzi scheme. And it's not surprising that, you know, there is this general temptation to just want to take it early. And now a lot of this messaging, this negative messaging about Social Security is making people feel like they're justified. They just want to get the money now. But to those of us who study retirement income planning, there's no better.

retirement income source than Social Security, because it is what we consider to be the Holy Grail. It's annuitization, which is generally, well, not generally, it's acknowledged by economists that is the most efficient way to generate lifetime income. It's, you know, getting rid of the risk of not knowing how long you're going to live. So annuities are, you know, all else equal, the most efficient way to generate retirement income. So social security is really the holy grail of annuities because it is not just a stream of income that lasts for a lifetime. It gets rid of that risk of not knowing how long you're going to live, but it's also inflation protected. And that doesn't exist in the private sector. So delayed claiming, it seems like a strange way to think about it,

but the best way to think about delayed claiming is that you are buying more of an inflation protected annuity. And it costs money to buy it. And the money that it costs is the bridge of spending that you need to withdraw, probably most efficiently from your traditional qualified assets, like an IRA, a traditional IRA, pull the money out, fill up those tax buckets before the age of 70 in order to provide that income. And then delay claiming is a way of getting a higher inflation-protected base of income to cover your expenses. And I feel like it's very often not characterized that way to an economy.

it makes perfect sense that delayed claiming is buying Social Security. But what I hear when I look at conversations about delayed claiming of Social Security are things that are irrelevant. So one of the things that's irrelevant is, well, I really want to live it up in my mid-60s. You know, after I retire, I want to spend more money, so I'm going to claim Social Security now. You can, and this is what blows people's minds, you can spend more money early in retirement if you're going to you know that you're going to get a higher inflation protected income later. It just means that you have to psychologically get over this hurdle of spending more out of your IRA or whatever you're going to be spending the money from.

You can spend more money in your mid-60s to late 60s if you get that higher Social Security payment for the rest of your life. So you can live better at every period of retirement if you're disciplined enough to delay claiming Social Security. In your article, you make the point that it's even more compelling argument for people who have higher incomes. And, you know, I don't know exactly what you mean by higher income, but basically anyone who's listening to a financial podcast has above average income wealth. So what is it about income level that makes delaying even more compelling? Yeah, you know, we did a study a few years ago, David Blanchett and I, where we actually dug into the data on anybody that contributes to a 401K plan versus those who don't have a qualified.

qualified retirement land. That's about half of Americans who don't have a qualified retirement savings plan. And the ones who have a 401k. So in other words, if you've contributed to a 401k in your working life, you're on this longer-lived side. They'll live maybe four to five years longer than the other half of Americans. So in other words, when Social Security estimates how long people are going to live, they use the entire population of Americans, you know, including all the people who keep the fast food joints in business. And if that's not you, if you're, if you exercise, if you eat a little bit more healthily, as a lot of higher income earners do, you're going to live longer.

And what that means is that by delaying Social Security, you're going to get an actuarially unfair benefit from delaying claiming, which means you're going to live longer. You're going to cash more Social Security paychecks than the average American. which is why you should do it. And, you know, I've actually had an interesting policy conversation with people about this, and they say, well, you know, delay claiming is actually going to put Social Security on a more precarious footing because it's going to cost the U.S. government more. And I say, well, that's true, but I feel like a lot of people who delay claiming are going to continue working

and they'll continue contributing to payroll taxes. So it's probably going to be a wash anyway. But, you know, if you really want to stick it to the government, the best, way to stick it to the government is to delay claiming, not to claim at 62. The government wants you to claim at 62, especially if you're healthy, because then they're going to pay you in present value terms a lot less. You point out in your article that the boost you get from delaying isn't equal from ages 62 to 70. At some ages, you actually get a slightly bigger bump than others. So generally, what are those ages? So whenever that benefit goes up by a higher percentage.

So in other words, if you're thinking actuarially, so you've got a table, And you're estimating, you know, if you wait to claim an annuity, how much more money can you get? Now, this is already built into annuity pricing. So if you claim at age 66, you're going to get more income than if you claim at age 65. You know, because you're not going to live as long. You're not going to get as many checks. So whoever it is, the insurance company, Social Security Administration, they know that. They know they're going to pay you a little bit less if you claim at a later

age. That's totally fair. However, Social Security built in the formula using a shortcut. And the shortcut is it's the same percentage up to the age of 64 or 65. Then it goes up to six, you know, starts out at 5% is the increase. Then it goes up to 6 and 2 thirds percent. And then if you're born after 1960, it goes up to 8% per year after full retirement age at the age of 67. So you get an additional 8% bump from 67 to 68, another 8% from 68 to 69, and another 8% from 69 to 70. But that's not actuarially the way it should be. It should be maybe, you know, 7.5% between 67 and 8.68. It should be maybe 8% between 68 and 69, maybe 8.5% between 69 and 70. But the government created a shortcut. And that shortcut means that the year after that bump in income,

is the most valuable year. So when it goes from 5% to 6 and 2 thirds percent, that is either the most valuable or the second most valuable year. Between full retirement age at 67 and 68, if you can just delay that one year, that is the most valuable in present value terms, and it's even more valuable for women.

Now, the other big caveat here is that if you're a higher-earning spouse and you have a lower earning spouse that is younger than you. So let's just give us an example because in older generations, it was more common that the male was the higher earning spouse, not necessarily so much in younger generations, but older generations. The male was the higher earning spouse oftentimes married a woman that was younger than him,

in which case that guy can be in rough shape. He can be overweight. He can be diagnosed with heart disease. You know, he'd just gone through a triple bypass. And we'll ask you, why should I wait to claim till 67? Because your longevity doesn't matter. What matters is the surviving spouse who gets your benefit after your debt. So you should base your claiming decision on the lower earning spouse, and especially

if the lower earning spouse is expected to live longer than you. If they're younger, if they're in better health, then you definitely want to delay claiming because that spousal benefit is hugely valuable. That's because it's not just your benefit you're thinking about when you pass away, your spouse will get your benefit. And if so, if you claimed earlier, you've reduced the benefit your spouse is going to get. That's right. You know, forever. So if your spouse is younger, then when you die, they're stuck with that lower benefit forever.

Now, the other big question I get is, well, Social Security is going bankrupt. And in 2003, it's going to go away. A lot of people just don't understand the way the social security system works, which is, that it is a pay-go system, which means that anybody who's working contributes to, you know, through payroll taxes to Social Security, that money goes to beneficiaries. The problem is that the benefit is scheduled to be reduced by a little over 20% in 2003 or so if the government doesn't do anything. Now, I don't know about you, but I can't even imagine what would happen to the political landscape if everybody's, if all baby boomers saw their social security check

declined by 23%. Nobody would ever get reelected again, who was currently in Congress. So that's never going to happen. So what's going to happen is some combination of borrowing more money. You know, I think probably taxes are going to have to go up a little bit. maybe we change the inflation adjustment so that it's a little bit less generous. Because many have argued that it's actually too generous, especially after people who are Social Security age, if the price of gasoline goes up, then they can just travel a little bit less. Workers don't have the same amount of budget flexibility. Therefore, it's probably the most politically palatable way to help at least reduce some of the

problems that Social Security has by adjusting that inflation, or changing the inflation adjustment to more closely represent the way people actually spend money. But it's not going to go away. But even if in the worst case scenario, everybody's benefit gets cut. Even those who claimed at the age of 62 and have this lower benefit, they're going to get cut by the exact same percentage as someone who waited to claim, which is one of the reasons why everybody who's modeled this out has found that, you know, in the worst case scenario, it still makes sense to delay claiming.

Let's say someone agrees that delaying is the right move. Let's say they retire at 65. They have a diversified portfolio. Should they be spending down their stocks or their bonds or both while they wait to delay to age 70? That is such a great question. And this is one of those points that I have to continue to make to even financial advisors. When you delay claiming, you're buying an inflation-protected annuity, which is a good way to think about

this is it's an annuity that's constructed with Treasury inflation-protected securities. So you are buying more bonds, which means that you should take the bonds from your portfolio to fund your spending during that bridge period until those higher Social Security benefits start. And then once they start, if you think about a balance sheet that includes the value of Social Security, you're increasing the value of that asset on the balance sheet, which means you can actually reduce your allocation to bonds that are held directly in investments, as opposed to a bond which is held in a somewhat theoretical sense in the value of your Social Security, but it's still there. In fact, it's even more valuable than bonds because it also provides

inflation and longevity protection. So the allocation to stocks then should be higher once you've delayed claiming. So there is not this trade. If a lot of people say things like, well, if I just would have invested the money, I could have been better off. Well, most people probably have a balance of bonds and stocks in their portfolio. Take the money from your bonds to delay claiming Social Security. Don't touch the allocation to equities. Don't sell your equities in order to make that bridge. There's no downside. Even if, equities go up, you have just as many equities as you did before. And the other thing is that once the Social Security payment starts, the higher Social Security payment, you're now withdrawing less

from your investment portfolio, which takes the pressure off the portfolio to fund your lifestyle. If you have a down year in the equity market, then, you know, you're going to have to pull a lot of money out of stocks to fund your lifestyle if you've claimed at 62, because you're going to have to rely on that portfolio more to fund your social. spending. But if you delay claiming Social Security, you're going to have this long period where you're going to get substantially more. I mean, the difference between 62 and 70 is like 72% higher income. That's substantial. And for a lot of retirees, especially as they get older, that's going to cover a big chunk of their expenses. If you're early in your career and looking

for insight, inspiration, and honest advice, listen to the Capital Ideas podcast. Hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last and what it means to lead with purpose. The Capital Ideas podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. It's time for our Get It Done segment. And earlier in the show, I said that a sign that you're at least financially comfortable is that you're on track to meet your financial goals.

So, are you? Well, one way to find out is to use an online tool. And last Saturday's episode, I highlighted the Calc XML retirement planning module that's Calc-C-A-L-C-X-ML-Tatmitment Planning Module, which you can find just by doing an online search, but also check out any retirement calculators offered by your brokers, your IRA provider, your 401k account provider. In fact, you really should do a few analyses with a few different tools

because you want to get sort of different opinions, and no single free online tool is perfect. For more general goals like saving for a new car or a home, just a regular online savings calculator would do, and you'll find plenty of those scattered. about the internet. If you're saving for college, check out any calculators found on the website of your state's 529 plan and also do an online search for the invite education college savings estimator, which is very customizable and can pull in the cost of a college your kid may be considering.

And finally, if you work with any kind of financial advisor, she or he should be able to use their professional grade tools to see if you're on track to make all your financial dreams come true. And that's the show. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or it gets. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and are provided for informational purposes only. You see our full advertising disclosure, please check out our show notes. I'm Robert ProCamp. Full on, everybody. You know,