When to Start Drawing from Social Security

Summary

Summary of "Money Guy Show" - Episode: When to Start Drawing from Social Security

Release Date: December 9, 2024

Hosted by Brian Preston and Bo Hanson, the "Money Guy Show" offers expert advice on wealth building and financial strategies. In the episode titled "When to Start Drawing from Social Security," Brian and Bo delve into essential topics surrounding Social Security planning, investment account protections, and retirement strategies. Below is a comprehensive summary capturing the episode's key discussions, insights, and conclusions.

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1. SIPC Insurance and Brokerage Account Protections

The episode kicks off with a listener question from Aaron H. about SIPC insurance limits. Aaron queries whether funds exceeding the standard $500,000 SIPC coverage should be moved to another brokerage.

Notable Quote:

• Aaron (00:11): "Most brokerages provide SIPC insurance up to $500,000. When your account exceeds that, should anything over $500,000 be moved to another brokerage firm?"

Key Points:

• Distinction Between FDIC and SIPC: Brian explains that FDIC insurance covers cash deposits (up to $250,000 for individuals or $500,000 for households), whereas SIPC covers brokerage assets up to $500,000 in case a brokerage becomes insolvent.
• Challenges for High-Net-Worth Investors: For investors with portfolios exceeding $500,000, especially those aiming for $750,000 or more, managing multiple accounts to stay within SIPC limits can be cumbersome.

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2. Maximizing Insurance Protections with Large Brokerages

Brian advises against the immediate decision to open multiple accounts. Instead, he highlights that major custodians often purchase additional "excess insurance" to cover amounts beyond standard SIPC limits.

Notable Quote:

• Brian (02:13): "Fidelity has what's called excess insurance. [...] They even take your cash protection. I think it's a million or something like that."

Key Points:

• Research is Essential: Brian encourages listeners to verify the insurance coverage offered by their brokerage firms rather than assuming protection based solely on standard SIPC limits.
• Visualizing Insurance Coverage: He likens excess insurance to Lloyd’s of London policies, providing a mental image of extensive coverage beyond primary SIPC insurance.
• Benefits of Large Custodians: Utilizing large brokerage firms can simplify asset protection, avoiding the need to manage numerous accounts and ensuring beneficiaries have easier access to protected assets.

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3. Complementing 457 Plans with Brokerage Accounts

Caitlin, a listener, asks about using a traditional 457 plan instead of a brokerage account for early retirement.

Notable Quote:

• Brian (05:07): "457s don't have the early withdrawal restriction. [...] you could actually get right to them without penalty."

Key Points:

• Unique Features of 457 Plans: Unlike 401(k)s and 403(b)s, 457 plans typically allow penalty-free withdrawals before age 59½, making them attractive for public servants and other employees with early retirement needs.
• Tax Considerations: Withdrawals from traditional 457s are subject to income tax, whereas Roth 457s offer tax-free withdrawals if certain conditions are met.
• Strategic Planning: Brian and Bo discuss integrating 457 plans with taxable brokerage accounts to optimize overall retirement strategy, emphasizing the importance of cash flow planning and tax efficiency.

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4. Roth 457 Plans: Unique Considerations

The hosts touch upon the differences between Roth and traditional 457 plans, particularly regarding early withdrawals.

Notable Quote:

• Bo (08:17): "There are 457s that do have Roth provisions in them, but the Roth provision of a 457 operates a little bit differently than the traditional 457 provision."

Key Points:

• Understanding Plan Details: It’s crucial for participants to read their plan’s summary description to understand the specific rules governing Roth 457 withdrawals.
• Tailored Strategies: Depending on individual circumstances, Roth 457s can offer advantageous tax treatments, but their unique withdrawal rules must be carefully navigated.

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5. Lighthearted Banter: Personal Appearances

Brian and Bo engage in a playful exchange about personal appearances, particularly facial hair, adding a touch of humor to the financial discussion.

Notable Highlights:

• Facial Hair Trends: Bo notes the increase in mustaches at their offices, leading to a humorous comparison with invasive species.
• Audience Engagement: This segment serves to humanize the hosts and create a relatable atmosphere for listeners.

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6. Strategizing Social Security Benefits for Couples

Jason B., a 52-year-old listener planning to retire in around five years, poses a question about optimizing Social Security benefits for himself and his 61-year-old high-earning spouse.

Notable Quote:

• Jason B. (10:18): "I'm 52 and I'm looking to retire in 5ish years [...] what should we think about on when to draw Social Security?"

Key Points:

• Household Maximums: Brian explains that while Social Security benefits are based on individual earnings histories, there are household maximums that can be strategically utilized.
• Deferred Benefits: Highlighting the strategy where the higher-earning spouse defers benefits to maximize household income, while the lower-earning spouse may begin claiming earlier to provide immediate support.
• Modeling Strategies: Brian mentions the importance of using financial modeling tools to evaluate the best course of action based on their specific circumstances.

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7. Tax Implications and Earned Income Considerations

The discussion emphasizes the taxability of Social Security benefits and the impact of earned income on benefits if claimed before full retirement age.

Notable Quote:

• Bo (15:15): "It's a super, super nuanced part of the financial planning equation."

Key Points:

• Taxation of Benefits: Depending on total income, a portion of Social Security benefits may be taxable, influencing the net benefits received.
• Earned Income Penalties: Claiming benefits while still earning income before reaching full retirement age can lead to reduced benefits and additional taxes.
• Comprehensive Planning: The hosts stress the importance of factoring in taxes and earned income when deciding the optimal time to draw Social Security benefits.

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8. Encouragement for Professional Financial Guidance

Brian and Bo advocate for seeking professional advice to navigate the complexities of Social Security and retirement planning.

Notable Quote:

• Bo (16:57): "I mean, all of us, we have the option. [...] this might be a perfect time to consider taking the relationship to the next level and working with someone who's actually navigated hundreds of people entering into Social Security agencies."

Key Points:

• Personalized Advice: Every individual's financial situation is unique, and tailored strategies can significantly enhance retirement outcomes.
• Utilizing Expertise: Engaging with financial advisors can help optimize Social Security claiming strategies and overall retirement planning.

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9. Closing Remarks and Disclaimers

The episode concludes with standard disclaimers, reminding listeners that the show provides informational content rather than personalized financial advice.

Notable Quote:

• Bo (17:13): "The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice."

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Conclusion

In this episode of the "Money Guy Show," Brian Preston and Bo Hanson offer valuable insights into Social Security planning, investment account protections, and retirement strategies. By addressing listener questions and providing practical advice, the hosts emphasize the importance of informed decision-making and professional guidance in achieving financial security and a fulfilling retirement. Whether managing large brokerage accounts or optimizing Social Security benefits, the episode underscores the significance of strategic planning and thorough understanding of financial tools.

Transcript

[Aaron]

All right, this one is from Aaron H. Aaron said.

[Brian]

Is that two A's?

[Aaron]

Yes, two A's. AA Ron said most brokerages provide SIPC insurance up to $500,000. When your account exceeds that, should anything over 500,000 be moved to another brokerage firm? And I think a lot of people have this. Okay, great. Next question. If you would like a text, I'll let you tell.

[Brian]

Why is the answer no?

[Aaron]

So a lot of people have this question because we know that FDIC insurance covers cash deposits, like what you have in a checking account or savings account. Up to $250,000 for individuals or $500,000 for households or for couples. Well, when it comes to investment assets, not cash assets, there's a different type of coverage that exists that's called SIPC coverage. It's different than fdic, which covers cash. But this now covers brokerage assets. If the broker that you were using or the company you're using were to become insolvent. But those limits also go up to 500,000. Well, you can imagine as you're saving and investing and you're trying to build to 750,000, a million, 2 million, 3 million, $5 million, there's a really good chance that you're going to have accounts, maybe even multiple accounts that exceed that $500,000 threshold. So as an investor, Brian, how can someone have confidence knowing they don't have to go open 15 different accounts in order to house all of their retirement portfolio in less than half a million dollar chunks?

[Brian]

Look, don't skip out on doing your own homework on this. But most of the custodians, the big ones, if you think about. I know this is the case with both Fidelity and Charles Schwab. I'm sure it's that way with Vanguard. But just go do the research because I don't think I've ever gone and actually looked it up for Vanguard. Fidelity has what's called exc insurance. They go and buy an additional policy. And if you go read the disclosure, it's actually pretty interesting to read. Like they even take your cash protection. I think it's a million or so, something like that. And then it's limitless. Or maybe is it 10 million?

[Aaron]

I think it's a billion dollar.

[Brian]

It's a huge number on the excess insurance. I always have this visual when I read those type of things. I always think of these. You remember back in the day, I'm older, so maybe everybody my age will know Lloyd's London had all insurance policies where they like insure Cindy Crawford's legs. And I always think, like, you're walking through the halls of Lloyds of London and then they have like, you know, all these celebrities, key things that they're insuring. And then they got Brian Preston's excess policy for his retirement account or something like that. Fidelity has, I'm sure Fidelity is buying Lloyds London, you know, type of insurance for my excess insurance. That's how I visualize it. But yes, they typically have additional insurance protection. But go do your research. Make sure you check on that. Don't take our word on it, but they've thought about that because they know a lot of people. They want you to have peace of mind that your assets are okay. What I like about when you work with these big custodians, it's just like my granddad used to drive to every bank to try to protect them. He tried to get the best CD rates, but he was also trying to just move money around because of these FDIC and so forth. A lot of times with these big brokerages and so forth, you can go buy CDs from these banks into one big brokerage brokerage account and get a lot of the protections and save yourself from driving all over town and also save your beneficiaries a lot of hassle of having to track down where the heck are all those assets.

[Aaron]

Your beneficiaries, your accountant. Every year when you do your taxes, you said it best. You said, as a consumer, make sure that it's buyer beware. You understand what you're doing and where you're putting money, especially in the world in which we live, whether there are all these startup fintech companies that will say, hey, if you open an account with us, we'll give you an extra $500 or whatever. The thing is, you just want to make sure that whoever you are using as your brokerage institution or Azure custodian, you verify that they do carry these additional insurances so that you are protected. Because by this way, when things get scary, when they get really unnerving, and we saw this during the financial crisis in 2008, 2009, you really begin to start asking these questions, Am I protected? Have I done what I needed to do? And if you've done the due diligence to make sure that the custodians you're using do carry these policies, you can at least have some peace of mind knowing that you've done all that you can do to protect yourself. Now, Aaron, that was a great question. If you would like a Tumblr Koozie Koozie Tumblr. You can write winneroneyguy.com all right, let's see next question. This one, Brian, is from Caitlin. Caitlyn, question. I work for the state and I'm trying to retire early. Since I have access to a traditional 457, can I use that in lieu of a brokerage account? Oh, I love it.

[Brian]

Brian, that's a great question.

[Aaron]

Why don't you tell them a little bit about what a 457 is and why maybe it's a little unique or different than a 401k or 403 or something like that.

[Brian]

I do. Like, you know, when people talk about retirement accounts, employer provided retirement accounts, the easy answer most people think of is that 401k most common type because that's the most common type. And then you think about the teachers and the hospitals that have the 403s and those are very similar to the 401ks. But then right after that as you get into 457s and these are, they have the same funding limits as 401ks 403s. But because this is typically for public servants and other like you think about police officers, you think about firefighters, other people who work in the state and that type of service, these have a very cool benefit is that they don't have that 59 and a half provision or 55 for like 401k retirement accounts. In general, it's 59 and a half. To get access or otherwise you have to pay early withdrawal penalties. 401ks and other qualified retirement plans provided by your employer do allow. If you retire 55 and greater, you get access to those assets penalty free as well. But 457s don't have the early withdrawal restriction. I think they were designed on purpose because it's not uncommon that you go work as a police officer at 18 years of age. You work for 30 years, you're going to need access to that money pre all these dates even before 50 potentially they designed these products to where you could actually get right to them without penalty. Now you will pay income taxes unless it's a Roth from 457. So that's why then falls into yes, you have access to this money pre all the other people who are working traditional jobs in different account types. But now you've got to do don't skip leg day. You actually have to now do the cash flow planning. You know, is this money that is it better to get access to my bridge account which is my Taxable brokerage account or is it this account because I'm in a low tax rate? You got to do the work and figure out from a cash flow perspective and from a planning perspective which is the best count and what's the order of operations to use those assets.

[Aaron]

Yes, I would say that it's not necessarily something you would use in lieu of a brokerage account, but perhaps it's something that serves as a complement where you're building both because you understand where you are in your financial journey. Brian, can you hold the thing up right now? That's why we have the nine steps tried and true that you can work through. If you are in step five, coming into step six, it may make sense to begin maxing out that traditional 457. Once you do that, then you begin building up that brokerage account so that you have those bridge assets. By the way, if you'd like to know even more about the financial order of operations right now, it is on a never before seen sale. You can go to learn.moneyguy.com to check that out and get an amazing deal on that. I think that was a great question. Now there is one. Well, I'm not going to go there. There's one little unique thing about Roth.

[Brian]

You know, what people love about broadcasting is when somebody says, you know, I.

[Aaron]

Don'T want to get too squirrely with this because Roth 457s operate a little bit because a lot of people are asked this. There are 457s that do have Roth provisions in them, but the Roth provision of a 457 operates a little bit differently than the traditional 457 provision when it comes to early withdrawals and what you can have access to. So you want to make sure that if you're going to participate in your plan, you read the summary plan description, you understand exactly what is allowable and permissible in the plan in which you are participating. Because not all of them are created equal.

[Brian]

Why wouldn't you want to share that? That just shows that life gets complicated and this is maybe when. Hey man, I don't know what. I don't know. So maybe I need to talk to somebody.

[Aaron]

I did it. That's what we did right there.

[Brian]

I'm proud of you. I think you weren't going to do it if I didn't bully you though.

[Aaron]

That's a lot, a lot of things I wouldn't have done around here if I wouldn't have gotten bullied into, you know.

[Brian]

By the way, is anybody, anybody Talking about how much better look you better looking you are today.

[Aaron]

No. Everyone said, oh, my goodness, who's this guy up here? I don't even recognize him anymore is what they said. But here's what happened. We had some really exciting stuff that we were doing in this past week.

[Brian]

I wish the pole. If I was controlling the control panel, Bo, the poll wouldn't have been about because you told me there's something about your facial hair on there. I would. I would have had a poll halfway through saying, did you even notice Beau shaved?

[Aaron]

Oh, sick burn, Sick burn.

[Brian]

But I'm not in charge of the poll.

[Aaron]

You know what I love, though? Have you noticed how many mustaches have popped up around the Money Guy and Abound Wealth Enterprises over these past few weeks? I think it's pretty awesome.

[Brian]

It's like an invasive species. You know, you hear about these things that come into a community and an ecology, and you're like, who was the person that brought over on the boat that thing that has now destroyed what was awesome? And Bo. Yes. You planted kudzu in the middle of a bound wealth in the Money Guy show. Congratulations.

[Aaron]

You are welcome. Oh, all right, let's do another question.

[Brian]

You know what's sad, though? They all grew facial hair much faster than you do.

[Aaron]

Okay, here we go. Just flipping the tape. Oh, that got audible laughs from the production team.

[Brian]

Oh, I'm so proud of myself. So proud of myself. Look at. We should have a camera on you guys. All of you. We should have. They would all immediately leave, but it would be great.

[Aaron]

All right, this next question is from Jason B. Jason says, I'm 52 and I'm looking to retire in 5ish years.

[Brian]

Now, he didn't grow up. His dad wasn't a Methodist pastor. Was it because I grew up down the street from a Jason B.

[Aaron]

Who would be about 52 years old?

[Brian]

Yeah, that's what I mean. This could be my old, long lost neighbor, Jason B.

[Aaron]

Did that Jason B. Marry a lady who is now 61 and a high earner?

[Brian]

I wouldn't know that. I wouldn't know that could be Jason. Because, you know, I don't know if you know this about Methodist pastors. Back in the 80s and 90s, they actually moved every seven years.

[Aaron]

Is that right?

[Brian]

Jason B. Got moved away, sadly.

[Aaron]

Well, if Jason B. Were here, this is the question he'd want to ask you. He'd want to say, what should we think about on when to draw Social Security for each of us again, I want to remind you, I. Jason B. I'm 52. My wife is 61 and she is the higher earner, so it's likely she has paid more. Did I do that wrong? I'm 52. Oh, but I'm the high earner. So she's 61. She is older. But the lower earning spouse, he's younger. But the higher earning spouse. When it comes to Social Security, is there a strategy that might make the most sense for them? Or maybe why don't you just talk in general? So it's not specific advice. What are the different ways that people approach Social Security and things you can think about as you get there?

[Brian]

By the way, Jason, this is a great question, and it's kind of a unique thing about Social Security is that Social Security, you do have household maximums, but in a lot of ways the government still looks at your credits and your earnings history as your own. So that creates some unique planning opportunities. And it's not uncommon that you will look at the spouse. I'm trying to word this correctly. The spouse that has not earned as much as the higher earning spouse. And you can potentially turn that on and they use their benefit for a number of years. Meanwhile, the higher earner defers their Social Security for a while and then they eventually turn theirs on. And you take, kind of take that household maximum. At that point, you're going to technify this much more than I did. So I'll let you. I just wanted to set you up so you could go ahead and then show how smart you are.

[Aaron]

No, no, no. There are a few things to think about when it comes to drawing Social Security. I mean, all of us, we have the option. We can begin drawing as early as age 62, or we can draw at our full retirement age, which for most folks at this stage is around 67 years old. Well, if you begin drawing early, your benefit amount will be reduced because you're drawing over a longer period of time. So there's a significant decrease. Also, if you begin drawing early while you're still working and earning an income, there's a chance that your benefit could even be reduced further because you get penalized for earning income if you begin drawing before full retirement age. So that's one of the things that you may want to take into consideration as to when do I begin drawing between age 62 and 67. Well, there is even a benefit if you wait from 67 all the way out until age 70, which is the latest. You can defer Social Security 8%. You get an 8% embedded annualized rate of return on your Social Security increase. So there's a lot of benefit for folks in waiting till age 70. Well, when you're married and when your spouses, a lot of people don't recognize that for lower earning spouses, their benefit is equal to either the benefit on their own earnings record or half of their spouse's full retirement age benefit. So in the strategy that Brian was describing, sometimes it makes sense for the lower earning spouse, lower benefit spouse to begin drawing at age 62 on their own record. And then when the higher earning spouse gets to full retirement age and begins drawing theirs, the lower earning spouse would automatically be increased up to 50% of their benefit. It's a really unique strategy that's available for some people to take advantage of. Again, this is where personal finance becomes incredibly personal. What makes sense for one couple or one individual might not be the exact thing that makes sense for another couple or another individual. And what's wild is the decisions you make around Social Security can have huge impacts on the longevity and life of your financial plan. So this is one of those areas where as you are getting into these ages, thinking about claiming strategies, thinking about how you're going to go into this next phase of life, this might be a perfect time to consider taking the relationship to the next level and working with someone who's actually navigated hundreds of people entering into Social Security agencies to make sure that you're making the absolute best, most optimized decision for your unique solutions.

[Brian]

Well, the thing I was thinking about because usually I love modeling this, we have some software that we use for modeling Social Security strategies because everything, because the layout with him being the higher earner versus her income, it seems like it's a classic example of yes, let's go ahead and implement her to exercise hers on her own earnings and then turning it where she gets half, you know, later when he executes. But the age difference creates a unique thing there that I don't feel comfortable completely saying. It's a no brainer because I just want to model it to see if. Because maybe she needs to defer and I can't remember was she still working? Because it's back to that point that do not take Social Security at 62 to whatever your full retirement if you are out there still working. Because I've sadly had people come work for me or I've seen people working where you're completely caught off guard by how just penalizing it is what they do to your benefits and the taxes. If you take any type of earned income Once you execute Social Security between 62 and full retirement.

[Aaron]

We didn't even talk about the taxability of Social Security because even that is something that's a little unique. Again, based on your income, how much of your Social Security gets taxed plays into the equation. It's a super, super nuanced part of the financial planning equation. Jason, that was a great question. One if you want to think about having someone help you guys navigate this, I'd encourage you to go check out the work with [e-mail] or aboundwealth.com or you could just write winneroneyguy.com and we'd love to send you a Tumblr as you begin to do your own analysis.

[Brian]

On or wouldn't it be something if from the show a long lost Jason B. Reaches out, you know who moved away from the parsonage and it would be wild.

[Aaron]

It would be wild.

[Brian]

You never know. Money Guy has done some crazy things.

[Aaron]

We've seen crazier.

[Bo]

The Money Guy show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.