Quince Advertisement (4:43)

Why drop a fortune on basics when you don't have to? Quince has the good stuff. High quality fabrics, classic fits and lightweight layers for warm weather, all at prices that make sense. I know I was surprised at the prices. By working directly with top artisans and cutting out the middlemen, Quint's gives you luxury pieces without the markup. And Quint's only works with factories that use safe, ethical and responsible manufacturing practices and premium fabrics and finishes. You'll find three Quince shirts in my closet. I've got the Pima Cotton Luxe touch tee in deep navy, a black polo shirt and probably the one I've been most excited about, a long sleeve linen shirt in driftwood. Keep it classic and cool with long lasting staples from quince. Go to quince.com motley for free shipping on your order and 365 day returns. That's Q-U-I-N-C-E.com motley to get free shipping and 365 day returns. Quince.com motley you can claim Social Security.

Robert Brokamp (5:44)

At age 62, but for every month you delay up to age 70, you'll get a bigger benefit. While most beneficiaries still claim in their 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 Fincke, professor at the American College of Financial Services. Michael, welcome back to Motley Fool Money.

Dr. Michael Finka (6:05)

Great to be here.

Robert Brokamp (6:06)

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.

Dr. Michael Finka (6:20)

Well, I mean, obviously some of the messaging about Social Security is scaring people. You know, it's, 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 getting rid of the risk of not knowing how long you're going to live. So annuities are, 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, 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. You know, to an economist, it makes perfect sense that delay 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, is, well, I really wanna live it up in my mid-60s, you know, after I retire, I wanna spend more money. So I'm gonna claim Social Security now. You can, and this is what blows people's minds, you can spend more money early in retirement if 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, 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.

Robert Brokamp (9:18)

In your article, you make the point that it's even more compelling argument for people who have higher incomes. And 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 and wealth. So what is it about income level that makes delaying even more compelling?

Dr. Michael Finka (9:36)

Yeah, 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 retirement plan. 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 live 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, 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 actuarily 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, delayed claiming is actually going to to put Social Security on a more precarious footing because it's going to cost the US 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.

Robert Brokamp (11:25)

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?

Dr. Michael Finka (11:37)

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 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 6. You know, it starts out at 5% is the increase, then it goes up to 6 and 2/3%. 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 7 and a half percent between 67 and 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, is the most valuable year. So when it goes from 5% to 6 and 2, 3%, 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 as 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, he's just gone through a triple bypass and will 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 huge, hugely valuable.

Robert Brokamp (14:41)

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.

Dr. Michael Finka (14:51)

That's right, 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 2033 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 2033 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 decline by 23%, nobody would ever get reelected again who is currently in Congress. So that's never going to happen. So what's going to happen is some combination of borrowing more money. 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 in the worst case scenario, it still makes sense to delay claiming.

Robert Brokamp (17:07)

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?

Dr. Michael Finka (17:21)

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 off. 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're gonna have to pull a lot of money out of stocks to fund your lifestyle. And if you've claimed at 62, because you're going to have to rely on that portfolio more to fund your 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.

Quince Advertisement (19:38)

They say it's not what you say, it's how you say it. Because when you're someone who leads with confidence, who adapts, evolves and moves with purpose, you need a vehicle that mirrors that drive. Enter the Range Rover Sport. Blending power, poise and performance. It's a force both inside and out. With a design that's distinctly British and the capability to take on roads anywhere, the Range Rover Sport isn't just refined, it's ready. Its assertive stance hints at the experience within. An instinctive, exhilarating drive backed by a lineup of powerful engines, including a plug in hybrid that's an estimated range of 53 miles. Inside, comfort meets control, with cabin air purification, active noise cancellation and terrain response too. Fine tuning your drive across seven terrain modes. Stripped of the unnecessary, what remains is pure performance, agility and elegance. Modern luxury redefined. Explore the Range rover sport@range rover.com us and configure yours today.

Robert Brokamp (20:39)

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 are on track to meet your financial goals. So are you? Well, one way to find out is to use an online tool. In last Saturday's episode, I highlighted the Calc XML Retirement Planning Module. That's Calc XML Retirement Planning Module, which you can find just by doing an online search. But also check out any retirement calculators offered by your brokers, your 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 against. 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. To see our full advertising disclosure, please check out our show Notes. I'm Robert Brokamp, Full on everybody.