← Ready For Retirement
Loading summary
Transcript1 lines
- [00:00]
A
If you're 60 years old, then it's what you don't know about Social Security that could cost you tens of thousands of dollars over the course of your lifetime. That's why in today's video, I'm talking to you and I'm going to share five secrets, five things that you need to know about Social Security that could help you dramatically improve the way you utilize this incredible tool in your own retirement strategy. I'm a financial advisor and I've worked with hundreds of clients over the course of my career. And the number one secret I want clients to know or the number one things I want them to understand is this. You need to understand what you're using Social Security to optimize for. Now, some people look at Social Security and say it's an income source and it's income is an income is an income. What do you mean? What are you optimizing for? It's just this one single thing. And yes, different amounts at different ages. But what do you mean by that? Well, what I mean by that is there's four distinct things you can optimize for with Social Security. Number one is longevity insurance. You can use it as a hedge to protect against what if you live for a very long time, if you live until your 90s or even beyond. Social Security is an income source that you won't outlive. So if the goal is to minimize risk in your plan, waiting to delay Social Security could be the best thing that you could do. By waiting to delay, you have that income floor that will last for the rest of your lifetime. That's not the goal for everyone, though. For some people, they want to protect a spouse. Now, protecting a spouse could look very different. Maybe you look at finances and you're very good, you're very strong with your financial plan. You understand how all the pieces interact. But you have a spouse that's not as involved or doesn't care as much well as you're thinking about Social Security, it's not just what's best for you and your lifetime, it's what if you predecease your spouse. How do you utilize survivor's benefits, spousal benefits to ensure that your spouse is well taken care of even if you pre decease them. The third thing you might be optimizing for is legacy. Social Security is wonderful, but that money stops once you. And if you're married, your spouse pass away. That's not money that's going to continue going to your children or grandchildren. And some of you listening, one of your Primary goals with your financial plan is to say, how do I ensure that I have money left over that I can pass on to children or grandchildren? If that's you, Social Security won't pass to them. But what sometimes people will do is they will collect early so they can invest that Social Security benefit. They can set that benefit aside so that when they do pass, the income discontinues, but the investment pool, the savings they've built up, that can pass along to their children or grandchildren in a tax free way. And then finally, the fourth thing that people might want to optimize for is investment returns. People very rarely take this into account, but when you look at a Social Security break even analysis, it's typically looking at how long will you live in, at what age should you collect benefits so that your lifetime cumulative benefit is maximized? That's a good starting point, but it's an incomplete picture if you're looking at everything. Let's illustrate this with a basic example. You're 62 and you're going to retire. Now you can take Social Security today or you can delay it and you can maximize your benefit if you wait all the way until 70. So if you do that, the break even age is typically somewhere in your 80s, where you're better off doing that if you live until your early 80s or beyond. But what that does not take into account is from 62 until 70, you're going to be drawing down your savings, you're going to be drawing down your investment accounts and there's an opportunity cost to that. Those are investment accounts that can no longer continue growing and compounding and becoming worth more and more for you over the course of your retirement. So the break even analysis must factor in if you're going to be retiring and delaying your Social Security benefit. What's the lost opportunity cost on, on what that money could have done for you? Not if you took that money and invested it, but even if you took that money, it admit you had to pull less from your investment accounts and that money could then grow for you over time. So that's secret number one is yes, Social Security seems simple, it's just an income source. But what are you optimizing for? Is it insurance against longevity risk? Is it protecting a surviving spouse? Is it legacy? Or is it optimizing your own investment returns? That number one thing is going to be the biggest determinant. And how should you then go ahead and collect your Social Security strategy? Secret number two, and I touched upon this a little bit, but secret number two is spousal and survivor benefits can be an absolute game changer. This is most important when you have a high earning spouse, in a low earning or potentially a zero earning spouse. So me, for example, I work and have a strong earnings record. My wife stays at home and she raises our two children. If we reach Social Security age, I'm going to have a strong Social Security benefit. She is not. In fact, if she looked at her statement, it would be very, very low, potentially even non existent. So if you look at that, some people assume, okay, James, well, you got to maximize your benefit because that's the only benefit that you're going to have. Well, yes, that's going to be the main benefit, but my wife Ashlyn would be eligible for a spousal benefit. So a spousal benefit is half. Up to half of what my benefit would be at my full retirement age. As of today, that's age 67. So if my benefit at age 67 was going to be $3,000, Ashlyn could collect $1,500 as a maximum benefit if she waited until her full retirement age to collect. Now I have to be collecting for her to collect. So if at 67 I want to delay until 70, something to keep in mind is she cannot collect a spousal benefit until I have first collected my own benefit. But once I do, she is eligible for up to 50% of my benefit, then survivor benefits are even stronger. Survivor benefits. Going back to that example, if I wait until full retirement age and my benefit is 3,000 per month, but I could delay until age 70, and let's assume at age 70, my benefit would be $3,500 per month. It's not exactly how the math would work out when you look at delayed retirement credits. But just to keep the numbers simple, if I waited until 70 and collected $3,500 per month, if I were to pass away before my wife, she could then collect that $3,500 per month, not the fifteen hundred dollar per month spousal benefit that she was previously collecting. So that can be an absolute game changer when you're trying to build a strategy that not only maximizes your lifetime income when the both of you are alive, but if you are married, how do you protect the surviving spouse? How do you do that in a way that they're well taken care of even if you predecease them now, even if you're divorced, if you're married for at least 10 years before being divorced, you're still eligible for spousal benefits. You're still eligible for potential survivor benefits. So keep that in mind. You don't have to currently be married, but if you are married at any point for at least 10 years, spousal benefits, survivor benefits can be a huge part of your Social Security strategy. Secret number three is Social Security can be taxed. Now, this is confusing to a lot of people, especially because there's talk of is Social Security going to stop being taxed? What about this new legislation, this new tax bill? Social Security is taxed. The upside here is Social Security is taxed more favorably than other types of income, such as IRA distributions, non qualified dividends, things of that nature. A maximum of 85% of what you earn from Social Security will be included in the income that you pay taxes on, which means that at a minimum, 15% of your benefit will be tax free. And then for most states, many states don't tax Social Security. However, Social Security at the federal level is still taxed. This depends on a couple things, though. Number one is your provisional income. Provisional income is a way of saying, here's the amount that you're collecting from Social Security. How much of this amount is actually going to be taxable? As I mentioned, a maximum of 85% of it will be taxable. Sometimes, though, none of it will be taxable. So there's a calculation for that. Other videos I've talked about that, and at the end of this video I'll include a link. One more thing on that note. With the most recent tax legislation that was passed, there is a new extra senior deduction of $6,000 per individual who is 65 and older. This deduction is only in place for taxers 2025 through 2028. This deduction in many ways was designed to offset whatever taxes people would pay on Social Security. But it's not exclusively a Social Security deduction. Doesn't even matter if you're collecting Social Security. That deduction can be applied as long as you're 65 or older in those taxes I talked about. And that does phase out. So that phases out over certain income levels. But that is one thing to keep in mind. Social Security is not tax free. But there are some ways you can plan for this, some tax strategies you can implement here to minimize the tax liability as much as possible. Secret number four when it comes to collecting Social Security is continuing to work after collecting benefits can reduce the actual benefits that you receive. Now, this is only true before your full retirement age. So this is true anywhere between collecting at 62 to your full retirement age, which for most of you is going to be 67. If you begin collecting benefits, then any money that you earn, and by earn, I mean as a wage. I'm not talking about IRA distributions, I'm not talking about dividends. I'm not talking about interest. Even any earnings that you have in excess of $23,400, that's for tax year 2025. For every $2 you earn above that limit, $1 will be withheld in Social Security benefits. So I hear a lot of people talking. They say, I don't know what Social Security is going to be like in the future. There's talk of it's going to go insolvent or the benefits are going to be reduced. I want to take what's mine. I want to get what's mine. So they start collecting early. But what they don't realize is that because they're continuing to work, those benefits that they're collecting are mostly or in some cases fully offset by the earnings they have from age 62 up until their full retirement age. So be very mindful of this. If you are going to collect early, make sure that you understand what your earnings might look like or what your potential earnings might look like. Some people have stopped working. They've retired at 62. These are people I've worked with. They retired, they got bored, age 64, they went back to work. And what happened was their Social Security benefit would have been fully offset based upon their new earnings record. But. But you have the option of suspending your benefit or discontinuing benefits. Now, there are some rules around that. You have to do so in a certain period of time. Also, there are some details around this where any of the benefits that are withheld. So if you earn too much because you started collecting Social Security, but you earn a number, you earn an amount greater than the wage limit or the earnings limit. Those earnings that are withheld, they do end up getting paid back to you over time because they get refactored in to your Social Security calculations. But if you know that you're going to be exceeding that earnings limit and might want to reconsider, is now the right time to collect your Social Security benefit? Or do you let that continue growing for you? And then finally, secret number five is you don't have to collect Social Security as soon as you retire. Many people retire at 62 thinking, I need to collect Social Security at 62. What else am I going to live on? Now, you could do that, and in some cases it makes sense to do that. But just because you retire does not mean you need to collect Social Security. In fact, even if you stop working, your Social Security benefit could continues growing. And it continues growing because every year before your full retirement age, there's actually a reduction if you collect your benefit then. And every year after your full retirement age, you get to take advantage of what are called delayed retirement credits. So just because you're not working does not mean you have to collect your Social Security benefit. This is where a well designed financial strategy comes into play of what's the coordination or what are you doing between Social Security benefits, living on cash that you've saved, IRA distributions, pensions, other types of investment withdrawals. When you retire, you get to create own income. And there's a way to maximize that income in terms of what's the most amount of income I can create. But most importantly, you get to manufacture the type of taxable income you're going to receive. So not just what's the highest income I can create, but what's the highest after tax income I can create. And that's where the strategy really comes into play. Combining Roth withdrawals from Social Security income with IRA distributions, with living on cash with all these other various things, that is where you can create the most effective tax efficient income for possible to support the goals that you have for your retirement. So for those of you listening, get ready to collect Social Security. These are the things that you need to know, these are the ways that you can maximize your benefit. Starting with understanding what's it going to look like, what are you trying to optimize for with your Social Security strategy and understand these other details to make sure that you're making the most of your benefit. Now I mentioned before that the taxation on Social Security is really important to know. I recorded this video here and in this video I'll walk you through how is Social Security tax, What does provisional income meaning? Take a look at that to understand what that might look like for you.