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What If Social Security is Cut? Here's What it Means for Your Retirement
00:25:03
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- [00:00]
A
Hey, James, what if Social Security gets reduced? Can I not retire? And also, by the way, what if returns are way lower and I might live to, like, 120 because I'm, like, super healthy? And also, I don't know, but what if tax brackets go up? Does that mean I can't retire? There's, like, so much going on in my head. I just want a simple yes or no.
- [00:19]
B
This is another episode of Ready for Retirement. I'm your host, James Knoll, and I'm here to teach you how to get the most out of life with your money. And now onto the episode.
- [00:29]
A
I know the last episode, we were going through a really simple example, and it was just so easy. Why is it people make this retirement stuff so complicated?
- [00:39]
B
Gosh, even as you say that, I'm like, gear in the headlights. Oh, man. Do you that It's. It gets complex really quickly. And I think that one inherent part of planning is that we are planning for so many things that are out of our control by the nature of what it is. One of those things is Social Security, which we're going to talk about today.
- [00:59]
A
Yeah. I don't know if it's analysis paralysis or paralysis analysis, but either way, what we're going to be going through today is helping your brain go, what if Social Security does get reduced? Would I still be okay? Because a lot of you go, yeah, I've got a million bucks or 2 million, or I'm going to have that amount. But there's still a million things that could happen, so maybe I don't retire. And you know why you're doing that? Because it's easier, because you're a human. And there becomes a point where James and I have to say, hey, I know you're going to keep working, and I know you could have more, but what about time with family? What about prioritizing your health? So we don't love provisional income policies and we don't love legislation. We love that if you can use numbers wisely and plan efficiently, you get more time with your family and, you know, on the golf course or doing whatever it is you want to do. So we're going to be walking you guys through a case study today. This was prompted by an awesome comment. So please leave comments below as to what you want us to make more videos on. This is how we actually create the content. So this was left by. You could see Wayne Brizet. Hopefully I'm saying that correctly. 9459, who says the hardest part of all this planning. I'm 60 my wife is 56 is trying to forecast what the US government will do with Social Security. The noise is they may need to reduce payments. None of that is factored in a Monte Carlo. It's why I keep struggling with retiring next year or later. And I'm reading this comment James going of course, like how could you not feel anxiety about this? But what you shouldn't do is that goal post planning of yep, one more month, then I'll retire. One more bonus, six more months. So when people come to you going hey James, Social Security, like how do I even think through this? How do you normally approach that?
- [02:42]
B
Well here's what we're not going to do. I think the temptation is to go in and read the and I got to be careful. I say this, I can read so many reports that talk about how Social Security is so underfunded and I can read so many reports about how changes are coming and taxes are increasing and ages are being pushed back and benefits are being reduced and I can read so many reports about what they've done in the past to extend it. Great. But at some point realize this, you are just spinning your wheels. There's going to come a time when they make changes to Social Security. I don't mathematically know how they wouldn't do that. But that's not where the focus should be. The focus should be let's go back to the drawing board. Let's go back to your financial plan and model out what would this look like under the assumption that Social Security is reduced. That's the only thing in our control. We can't control what Congress does. We can't control how much is raised in tax revenue to fund Social Security, Medicare. What we can control is the decisions we make around when we retire, how much we spend, how much we save. And we can do that. And by the way, to to this comment specific point, we can model that in Monte Carlo. It's just modeling that out in someone's plan of let's run a plan base case Social Security is cut by 25 to 30% or whatever it might be that is fully within our control. The last thing I'll say on that, this is no different than anything else we do. Let's run a plan assuming less than average long term returns. Let's run a plan with higher than average long term tax rates. Let's run a plan with higher inflation, more longevity, more healthcare expenses. It's really the same thing across all those things which is we can't predict with future or with any Degree of certainty, any of these things, but we can plan for it. We can have contingencies in place so that not even if, but a when some of these things happen, we know what that means for us personally and how we can rectify the situation, what we need to do to ensure we're still on track to meet our goals. So let's go through an exercise like that.
- [04:43]
A
Let's do it. And I use a phrase often in videos where I'll talk about retirement comfort, which is what? For some people, they might go, look, yeah, Social Security might get reduced, but that doesn't really bother me because people have been saying that for years. And if it gets reduced, I'll adjust my lifestyle. Other people go, no, no, no, I'd really, I'd be okay. But my spouse, she. I could just tell you, he, she. They wouldn't be okay because of that. That means I got to work two more years. Because you tell me that would kind of negate any potential impacts of that. You know, I could see why I don't need to, but I'm just going to sleep better doing it. It's like the person that pays off the mortgage, even if they, quote, unquote, shouldn't because they could invest and maybe do better, they don't really care, and they sleep better and they throw a party with their friends. So as we're going to go through this example, don't think, oh, I know they're doing this and the math works. And I see why they're confident. But for some reason, my feeling still not confident. You're a human, you're not a robot. Let's go through this. So this person here, just fictional couple, John and Jane, lots of John and Jane's on the Root talks Show both age 60, and they say they want to spend a hundred thousand a year and they've got 2 million bucks loose. Okay, we don't really know exactly. And some of you are going, that's unrealistic. Most people have a Roth and a brokerage account, and we're just keeping it simple here. So just assume 2 million and a 401k, no superhero accounts or anything like that. 100,000 years, what they want to spend in retirement. But Jane's worried. Jane's like, hey, James, you know what? If Social Security gets reduced by 50%, does that mean, like, I'm eating top Ramen again?
- [06:18]
B
Yeah, good question. Let's see. And I will say this before we go into it, part of this comes down to how dependent upon it, upon Social Security are You. So what we're going to want to look at, John and Jane, is you really have two sources of income in retirement. One is your portfolio. One is Social Security. Now there's his and her Social Security, maybe his and hers portfolio, but let's take a look at that. So let's start with Social Security. Let's assume, Ari, that they're going to have that 50% reduction. And let's assume that their starting benefit is. What number do you want to say?
- [06:48]
A
50,000 a year.
- [06:50]
B
Okay, great. John and Jane have 50,000 per year coming in from Social Security. They want to be able to spend $100,000 per year. So that first example, nothing changes if Social Security is fully there, 50% or $50,000 will come from Social Security, 50,000 will come from the portfolio. But we're not going to assume that. We're going to assume not just a reduction, a pretty big reduction, a bigger reduction than even people would project is coming with Social Security if nothing changes with the current system. Well, if their benefits get cut by half, what is their new benefit, ARI?
- [07:23]
A
25,000 a year.
- [07:25]
B
25,000 a year. That's a big hit. They just lost over $2,000 a month. That's a quarter of the total desired income. They wanted a hundred thousand per year. A quarter of that just got wiped out. Does that mean that they've got to cut their expenses by 25%?
- [07:39]
A
No. And there's a lot more we don't know yet. But that 25,000, that's a scary number. It's like that's not 25,000 once. That's like for the rest of their life that we're. That's not us just cutting that once.
- [07:50]
B
That's pretty significant, what we want to do. I think this is where people maybe don't make the connection properly sometimes. Is. That is dramatic. That would be scary to say. You're retired. You don't have the ability to create income anymore. You could, but maybe you don't want to go work at a job that you might be able to work at in your 60s, 70s, and beyond. You have two things. You have Social Security and you have your portfolio. And one of those things just got cut by over 2000 per month. What is that other thing though, your portfolio? How much income could that create for you is what we want to look at next.
- [08:22]
A
If we're just using basic withdrawal rates, and I know a lot of you are going, hey, you guys, talk about different rules out there, but keep it simple. If we're just using the 4% rule. Their $2 million could create $80,000 a year. So $80,000 a year plus we're once again putting a 50% slash on that 50,000 a year Social Security benefits puts us at 80,000 a year plus 25,000, which is $105,000. Now do you remember what they wanted to spend at the beginning, James?
- [08:55]
B
They wanted a hundred thousand.
- [08:57]
A
So here they are and where we'd be delivering news that if they're doing everything properly and there's taxes and state taxes and more to come with this, but that right off the bat it looks like they might still be okay.
- [09:11]
B
I think so. And now this is obviously a cherry picked example where we designed the numbers to show and illustrate the point that we want to make. Let's assume they have a million dollars. And I don't even know where this math is going to go. I'm just kind of going on a whim here. They have a million dollars, okay? And let's assume, let's assume that they are using the 4% rule, that's fine, but they're actually using a more guardrails based approach and they can create actually 50,000 per year, that million dollars. So 5% withdrawal rate. Well, if they go to that, that million dollars creates $50,000 per year. Social Security is still just at 25,000 per year, still not enough. That's $75,000 per year combined. But we have to go back to the drawing board, okay, so that Social Security is out of your control. I don't care how many letters you write to Congress, I don't care how many letters you write to irs. They're not going to increase your Social Security benefit unless you delay collecting benefits. Now this isn't ideal for most people. That shouldn't be like the optimal plan. But maybe they say, you know what, we, we do need to delay benefits. And Instead of collecting 25,000 per year in combined benefits at age 67, they instead, and I don't know what the math on this would be, but 24% higher of that, say that number goes to 35,000. It wouldn't go that high based on, you know, delayed retirement credits, but say that's 30,000, 35,000. Okay, well if you wait until 70 now you have 35,000 coming in, but you're still not quite there because your million dollar portfolio at full retirement age can only create 50,000 per year. Again, back to the drawing board. If you continue working from 67 to 68 to 69 to 70, hopefully that portfolio is growing A little bit. Hopefully, that portfolio, you're maybe adding some contributions to it. Maybe it's 1.5 million by the time that you retire. 1.5 million can now generate $75,000 per year of income for you using a 5% withdrawal rate. And by the way, the older you are, the more you can start taking from your portfolio. To use an extreme example, if you're 90 years old, I'm not going to tell you to limit your spending to 4% of your portfolio. That's designed to last for 30 plus years. At 90 years old, you're probably not going to last for 30 more years. And so the older you are, the more you can actually spend. But in that example, you're 70. You have 75,000 now coming from your portfolio, 35,000 now coming from Social Security, which is still a 50% reduction. You're back to 105,000. So what we've done there is that's, that's not ideal to have to work three more years, but neither is Social Security getting slashed by 50%. So I think what good planning does is it doesn't try to control for the uncontrollable. It doesn't try to say, well, we got to, you know, read the right blogs that tell us the news. We want to hear about what's going to happen to Social Security. It means we have a plan that our goal is to retire at full retirement age and be totally fine. But if changes happen, here's how much longer we need to work, here's how much more we need to save, or here's how much we would need to cut spending in retirement to still be on track to be okay.
- [12:05]
A
Yeah, let's assume that's a perfect example, because I'd want to go to that couple and say, hey, guys, look at the planning we just did. Did that make sense? And people go, yeah, James, that makes sense. I followed the math and it makes sense. I say, how does that sound? And they might be like, I mean, I, I get the math and the Social Security reduction, but, you know, I really don't want to work anymore. I say, great, that's. There's another option. You could spend 80,000 a year instead of a hundred thousand. You could stop right now with that Social Security reduction and they might go, ooh, that sounds a little better. I mean, I'm not spending a hundred thousand, but I still feel like 80 is more than plenty. Well, great. It's like the example I'll share when I personally play soccer. Love playing soccer. And it is not fun for me. When I get injured, I am hangry. Apparently, dude, that my fiance says, hungry and angry for those that don't know, until I get my mri and then I go, got it. When I have an mri, oddly, it brings me comfort because I go, look, I'm gonna find out the severity of the injury, like, what's my financial plan? And then I get my physical therapy and they give me an option. They say, look, if you were to do physical therapy at this rate, here's how quick you could get back on the field. Now, the risk is no matter what we told you, you shouldn't get back on that field for a month. I get to go, yeah, I know that's the risk, but I did my physical therapy so well, I don't care. I want to be back on that field. Like this couple could say, look, I don't care, I want to stop working tomorrow, I'm over this. Or they could go, you know what? Yeah, I. Using the physical therapy example, they tell me I should do six to eight weeks before I get back on the field. I, I could do all the best physical therapy in the world. I could hope markets go up right before I retire, but that is out of my control. It's a time thing at this point. So we need you to ask yourselves, what do you care about most? Which by the way, is way harder than all the math we just did.
- [13:50]
B
Exactly. And there, there's not just one answer is the thing. Do you want to downsize your home and use the equity from that 10 to your portfolio and maybe minimize property taxes? Do you want to move out of state, which reduces taxes and allows you to keep more in your pocket? Do you want to not just think of spending a thousand, a hundred thousand per year or 80,000 per year, but separating that into maybe your go go years, the slow go years, the no go years, to say, how do we account for changing spending patterns over the course of your lifetime? Do one of you want to pick up a part time job at the local golf shop because you love golfing and it gives you a few extra thousand bucks a year. And by the way, now golf is free because you're doing that. There's all these different things that you can talk about doing. And the goal of a good advisor is to understand the financial side, what trade offs carry the most leverage in terms of their ability to get you closer to where you want to go, but also understand you at a very deep personal level to understand which of those trade offs are not just acceptable to you. But. But are going to be the most aligned with what you value, with what you enjoy, with what you want to do. So that your plan is constantly evolving in the state or in the face of all these things that are out of our control, specifically Social Security, like we're talking about today. But the changing tax landscape, the changing. What's going to happen with market, what's going to happen in politics, what's going to. There's all these things. And we're picking on Social Security here because that's a massive one on top of a lot of people's minds. But recognize that's kind of universal when it comes to planning.
- [15:21]
A
Yeah. Let's talk, if you don't mind. James, what are just so many mistakes that I don't blame people. How could they know everything about Social Security? That's our job. What are some of the most common mistakes? And I'll just tell you one, and I'm sure you've got a list of 10 more that I see all the time, which is a couple comes in and they're like, look, it's so great. If something happens to me, I get to collect whichever benefits higher, whether it's mine or my spouse's. And I say, that's pretty cool. And then they go, you know what's even better? If I were to just, for example, be the breadwinner.
- [15:51]
B
And.
- [15:51]
A
And then my fiance, Alice, she decides to stop working. She's like, well, this is pretty cool. At age 70, when Ari decides to collect, you know, far into the future, even though I know I look like I'm getting there, what is going to happen is Alice is going to be like, I get half of that benefit. That's so cool. But what's wrong with that?
- [16:11]
B
What's wrong with that is a spousal benefit is based on half of the workers primary insurance amount. So in this example, if Alice were to collect a spousal benefit, or even if you wait until age 70, her spousal benefit is based upon half of what you would have been eligible for at age 67.
- [16:29]
A
So that's part of it.
- [16:31]
B
Another mistake people make is technically a spousal benefit isn't. You know, in that instance, Alice's spousal benefit isn't half of year 67. Her spousal benefit is in. What's the right way to explain this? It's almost like if this. If you would have earned $3,000 at age 67.
- [16:49]
A
Mm.
- [16:49]
B
She'd say, okay, my spousal benefit's $1,500. Well, if her own earnings record makes her eligible for a thousand dollars a month at that time, technically the spousal is the $500 supplement on top of that. Seems like it's semantics. Why does that matter? If a thousand of that is her own benefit, 500 is spousal. Well, because you can't collect a spousal benefit on a worker until they are already collecting their own benefit. So if, and let's assume for a second you're the exact same age to the day, well, she's not going to collect her spousal benefit until you turn age 70. Because she thinks, okay, well I can't collect a spousal benefit until Ari has collected. Well, she can collect her own benefit at age 67. So she could be collecting that thousand dollars a month from 67 until 70 and then turn on spousal. So there's, there's all these little nuances and all these little things. Um, another one, I had a client one time, she came in and she was getting ready to collect her own benefit. She had just retired at the age of 65. She had been divorced for a long time and she was retired self sufficient. She had her assets and her Social Security and said, do not collect your own benefit. Here's what we're going to do instead. You're going to collect a spousal benefit until you turn 70 and then you're going to collect your full maxed out benefit at the age of 70. She said, well, I'm not, I'm, I'm not married. And I said, well were you married for 10 years? And she said yes. Well, because you are married for 10 years or more, you can still collect a spousal benefit on your ex spouse's earnings record. And what she's able to do is from 65 to 70 collect that. And now at age 70, she's turning on her own benefit, which is significantly greater than it otherwise would have been. So there's all these spousal benefits, survivor benefits, primary insurance amount reductions, delayed retirement credits, all these things that need to be known which extend well beyond is Social Security going to be cut or not? Well, these principles are still probably really important to understand because those cuts would just be proportional if and when they happen, regardless of how you're collecting.
- [18:50]
A
Amazing. And I see, I saw this a few weeks ago where someone said, I don't want to collect Social Security too early because I saw my parents who wish that they had delayed. I said that's cool. Then they said, but I also want to make sure I don't collect too late because, you know, I've been paying into this thing for a while. And so I said, what's your plan? And they said, well, I'm thinking full retirement age, but I don't really know. And I said, okay, why? Then they said, well, just kind of sounds like it would align well based off of, you know. And I said, it doesn't align well with your plan. And what I find is people want an answer like, oh, this is the exact date I should collect. But what happens is as soon as you turn on that Social Security, that's more income. Not a bad thing. Who doesn't like income? But what if that interrupts your health care subsidies or your Roth conversion strategy or something else and people start to go, oh, so then there's like taxes, but then like, what about do I need insurance? And so there's this phrase that I'll call vacuum planning, which is, you can make a great Social Security decision, but in a vacuum. It's an awful tax decision. And you can make an awesome Roth conversion strategy, but from a purpose side. It's not going to let you travel to the degree that you want. So we want to make sure we're not looking at things just in a vacuum.
- [20:00]
B
Yeah. The last thing I'll say this. Cause this ties into both that as well as this concern of what if Social Security benefits are reduced? Who knows? We obviously can't predict the future, but one thing you'll hear a lot of people say is, oh, you better collect at 62 and get it while you can because the benefit's going away. I've gotta think, and again, anything could happen. That's not the mindset I would take. That might lock you into a really low benefit and you might suffer unnecessarily long term by doing so. If and when changes come, they're almost certainly not going to make it at least as dramatically to the people who are already collecting benefits. What's. I'm not going to go on record and say what's going to happen because I have no idea. But it's not unlikely to think, okay, payroll taxes are raised and anyone that's under the age of 55, the ages at which they can push Social or collect Social Security are pushed back. If it's hard to imagine any politician coming out and saying, hey, I'm going to go change Social Security and the amounts current eligible retirees are collecting without alienating their entire voting base and not just their voting base, but I think anyone could see how that would Be a challenge to people already on it. So it's more than likely going to be if you're under certain age, benefits are going to be impacted for you. So that mindset, I think a lot of times it's justifying. It's people helping themselves to justify a bad financial decision because of either a lack of patience or lack of discipline to do the right thing, when it's so much easier to just say, I'm gonna get mine while I can. Good luck. When you're 80 and that benefit's not going as far as it wants to, you spent on your assets, that might not be the best decision. In retrospect, I agree.
- [21:38]
A
And if I had to be, or if I got to be the advisor for the person that left this comment, sometimes I get to tell people they retire and you're in a great spot to do so, and that's fun. Other times, I'm not as, you know, fun or as joyful to be around. Because I would tell this person, I would say, you're cheating yourself. You're saying right now it's, you're worried about Social Security getting reduced, but in reality, I feel there's something else there. And they might say, yep, it turns out I don't know what it's like to be around my wife. I haven't been home for many years, or you know what? I really just don't know what I'm going to do around purpose when I do retire, whatever it is. So I would say, don't cheat yourself. And it's hard to hear, but it's the same people that say, I don't want to retire early because I don't know where healthcare is going to come from. It's a cost. And if you plan for it, you still might be able to retire early. So don't let that be the reason you don't retire early. And if you can hate me on this podcast or YouTube video or James for bringing it up, hate us. And then send us an email a month later and go, you guys called me out on it and now I'm retired. So keep us updated in the comments, whether you're the person that doesn't like us or the person that goes, yeah, I kind of needed to hear it, and now I'm taking steps. I just didn't know how to think through it.
- [22:44]
B
Yeah, redirect all mean comments, Ari's away, and give me the nice stuff. There you go. We'll do it that way. Where can people find you, Ari, outside of the podcast and this YouTube channel.
- [22:53]
A
Yeah, they can find me writing those emails to Social Security, hoping to not get that reduced on early retirement. Ari on Instagram and then on LinkedIn. Ari Taublieb t A U B L I E B. You can tell I've never had to say that before. And James, where can they find you?
- [23:08]
B
Same Instagram. James Knoll LinkedIn James Knoll and who knows? In the future, I think we're always talking about where's the best place to do stuff to impact as many people as possible. So again, if you have thoughts on that, leave it in the comments. Where would you like to see us? What social platforms, what media solutions, whatever that might be. But keep up with what's going on there. And that is it for today. Thanks everyone.
- [23:30]
A
Bye.
- [23:34]
B
The information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific specific securities, investments or investment strategies. Investments involve risk and are not guaranteed. Any mention of rates of return are historical and illustrative in nature and are not a guarantee of future returns. Past performance does not guarantee future performance.
- [23:53]
A
Viewers are encouraged to seek advice from a qualified tax legal or investment advisor professional to determine whether any information presented may be suitable for their specific situation.
- [24:04]
B
Hey everyone, it's me again. For the disclaimer, please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed this podcast, then go to root financial partners.com and click Start Here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.