Ep 59: Top Social Security Myths, Part 1

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Have you ever wondered if the Social Security system will run out of money before you retire? Or if claiming benefits as soon as you’re eligible is the best decision for your financial future? In this episode, we’ll be debunking common myths about Social Security and answering the questions you’ve been curious about.

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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Marc: Welcome into another edition of the podcast, it’s Retirement Planning-Redefined with John and Nick from PFG Private Wealth. Got a little two-parter going on this podcasting episode. We’re going to spend this one and the next one talking about some social security myths, some of the top social security myths. Some of these certainly, I’ve heard and many of the guys have heard, and maybe even the listeners have heard, but there’s a few in here maybe you haven’t, and hopefully it’ll help you out a little bit if you’ve ever wondered some of the questions or things that we hear on the news all the time. Now we’re constantly making the rounds online. So again, we’re going to break this into a two-parter. So if you have not yet subscribed to the podcast, make sure you do so at pfgprivatewealth.com. That’s P-F-G privatewealth.com. Just hit the subscribe button or heart button or whatever it is on various different apps you might have already on your phone, like Apple Podcasts or Spotify or Google or whatever the case might be in that regard. So with that said, we got a lot to get through. We got five this week and five for the next episode as well, so let’s dive in. Get started. Nick, what’s going on buddy? How are you?


Nick: Good, good. Just staying busy. I had some family in town this weekend, which is nice to visit, which tends to be a trend this time of year.


Marc: Yeah. Yes, we’re taping this right after Easter, so yeah. Yep.


Nick: Yep. And then tax season is always entertaining.


Marc: Oh, busy. Mm-hmm.


Nick: So yeah, so we’re just plugging.


Marc: Good, good, good. John, how are you my friend?


John: Doing good. Doing good. Just celebrated my oldest daughter’s seventh birthday and I’m like, “Man, she is…


Marc: Where does it go?


John: When she hit school, it’s like, “Man, this is going by much faster than I anticipated.”


Marc: Yeah, it always does.


Nick: Yeah.


Marc: Mine is 25. She’ll be home this week, actually, for a couple of days from the Navy. And yeah, I’m like, “God, 25. Really? Stop.”. It only speeds up my friend, so good luck with all that.


John: I believe it.


Marc: But happy birthday to her. All right, let’s get into some social security myths. Neither one of our kids, John, will need this anytime soon, but for a lot of our listeners, social security is certainly a big topic of conversation, whether you’re, I think, you’re 50 plus. I think anything financially related from a retirement standpoint, we start paying a little bit more attention, maybe getting a little bit more nervous about some things that we see in here. So let’s jump in and talk about some of these myths. Number one, whoever wants to tackle this, I’ll let you guys go. The Social Security Administration will help you make the best decision about when you should start your benefit.


Nick: I’ll jump in on this one. Although I have heard some reports from clients, recently, where some of the information and/or slash, I wouldn’t call it advice, but information has been more comprehensive when they’ve had appointments with Social Security. It’s definitely not going to be the primary resource that one wants to use, as far as helping them to make their decision. Ultimately, this is one of those things where the social security decision should be heavily, or for most people at least, is heavily dependent upon the rest of the parts of the planning and the scenario. Is there a pension involved? When is retirement? Is one spouse still working while the other is retired? So there’s a lot of different factors that go into deciding and figuring out which options, scenario are best. And a lot of times, one of the things that’s come up quite a bit, with people, is we try to explain to them that it’s almost a two-part decision, where three to five years out, we have a good outlook and projection of when we expect to take it. But at the same time, in reality, what ends up happening is that the shorter-term, or more of a micro, decision tends to be impacted by factors that come up. So for example, a spouse gets laid off and retirement for them happens sooner than expected, or the market’s going haywire, and we want to dial back on withdrawals that were taken from investment accounts, those sorts of things. So having the ability to be able to pivot is important, but having a broad, overall plan in general when you want to take it is obviously the most important.


Marc: Yeah, and to your point, they just don’t know your personal, complete situation, so they can give you some ideas on, I’m sure, the best overall… Well, I mean not the best overall, but just looking at some of the claiming options that you have available to you, but how that’s going to play with everything else, they’re going to not have any clue to that, because they don’t know your financial situation. Now that’s the first one. Myth number two, John, you want to tackle this one? You won’t get any social security if you’re a stay at home mom. That’s not exactly right either.


John: Yeah. I’ll jump on this one, and then also I want to go back to myth number one. One thing I have also noticed, that people need to be wary of, is calling Social Security and getting wrong information. I’ve actually had multiple calls with clients and the representative didn’t necessarily know exactly, maybe what was being asked and they basically gave the client bad information, where we had to call up together and ask. And it really affected the client’s strategy that they were going to use, because at first they were kind of like, “Well, this is what Social Security told me.”. And we did our due diligence, realized like, “Hey. No, that’s not accurate.”. So we called up once, continued to got bad information, then we had to call back again. There’s actually specialists that we were able to talk to, that basically gave us the right information, which in her case ended up being quite a bit of money that she ended up gaining, by able to do some widow benefits where…


Marc: Oh yeah. That’s good to know.


John: Otherwise, she wouldn’t have known. So yeah, I just wanted to add that in, because I’ve seen it happen a couple of times.


Marc: No, absolutely. Yeah.


John: And as far as not being eligible as a stay-at-home spouse, basically that is a myth. There are spousal benefits and if you qualify for those, you’re eligible to get half of the other spouse’s full retirement benefit. There’s different strategies that one can implement in that situation, but you are eligible for some spousal benefits, even if you were not working and have earned credits into Social Security.


Marc: Yeah, and so I think some of the confusion, and a lot of times how these myths is usually it’s kind of close, but maybe a little off. So if you’re talking about your own individual benefit, you have to work, what is it, 40 quarters I think, through your lifetime, which is 10 years total, in order to qualify. But, to your point, if you’re married, and I think there’s a caveat there too, is it not that you have to be married at least 10 years. Is that what it is to get the spousal?


Nick: Correct. Married 10 years is the case.


Marc: Yeah, so there’s a couple little caveats, but I think that’s how myths get started and get skewed out of proportion. So yeah, if you’re married and you’ve been a stay-at-home mom raising the kids the whole time, you are still eligible for your spouses. So it’s certainly good information to know there as well. All right. Myth number three, you won’t pay taxes on social security, since you already paid taxes on that money when you paid it into the system. Once upon a time, that was true, but it’s no longer true, right?


Nick: Oh yeah. If you want to get somebody fired up, this is the way to do it. Yeah. So what we try to explain to people, is that for most people, most households, kind of middle class and up, about 85% of their social security income is going to be includable in their taxable income. So there’s a chart and it is dependent upon the other income sources that are coming into the household. But, like I said, for the most part, most people are going to have their income, up to 85% of their social security income, includable in the amount of taxable income that they have. So it is important for people to understand that there’s a difference between that, “Hey, it’s taxed at X amount rate.”, or something like that, because there is confusion in there. So that 85% of the number just is tax at whatever effective tax rate they’re in. So for most people, they’re going to fall into the 10 to 12, 13% effective rate. So it’s not a huge overall impact, but because it is considered a payroll tax that funds it, there is a little bit of firing up that happens when, from an emotional standpoint, where the thought process is, “Well, hey, I paid taxes into it.”


Marc: Yeah.


Nick: Yeah.


Marc: I mean it is… I was going to say, just didn’t mean to cut you off, but I think where people also don’t realize this is a good place where strategy comes into play, because how you’re pulling your income, it’s your income levels that’s going to determine how much that this could get hit. So again, social security should be part of an overall strategy and not just, “Oh, I’m pulling money out of X, Y, and Z account and then also I have this social security thing.”. You want them all working together, right?


Nick: Yeah, and the reality is, and people don’t necessarily want to always hear it this way, but the reality is, is that social security payments through your payroll, while you’re working are essentially, I try to tell people, essentially you’re paying into a pension, is kind of what you’re doing.


Marc: Sure.


Nick: So you’re kind of paying it into a pension, so it is done via payroll tax, but in reality that’s kind of what’s happening.


Marc: Yeah. John, anything you want to add on that one?


John: Well, I guess the one thing would be, as you mentioned, strategy. If you find yourself in a position where your social security is going to be taxed, maybe you have to take extra income in a given year, Roth IRA would be a great spot for it, because that does not count towards your modified, adjusted gross income in this case for the calculation.


Marc: So, maybe looking at ways to lower your taxable income limit, so just to help with that strategy?


John: Yeah, yeah. And that’s why it’s important. And if you tune into this podcast, often you hear Nick and I always say, you want to put yourself in a position to adapt to any situation and have balance, so that’s where that’s important, where it’s like, “Hey, I have to take some money out this year. Health, whatever, house.”. As we were chatting offline of house issues and contractors. Roth could be a good spot to take from, where it doesn’t affect your income.


Marc: Okay.


John: To get off-topic, same thing goes with Medicare. As you have too much income, your Medicare premiums might go up, so planning is very important.


Marc: Exactly. Strategy is completely important in how it might affect that particular myth. All right. Let’s do the last two. Here are some of the big ones, and these are the ones that get people most concerned or whatever. Myth number four, there won’t be any social security left by the time you get to retirement. I just don’t feel like this is probably going to… I can’t see any politician standing up there and doing it. It’s too much of a hot potato. They’re going to continue to kick the can down the road, and I think there’s going to be something, in some form or fashion. Could changes be coming? Sure, but the whole concept of it’s just going to go away, just seems like a lot of fluff to me.


John: Yeah, I would agree with that. Changes are already happening. We already see the cap limit for income going towards social security. That’s been increasing. So there are some updates that we see happening, and this is really an actuarial problem, so it’s a matter of just being like, “Okay, this is what we need to do to fix it and it will be fixed.”. What most people… What’s interesting, is I just got a question last week on this from a client, because they read an article about the trust fund will be exhausted between 2032 or 2034, if no changes happen. So their concern was, “Hey, is the money going to be there?”. And the answer is, your benefits will still be coming in, because it’s funded through your payroll, so there’ll be people paying that system, while people are drawing out.


Marc: Right. And we do have a problem there. That is a concern, right? If you look at those numbers, there’s way less people paying in now than people pulling out, which is why some other changes may need to come into play. But yeah, I think that’s where the confusion comes in too.


John: Yeah, exactly. And I believe a couple.. And you can look this up, if nothing changes, there will be roughly a 20 to 24% reduction in benefits, if they don’t change anything. But we feel confident that they’ll make some adjustments to the program-


Marc: Last minute, yeah.


John: … to get everyone whole. But again, it comes back to planning correctly. So, are you positioned yourself to adapt to this, if this were to happen? If social security benefits were to get cut, how does that affect your plan and what are you going to do?


Marc: Yeah. You hear all sorts of strategies out there, Nick, right? I’ve heard the one that if they just eliminate the early, at 62, and even moved it to 64 or just said, “No, we’re just dropping the early and you’re 66 or 67, depending on your full retirement age.”, it could fund it for another hundred years. Then they’re talking about means testing. So there’s a lot of things on the table, they just haven’t pulled the trigger on any way to actually replenish it yet.


Nick: Yeah, it’s pretty frustrating, because like John said, there is kind of a science to calculating this when you’re talking about this many people, from an actuarial standpoint. Literally from, like you had mentioned, increasing the initial, early retirement age from 62 or even starting to phase it in, like they have in the past as far as what they consider full retirement age, starting to move that towards an average of 65 would make a huge difference. Adjusting the cap, as far as the maximum amount of income that you pay into social security on, if they adjusted that up. So it’s frustrating, because like so many other things, and without going on a rant, it tends to be quite political. And unfortunately what tends to happen is instead of it being the small adjustments, that can make a huge difference, what tends to be in the news is more of like, yes or no. Will it be there or will it not? Versus like, “Hey, we can start to just adjust these numbers and make these… People are living longer, so we can figure this out.”.


Marc: Well, the doom and gloom makes a better headline too.


Nick: Yeah, for sure.


Marc: I mean, look at what’s been happening in France for the last month. They’re totally upset over pushing their pension there, which is basically the same thing that we have, back two years. There’s options there, it’s just a matter of what’s going to be acceptable. And I think for many of us, if you’re probably 50 or over, the chances of it affecting you greatly are probably diminished. I can certainly see though, changes to the ages or things like that affecting people. They say, “Okay, born from this date down, for sure you’re going to see some changes.”. So possibility, but just the quote on quote, “Well, it’s empty. It’s gone. No one gets a check ever.”, I think is just kind of silly.


Nick: Yeah.


Marc: All right. Final one guys and this kind of rolls into that prior one, as well. Number five is go ahead and claim it as soon as possible, turn it on as soon as you possibly can. And I think, again, whoever wants to answer this first, but if you need the money, that’s one thing, right? Turning it on, because the strategy makes sense, because you need the money, but turning it on, because you think it’s going to run out is maybe not the best way to look at that.


Nick: Yeah, we tend to agree. Taking it when you’re first eligible is very rarely a best bet. You give up significant benefits by taking it when you’re first eligible at age 62. And it kind of dovetails a little bit into what we had talked about, just on the previous question, where people that were at the point in time where their full retirement age was 65, so 62 is only three years before that period of time, the reduction, which is about a half a percent per month before your full retirement age, it didn’t have as big of an impact. But now with full retirement age, for many people, being 66 and a half to 67, now we’re talking a wider gap of years, four and a half to five years. So that the compounding effect of that early benefit is significant. So it has a really big impact for people that take it really early, when they don’t necessarily have to. And I get more regretful responses from people that took it early, not understanding the full situation, than I do from people that waited and had more of a strategy for when to take it.


Marc: Yeah. Any thoughts on that take it as soon as possible, John?


John: Yeah. I think it comes back to, like we said, what is the person’s situation? I really see situations where if someone doesn’t need it, taking it early makes sense. The only time is if there’s significant health issue or something like that. But then you also have to think about survivor planning. So there’s a lot of variables that you got to think about and does it make sense?


Nick: And just to dovetail off of that, John mentioned the survivor planning, where sometimes, as an example, one person in a couple taking it earlier and using that to leverage the other person waiting much longer, that combination can work out sometimes, work out-


Marc: Yeah, a couple’s strategy.


Nick: … really, really well. Yeah, yeah, so factoring in both strategies, letting one ramp up and using the other one to make it easier on the overall nest egg, sometimes that can make sense, but this is always something that we use. We have different calculators to strategize for social security and that sort of thing, and so we try to be as strategic as possible.


Marc: And John, I think you’re referring to the break point, so you’re talking about when you’re turning it on, you can run some calculations and see what that break even point would be if you turn it on early versus waiting. Obviously health plays a factor, but you guys can kind of stress test those numbers as well to see the best chance or the best option.


John: Yeah, so we have different programs, which is great, where one, we just look at social security in a vacuum and basically it’s, “Hey, let’s look at taking now versus 67.”, if that’s the person’s retirement age, and we can go look at their break even, which typically is mid-seventies in that scenario. Then we have our comprehensive planning tool, which takes into account other factors of, “Well, if you take it early, your investments can build up a little bit longer. What if you take it early and save it, so you can really put in different factors on it.”. But one thing people really think about if they take it early, and we’ve seen this lately, is the cost of living adjustments. So those in the last few years have been pretty significant. So when you take it early, you’re still going to get those cost of living adjustments, but they would’ve been much greater had you waited, because the balance is bigger that you’ll be getting monthly.


Marc: Gotcha. Okay. So again, there’s a lot to the social security strategies, the conversation. These were some of the bigger ones. We’re going to do a second part, with five more myths in a couple of weeks here. So make sure you tune in and check that out. But as always, if you’ve got questions, if you need some help, especially when it comes to claiming strategies and maybe running a maximization strategy to see what the best option’s going to be, don’t just run out and do something. And also don’t treat it as a separate entity from everything else that you’ve set aside for retirement. It really is about them all working together in a cohesive plan. And that’s what John and Nick and the team can help you out with. So if you need some help and you’re not already working with them, jump onto the calendar at pfgprivatewealth.com for a consultation and a conversation. That’s P-F-G private wealth.com. Get yourself some time onto the calendar, subscribe to the podcast. You can do so while you’re there as well, so there’s a little dropdown tab for podcast. We’re on Apple, Google, Spotify, all that good stuff. So again, P-F-G private wealth.com is where you can find them online. And we always appreciate your time here on Retirement Planning-Redefined. For John and Nick, I’m your host, Mark, and we’ll see you next time for more social security myths.