On This Episode
We continue our discussion on social security this week. Today’s show will focus on how you can integrate social security in your retirement plan and some variables you may need to look out for when doing so.
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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:
Speaker 1: Thanks for coming back in with us. As we talk here on retirement planning redefined, we always appreciate you joining us here on the podcast. With John and Nick, financial advisors at PFG Private Wealth, and we’re going to continue our multi-part series on social security. We talked about a few things last go around on the podcast, and we’re going to continue that on this time as well. John, how you doing buddy? How’s things going?
John: I’m doing good. How are you doing?
Speaker 1: I’m hanging in there. Doing pretty well. I think I’m doing about the same as Nick. At the time as podcast, our teams did not fare well this past weekend in football. How are you doing, Nick?
Nick: Good. While we lost, I’m still cautiously optimistic.
Speaker 1: Yeah, that’s right. That’s good.
Nick: I’m okay.
Speaker 1: That’s how fans do it, right? You still stay optimistic even when they break your heart over and over. We’ll save that for another time, but I do want to continue on our conversation about social security. We had some good chat the last time. We has some good conversation about things to consider, so we’re going to continue this piece on. As we teased the last time, and if you didn’t listen to it, make sure you go and check out the prior episode. You can go to PFGPrivateWealth.com. That is PFGPrivateWealth.com, and you can subscribe to the podcast, Retirement Planning Redefined, you can subscribe to that and listen to past episodes as well as future episodes. Let’s get into this part. We’re going to talk about how to integrate, really, social security into your retirement plan. So what’s a few steps to start and start thinking about when it comes to the integration of it?
John: Yeah, you know, one thing we wanted to touch on with social security is just how important it is in someone’s retirement plan. A lot of people don’t realize it really equates to almost 30 to 40% of their retirement income, and a big factor of why it’s important, it’s actually inflation protected. On average, historically, social security is average about 2.6%. So it’s really nice to have a set of income that’s actually going to be going up with cost of living adjustments. It makes a big difference.
John: Just kind of give a quick example. Let’s say if you’re starting social security now, it’s $2,000 per month. Within 20 years at 2.6%, that’ll be about $3,340 or so, which is a big jump in income. It’s important to understand how valuable that is in how much that really does help out someone’s retirement plan.
Speaker 1: All right, so let’s talk about some taxation and some benefits there. Nick, what are some things to think about when it comes to the benefits of the taxation?
Nick: From the standpoint of I guess making sure that people understand how social security works. From conversations that we’ve had, a lot of people are under the impression that because social security was funded via the payroll taxes that we talked about in the last session, they’re under the impression that there’s not going to be any sort of income tax when you start to receive it.
Speaker 1: Right.
Nick: As many people do know, that is incorrect. The formula that they use to calculate how much of the benefit is taxable to somebody is a little bit convoluted. Essentially what they do is they look at a modified adjusted gross income number, which includes your adjusted gross income, half of the amount that you receive from social security, and then a tax exempt interest, aka, interest from municipal bonds. They add that together, and then they really kind of look at a chart. And then dependent upon if you are single or married, it’s going to determine what percentage of your benefit is going to be includable in your taxable income.
Nick: If we were to say that your benefit amount was 2,000 a month, and your combined, that income formula that we kind of talked about, puts your income over about $38,000. 85% of your benefit, or about 1,700 of the 2,000, is going to be added to the other income sources that you have to determine how much you’re going to pay in tax. We just like to make sure that people understand that although that benefit is coming in, oftentimes they look at the gross amount, and they don’t necessarily understand that, hey, once you’re on Medicare, your Medicare, it gets deducted out of that. You’re probably going to want to have some sort of federal income tax withheld from it. That benefits starts to drop down. So that’s something that we always make sure we focus on and make sure that people understand.
John: When we’re doing planning, and people find out that the social security is taxed, they are not happy.
Nick: Yeah, and sometimes we get asked when did that happen or how did that happen? It really happened in the 80s, during the Reagan administration, is when it took place. Realistically, for most of the people that we’re working with, they’ve been in the working world for 30 years, and that’s been in place. It’s not something that’s necessarily very new or anything like that. There’s really minimal ways that you can actually reduce the impact on taxes. Realistically, the only other sort of income that’s not includable in that is any withdrawals that you’ll take out of a Roth IRA. So dependent upon their overall situation, and dependent upon the structure of what they’re going to have to take out, required minimum distributions and those sorts of things, we may look at different strategies, like converting traditional money to Roth money, and determining if that makes sense.
Nick: I’ll say this, that people do tend to hate taxes, and I know that sounds kind of funny, but the point being is that sometimes they’ll try to make irrational decisions just to try to deal with maybe a tax issue without figuring out that hey, you know, they may only be paying an effective tax rate of 12 or 13% on their income, which in the scheme of things is really low. And so making sure that they understand that, and that they don’t need to make rash decisions with how they structure their decisions is an important kind of thing. Social security just kind of factors in, it’s important for people to understand how it works and how it’s taxed. It’s more of just kind of an FYI sort of thing.
Speaker 1: Well, really good information here. We’re talking about how to integrate social security in a retirement plan. John, did you have another point about the taxes here on this?
John: Yeah, so one thing that we do in planning is we really start to map out someone’s taxes into retirement, and a big chunk of that is their required minimum distribution age 70 and a half. If we can see how much taxes they’re going to pay, we can really make some strategies for someone’s social security based on that. But again, the plan kind of gives you the roadmap so you can make the right decision based on your situation.
Nick: And to kind of add on to that. More specifically, when we map that out and we look at it, what we’re looking to see is when those required minimum distributions are due at 70 and a half, because people, by default, like to put them off as long as they can. Sometimes it will actually make sense to start taking money out of their IRAs first and wait on social security. Whereas the default for most people is take social security first, and then take out the money for the required minimum distributions. Structuring those decisions together as one is a really important way that you can kind of add in some tax planning into your overall retirement planning.
Speaker 1: All right, so we’re going to continue our conversation on the next podcast as well, part three if you will, about social security. But before we get out of here for this particular episode. Any other thoughts about some of the things we’ve covered today, gents?
John: Yeah, so it’s kind of going back to what we first talked about with social security being important in someone’s plan and inflation. The reason that is is when you have a portion of your retirement income that’s guaranteed, it really helps us kind of map out how we should invest or basically implement a distribution strategy from the rest of the assets. So having that base of, let’s say, 30,000 guaranteed income coming in, that’s going up with cost of living, helps us really map out the rest of the investments and how we should strategize behind that.
Nick: I think another good tool or, you know… Because as an example, my father has a pension, he’s a retired fireman, and I have to constantly remind my mother what kind of the equivalent of a lump sum of dollars would be if he would have a lump sum versus the amount that he gets every single month through the pension. If we’re saying on average the social security benefit amount for somebody that’s been working for their full life, and waits until their full retirement age to take it, is around 2,000 per month. Let’s say it’s a dual family household, so we’re talking about 4,000 per year. That’s really the equivalent of a safe withdrawal rate and a million bucks.
Nick: One of the super common questions that people ask us is how much can I take out of my retirement account each year? The safe withdrawal rates around 4%, so 4% on a million, $40,000 a year. 2,000 a month times two is closer to $48,000 a year. So we’re talking about one plus million bucks. If that money was sitting in an account at least generating income, even though you couldn’t invade principle, that sometimes gives people some perspective on how valuable that social security income really is to them in our overall planning.
Speaker 1: Well again, we are talking about social security. We’ve gone through a couple of pieces the last couple of podcasts. We’re going to do another one coming up in just a couple of weeks here, and continue on with our conversation with John and Nick, financial advisors at PFG Private Wealth, around social security. If you have questions and concerns, and you probably do because social security can be quite confusing to a lot of us who don’t deal with this every day. Well then reach out to the guys, give them a call and let him know, because they do obviously work in this arena every day. Having a conversation, getting a second opinion if you’ve already got one, maybe you have no plan at all, or maybe you’ve had no conversations around it,. Well, just reach out and let them know that you’d like to talk.
Speaker 1: 813-286-7776 is how you can reach out to them if you’d like. here in the Tampa Bay area. 813-286-7776. And of course, you can also just go to the website, PFGPrivateWealth.com. That is PFGPrivateWealth.com. Check out the team on the website there as well. You can also subscribe to the podcast on whatever platform you choose, Apple or Google, or so on and so forth, and listen to past episodes as well as future episodes. So guys, I’m going to say bye this week for you, and we’ll be back next time here on the podcast, so make sure you tune in for more Retirement Planning Redefined with John and Nick from PFG Private Wealth. We’ll see you next time.