Ep 13: Secure Act Changes – Stretch IRA

On This Episode

We continue our conversation about the SECURE Act. Another big piece to this new law is the removal of the stretch IRA. Nick walks us through the things we need to know about this big change.

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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:

Mark: Hey, everybody. Welcome into another edition of Retirement Planning Redefined. Thanks for tuning into our podcast about investing, finance and retirement with the guys from PFG Private Wealth. On this episode, just Nick joining me again. That’s all right. I like talking to Nick. How are you buddy?

Nick: Pretty good. Pretty good.

Mark: Hanging in there. Hope you had a good week since the last time we talked.

Nick: Yeah, absolutely. This is kind of my favorite time of the year from the standpoint of climate in Florida. Most people are in a pretty good mood overall, including myself.

Mark: Well, I’ll tell you what, you guys have in the weird weather we are? It’s in the 70s in North Carolina.

Nick: It’s definitely warmer than I prefer, but I know that it’s going to kind of cool back down. It’s still at least not 90 for four months in a row. I’ll take it.

Mark: Well, the bad part about the warmer winters is it doesn’t get a chance to kill the bugs. I’m showing my old man age there by that, but it’s really true. Every year I get older, it’s like, man, we do kind of need a cold snap during the winter to kind of kill off some of the stuff that is going to haunt us come spring in summer, right? We don’t get rid of some of those bugs. It just makes it that much worse. Hopefully another cold snaps on the way.

Nick: You must live near the woods.

Mark: Woods or water, man. Woods or water.

Nick: There you go. There you go.

Mark: You’ll get it with that. All right. Well, let’s get into our show this week. As I mentioned the last time, we talked about the SECURE Act on our previous podcast. If you haven’t subscribed to the show, please do so on Apple, Google or Spotify or whatever platform of choice you’d like. We’re all over the place with those. We talked about the increase to the RMD age limit and also the contributions for IRAs with the new SECURE Act. The SECURE Act, as I mentioned before, for those of you who’d just be catching this, that is the most significant piece of legislation the government has passed for our listening audience since really the Pension Protection Act of ’06. The SECURE Act is setting every community up for Retirement Enhancement Act.

Mark: This was $1.4 trillion budget piece that they kind of snuck it into at the end of December there last year in 2019. This week we’re going to talk about a really big component, Nick, and that is the elimination or the altering of what was termed the stretch IRA. Really a lot of people they’re saying this is the big negative to this piece of its great for the government because is basically a tax generating… This is the way to create more tax income for the government, but not so great for folks who planned on using this as a generational tool, which is primarily what it was done for to leave wealth to their heirs.

Nick: Yeah, absolutely. It’s going to have a pretty significant ripple effect from the standpoint of people that were planning to leave their IRAs or maybe had adjusted the way that they were taking from their investments throughout retirement and trying to preserve the IRA to pass. That’s going to have a pretty significant impact on that. Plus it’s also going to probably cost some people some money in legal fees as they adapt and adjust their estate plans and legal documents to take these sorts of things into account.

Mark: Yeah, absolutely. What was the stretch or kind of give us a quick overview and then what they’ve done to alter it?

Nick: Yeah. One of the things I always kind of tell people is from the standpoint of a stretch IRA is that it’s really kind of a nickname and it’s a concept. A joke that I would kind of make is if somebody passed away and you had inherited funds that were in an IRA and you walk into the bank and you tell the bank teller that you want a stretch IRA, they may look at you cross-eyed. It’s not an actual legal name for an account type. The real kind of legal name for the account type is an IRA BDA or a beneficiary designated IRA. Essentially what happens is if you inherit IRA funds or you’re listed as a beneficiary on an IRA, there are kind of two classifications for how they look at or at least that’s kind of been the rule up to now where it’s either spouse or non spouse.

Nick: The way that it would work is that if you were to inherit an IRA from a spouse, you could either put those funds into your own IRA, or you could put it into the beneficiary designated IRA. The rules for withdrawals would kind of dovetail from there. For a non spouse, you would also open it as a beneficiary designated IRA. But then the required minimum distributions that would have to be taken from that account would be based upon multiple factors, including your age, the year at which the person passed whether or not they had started taking distributions already, et cetera, et cetera. There are some different rules that went on with that, but in theory you could really stretch that over your entire lifetime by taking the minimum out, and you could also list a beneficiary yourself on the account.

Mark: The reason for doing that was to if it was a larger account for tax purposes, right?

Nick: Absolutely. Let the account continue to compound, avoid taking out in a lump sum and having to pay taxes on the entire lump sum amount. Because just as a reminder for people, when you inherited a traditional IRA or traditional IRA funds, the full account balance has… Taxes are due, federal taxes. If you live in a state where you pay state income taxes, income taxes are due on that full amount. That could be a pretty significant kind of tax bomb dependent upon what happened, especially if you made a mistake in how you had to take it out. Really this new provision essentially applies to people that are going to inherit these funds starting on January 1st of 2020 moving forward. It is not a retroactive rule. Essentially what it does is it says that you must deplete that account within 10 years.

Nick: From what I’ve seen so far, correct me if I’m wrong, the rules on how you need to take out distributions within those 10 years are not as strict as they used to be. However, that account needs to be depleted within the 10 years.

Mark: Right. Yeah. You can do it over like annually obviously, but at the end of 10 years, whatever’s left, you got to pull it out and pay the taxes.

Nick: But you can defer within those 10 years as well.

Mark: Yes.

Nick: Again, that could create a pretty big tax bond dependent upon the size of the account. There’s a little bit of a flexibility and a little less accounting or paperwork on trying to track those required minimum distributions that would have to come out and the amount on are you doing it correctly, are you calculating it correctly, or some people most likely, and we haven’t gotten into it yet with any clients with it being so early in the year, but my assumption is dependent upon the overall situation, people are going to probably take it out equally over the 10 years or try to defer and be a little bit strategic with how they take it out dependent upon maybe there’s an impending retirement. Maybe a husband and wife are 60 years old and they both plan on retiring at 65.

Nick: Wife’s father passes away, leaves them money in the inherited IRA. Our goal is going to be that we’re going to take it out post retirement where the income has come down, try to minimize the taxation, and maybe even let that fill in the income hole that they have between 65 and 70 or even 65 and 72 now that the RMD age for their own accounts has bumped up to 72, and they can let their own account kind of accumulate and grow and defer accordingly. It will definitely add another level of strategy and just kind of thinking outside the box a little bit so that we don’t have to deal with that, but it’s going to be interesting to kind of adjust and adapt to the new rules.

Mark: Oh yeah, for sure. Now, for some of those folks listening who are thinking about this now, I do know there are definitely some exceptions I guess if you will, if you want to call them that. There are definitely some pieces to ponder when it comes to some exceptions I guess if you will. Obviously if you’re a spouse, that kind of stays the same. This is really kind of targeting the heirs, so like basically if you were leaving this to your kids, but there are also a couple of exceptions there like chronic illness I think is one. There’s a couple of others as well.

Nick: Yeah, chronic illness is definitely one. If there’s a disability, that changes and adds a different set of rules. Those sorts of kind of deeper details are the things or the aspects of the new legislation that everybody’s kind of digging through. The attorneys are kind of reading through all the paperwork to make that everybody has a really good grasp and understanding of what those exceptions are and how those funds can be used. Attorneys typically do a good job of interpreting the new rules and laws and coming up with new strategies that allow us to work around them a little bit.

Mark: Yeah, no, that’s a great point. That’s why it’s really important to talk with your advisor about how this may affect you if you are planning on leaving. A lot of people do that. Some people are saying, Nick, with the way this whole SECURE Act is working together with the increase to the RMD limit at 72, age of 72, and then with this, a lot of folks, they’re kind of looking at it saying it’s a tax grab for the government, which of course, I mean, it’s always something, but it’s one of those deals where if you’re living longer and you’re putting more money and you don’t have to take it out and you choose to leave it to your heirs, like these IRAs or whatever, then that’s kind of where this is coming from.

Mark: That’s kind of how the two pieces of the puzzle in some people’s minds are working together in order to generate more tax revenue for the government. It’s certainly a piece where you want to talk with your advisor about how you can now be planning more efficiently.

Nick: Yeah. As an example with that, just kind of a thinking outside the box and how people may adjust and those sorts of things, if there are substantial funds in the IRA and it’s important to you to try to leave money to your beneficiaries, this change in the law may kind of push people to look a little bit more at using a tool like a permanent life insurance policy where they’re going to use their own distributions that they’re taking from their IRA in retirement, apply some of those distributions towards a life insurance policy that is going to pay out tax free after they pass on and avoid that potential tax bomb that the IRA would leave.

Mark: Got you.

Nick: There’s different things. The fun part, and we can put that in quotes as far as the fun part, but the part that we enjoy the most as far as financial planning and retirement planning, et cetera, is that people are different. There are enough rules, laws, product strategies, et cetera, that there’s usually something for everybody. It’s just important for us to kind of get to know them, figure out what’s most important to them, and adapt and adjust the strategies that we recommend so that it fits within their life and what they’re trying to do. This is just another change that we take it into account. We adapt. We adjust. One of the things that we always preface, and this is a really good example of why is…

Nick: In these classes that we teach, one of the most common questions that people will ask us is, should I contribute money to a traditional IRA or a traditional 401k or Roth IRA or Roth 401k? They start to understand by the end of the class together that we say it depends for a reason, things change. The only thing that we know for certain is that things will change. This is a great example. We always emphasize building in the ability to be flexible and adapt to whatever changes we do have happen to us so that we aren’t all in on one certain strategy that we have no control over whether or not it changes. This is just a perfect example, and it emphasizes even more that it’s important to have multiple sources of income in retirement, multiple account types.

Nick: That goes for the funds that you’re going to use in retirement, as well as the funds that you want to leave in retirement.

Mark: Got you. Got you. Okay. That’s why we kind of preached that on the show that anytime you hear anything, whether it’s our podcast, somebody else’s, a different show, a radio show, a television show, you may be hearing some information that kind of peaks up your ears there and kind of gets you to thinking about something. But before you take any action, you should always check out what’s going to affect your specific situation by talking with a qualified professional financial advisor like the team at PFG Private Wealth, John and Nick here on the podcast. As always, we’re going to sign off this week. Really good information here on the show.

Mark: If you’ve got questions about how the stretch IRA, the removal of that or the changes to that are going to affect you or how the SECURE Act in general is going to affect you, make sure you talk with your advisor or reach out to John and Nick at (813) 286-7776 here in the Tampa Bay area, (813)-286-7776. You can also find this online and subscribe to the podcast via the website pfgprivatewealth.com. That’s pfgprivatewealth.com. You can subscribe on Apple, Google, Spotify, iHeart, Stitcher, whatever platform it is that you choose. Nick, my friend, thanks so much for your time this week. I appreciate you. We’ll talk more I’m sure about the other components of the SECURE Act and how it’s going to affect things in the weeks to come.

Nick: Thanks, Mark. Have a good day.

Mark: You do the same, and we’ll see you next time right here on Retirement Planning Redefined.



Ep 12: Secure Act Changes – RMD

On This Episode

After it simmered in Congress for a year, the SECURE Act is now law. If you have a retirement account of any kind, or will one day inherit a retirement account, this will affect you. Today Nick will discuss the details around the new age specifications.

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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: Hey everybody, welcome into another edition of Retirement Planning Redefined. Into 2020 with our first podcast of the new year, joined this week with just Nick on the show with me. Nick McDevitt joining me here from PFG Private Wealth. Nick, buddy, what’s going on? How are you?

Nick M.: Just recovering from the holidays and getting ramped up for the new year.

Speaker 1: Yeah, aren’t we all? It’s so weird. Are you used to 2020 yet? I don’t know, it’s a weird number to me.

Nick M.: It is weird. Honestly, I was having this conversation with somebody the other day and the craziest thing to me is, with the age that I am, my grandparents were born in the early 30s, late 20s and it takes me back to thinking about in grade school, learning about The Great Depression and realizing that, that was 100 years ago almost.

Speaker 1: Yeah.

Nick M.: World War I and how far back, growing up in the 90s, how far back the 20s seemed and now here we are again.
Speaker 1: Yeah. Well, to that point, I’m a little older than you is, my dad was born in ’32. Actually my grandfather was born in 1890, go get that. And here it is 2020, so that just totally trips me out. My family had this weird and I’m only 50. But my family had this weird tradition of having, well, they had a lot of kids back in the day, but then they also had them late. My dad was 40 when I was born and so on and so forth. So yeah, maybe that’s why, my wife’s grandfather was born at the same time my dad was, and it’s just really weird how different people’s family dynamics work.

Speaker 1: But to that point, 2020 is bringing us a lot of change obviously and we’re going to spend probably, we’re going to the next two podcasts around this topic, but obviously we’re going to have an election later this year. The market popped 29,000, the DOW did for the first time, actually I think has done it twice now. It went over and then went back down at the time of this podcast taping, here in the early couple of weeks of January. So we’ll see. It didn’t drop very much, but it’s gone over and down. So that’s new records and new things happening, a lot of stuff.

Speaker 1: But out of all of that, one thing that really affects our listener base here for retirees and pre-retirees is the passing of The Secure Act. We talked about it months ago that it was sitting before the house and it looked like it was dead, The Secure Act. But then all of a sudden in December, there at the end, they slipped it through with some budget stuff. So let’s talk a little about The Secure Act this week, shall we?

Nick M.: Yeah, yeah. For sure. I was pretty surprised that it pushed through as quickly as it did. I had some clients that touched base towards the end of the year. And I told them what I always tell everybody from the standpoint of once it’s passed and it’s done, then we can talk about it.

Speaker 1: Yeah.

Nick M.: Because there’s always little adjustments and amendments and things like that, that are made. But a lot of the key aspects carried through. And so we’re still pouring through the details or really getting into the nitty gritty. But we figured today, we could at least cover one of the topics.

Speaker 1: Yep, sure.

Nick M.: And focus on that.

Speaker 1: Yeah, we’re going to do that with this week’s podcast and next week. We’re going to cover the two biggest components that it pertains to a lot. There’s multiple facets to The Secure Act and like any piece of legislation, there’s good and there’s bad. And of course, the government had to give it this name, secure. So for folks who are wondering, it actually is an acronym, it’s setting every community up for retirement enhancement. So that’s a mouthful.

Nick M.: Yeah, I always wonder how many people got in a room to try to figure out those sorts of things and how long it took them.

Speaker 1: How much money they spend just coming up with a name.

Nick M.: Yes, yes. And it actually takes away, fortunately, as you alluded to, the biggest aspect of this is changing the age at which required minimum distributions are required.

Speaker 1: Let’s get into it.

Nick M.: From 70 and a half, to 72 years old.

Speaker 1: Yeah.

Nick M.: Which ruins one of my favorite jokes about, again, the previous rule was so confusing to so many people and so absurd to make it a half a year and people trying to figure that out. We’re constantly befuddled, so now this is pretty cut and dry and pretty easy for people to understand, which I think it is probably a bigger benefit even than the increase of age.

Speaker 1: Well, okay, so let’s dive into that a little bit. So they did raise the RMD limit to 72, as Nick just mentioned. That’s the required minimum distribution, was 70 and a half. Now we should say Nick, to clarify, that if you have already started your RMDs at that 70 and a half threshold, it’s not like grandfathering but you have to stick with that. So make sure you are talking with your advisor about that. You don’t get to switch.

Nick M.: Correct, yes. So if you turn 70 and a half before 01/01/2020, then you are-

Speaker 1: On the old system, yeah.

Nick M.: So it’s everybody from 2020 moving forward, which again is a positive. A lot of people are working longer. And for those that don’t need the full distribution, defer income to live on, it helps them accumulate and grow money for a longer period of time.

Speaker 1: Right.

Nick M.: We’re definitely a big fan of the change.

Speaker 1: Yeah. And I think it needed to be done. I think from that standpoint, it’s good and it does clear up that confusion piece, but we just have to get through this initial weirdness, right, for folks who maybe just turned or are just planning at the end of last year, that kind of thing. So there may be a few areas where you want to try to have that conversation with your advisor about where you fall in that. So it’s certainly a piece you want to ask.

Speaker 1: So as you’re listening to this podcast, if you are new to our podcast and you’re not working with John and Nick yet, make sure you reach out to them. If you’re working with another advisor, ask them that same question, how it’s going to affect you because you still don’t want to get hit with that God awful penalty that the RMDs have, which is 50%.

Nick M.: Correct. Yeah. So just as a reminder for everybody, when those required minimum distributions are calculated. And from my understanding, again, we’re digging through all the language, the actual tables that are used to calculate the amount of money that has to come out, those tables themselves haven’t changed. So it’s just the time that you can wait as a little bit longer.

Speaker 1: Right.

Nick M.: And as a reminder to everybody, as an example, let’s say that the required amount needed to come out as $50,000. And for the last three years you’ve been taking out $2,000 a month from your account or $24,000, the penalty would be the difference between the amount due, which is 50, minus the 24,000 so 26,000. It’s 50% of that $26,000 so it’d be a $13,000 penalty, which is absolutely not a penalty that you want to participate in.

Speaker 1: No, that’s like a death sentence and it’s just terrible. I mean, so they don’t mess around when it comes to making sure you do that. Now this piece of legislation, by the way, The Secure Act, folks, it’s the most significant change since the 2006 Pension Protection Act that has come through. And there’s like I said, there’s a lot of components. We’re just going to talk a little bit about the age limit today. And along with that line, Nick, they also did eliminate age limits for contributions. So tell us a little bit about that.

Nick M.: Correct. So previously, if somebody had a traditional IRA and they were continuing to work, so as a reminder for everybody, if you want to be able to contribute to a retirement account, you must have earned income. So for those people that were maybe, let’s say, one of the things that we’ll see a lot is, to keep themselves busy, people would work a part-time job, so they would have earned income. And they were over 70 and a half and they weren’t necessarily working for the income. Of course, some are. But for example, even if you weren’t, if you were over seventy and a half, you could not contribute that money into a traditional IRA, even though you had the earned income.

Nick M.: So that rule or that restriction has been lifted. So it allows people that are working longer, which is much more common than it used to be, to be able to add money to the traditional IRA and dependent upon other factors, to potentially deduct that. So that’s a nice bonus because the other thing that happened is, because even if you were working in and this is how some of these two tie together. Let’s say you’re 71 and you were still working and you had IRA money and 401k money. Previously you would’ve had to take your RMD out of the IRA, although you could defer or wait on the money that was in the 401k for a business owner. So now that extra year and a half buffer, it can really, on some situations, it can really have a significant impact for some people on avoiding having to pay as much in taxes.

Speaker 1: Yeah. And it really also expands the opportunities for backdoor Roth conversions, as well for older clients, so that’s nice as well.

Nick M.: Yes, absolutely. And for those of you whose ears perked up a little bit on the Roth conversion, there’s a lot of caveats and we’re actually going to have a podcast in the future that talks specifically about those. There’s some hoops that you have to jump through, but that can be a really good tool to be able to use to produce some Roth money.

Speaker 1: Exactly. So yeah, make sure you subscribe to the podcast. That’s a great segue for me to mention that. We are going to talk next time about the stretch IRA and what happened to it in The Secure Act. So by subscribing to the podcast, you’ll get notifications for new episodes and really that’s pretty much it. So it’s a pretty easy thing to do. We just let you know about new episodes. You can listen to past episodes and you can find it a couple of ways. Whether Apple or Google or Spotify or whatever is your platform of choice, you can simply search on their a window, like if you’re on Spotify and hit search. You could certainly just type in retirement planning redefined and get us that way or Apple or whatever platform you choose.

Speaker 1: You can also go to the guy’s website@pfgprivatewealth.com. John and Nick have got the site there for their service, for their company. And while you’re there, there’s the podcast page. You can check that out. So that is pfgprivatewealth.com. That’s pfgprivatewealth.com and you can also call them. As we mentioned before, it’s very important. There’s a lot of changes, a lot of components to The Secure Act. We’re just going to cover over the next couple of episodes what’s going to affect most of our listening audience, but there are a lot of little pieces, so you want to make sure you’re having a conversation with your advisor and about the planning opportunities that may arise from these changes in The Secure Act law.

Speaker 1: Call John or Nick, give them a ring at the office there, if you need to talk with them. (813) 286-7776 in the Tampa Bay area, (813) 286 7776. Anything you can think of extra this week about the RMD component or shall we say goodbye for this week and hit it up next week?

Nick M.: I think we’re good to go.

Speaker 1: With that, we’ll say goodbye for this week on the podcast. So again, talk to your advisor about the RMD age limit change with The Secure Act. Reach out to John and Nick if you need a second opinion and we’ll catch you next time here on Retirement Planning Redefined.

Ep 11: Social Security, Part 5

On This Episode

Today is part 5 of our social security series and we will focus on the survivor benefit option. We will talk about a few situations that can arise and share a couple of client stories that have revolved around this topic.

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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: Back here with us for another edition of Retirement Planning Redefined, the podcast with John and Nick from PFG Private Wealth. Gentlemen, how’s it going? Nick, how are you today, my friend?

Nick: Doing pretty well. How about yourself?

Speaker 1: I’m hanging in there. Not doing too bad. We are into December. Moving along nicely on this. John, how are you doing? You doing all right?

John: I’m doing good. I’m doing good. No complaints. It’s a getting a little cooler here in Florida, which is nice. It’s been been hot, so it’s nice to get a little a cool, no more humidity.

Speaker 1: Yeah. Yeah. Now, as planners, you guys plan a lot of things, but are you the same way when it comes to holiday shopping? Have you kind of gotten some of this knocked out? We’re at about the middle of the month here now in December. So you guys ready to roll for Christmas or are you last minute?

John: I’ll take that one first. No, I do a lot of Amazon shopping [crosstalk 00:00:49].

Speaker 1: Me and you both. But how about you, Nick?

Nick: Anything I can do to avoid going to a store, I do, so the majority of my shopping [crosstalk 00:00:59].

Speaker 1: I think so many of us are that way, right, which obviously we can see in the death of brick and mortar, for sure. But yeah, absolutely. I agree with you there. Well, hopefully, folks, you’re out there getting your shopping done. Maybe you’re checking out this podcast while you’re driving around doing some shopping or walking around in the malls or whatever the case might be. That is kind of the beauty of podcasting. It’s not like traditional radio obviously, so you have more options, and hopefully you’re subscribed to the podcast Retirement Planning Redefined. Do it at Apple, Google or Spotify, and a couple others as well, and you can find the links if you want, and podcast episodes on their website at PFGPrivateWealth.com. That’s PFGPrivateWealth.com.

Speaker 1: All right, part five. I think this is going to probably wrap it up, too, for our series on social security. We’re going to talk about survivor benefits. Guys, give us some things to think about here. Survivor benefits are available to children and surviving spouses, correct?

John: Yeah, so it is available to children and surviving spouses. For today’s session, we’re going to focus more on surviving spouses because that comes into play more when we’re doing retirement planning.

Speaker 1: Okay.

John: So we always like to actually joke around with the survivor benefit. Not many people are aware, but they get a nice $255 lump sum death benefit if the spouse were to pass away.

Nick: Obviously has not been adjusted for inflation.

Speaker 1: Yeah, no, that doesn’t cover much of anything, does it?

John: No, no it doesn’t. But they do get a monthly benefit as survivor and when it comes to planning, that does help out quite a bit when we’re talking about strategies and trying to figure out a plan for a survivor. Kind of some rules that go with that. A survivor can actually start drawing social security at age 60 versus 62, which is kind of the normal first spouse, which we discussed last week.

Nick: It is important to note that as a reminder, even though they’re eligible to draw at 60, there are still the income tests from the standpoint of reductions. So if that person is working, then it may not make a whole lot of sense to get that early.

John: Yeah. What Nick’s referencing, we talked about the earnings penalty if you start taking social security before your full retirement age. That does still apply age 60, so if you’re still working, most likely that will wipe out any social security benefit you’re going to get as a survivor.

John: Some other things to consider, and I’ll kind of give some examples of this. Survivor benefit is not available if someone remarries before age 60, okay, unless of course that marriage ends. So we’ve had situations where we were planning for clients and we were talking about doing some survivor strategies and they actually … Let’s just give an example. They were 57 and were considering getting married and actually deferred their marriage until age 61 to be safe, which I don’t think the spouse is too happy with us on that because it deferred the marriage, but it made sense because we actually get some pretty easy strategies, which we’ll talk about later, to maximize the social security.

Nick: For the widow to the eligible for those survivor benefits, they had to have been married for at least nine months. There’s a caveat to that where the death was an accident, that could come into play. So essentially, that’s pretty lenient, but it is important to understand the nine month rule as well.

John: Yeah. And we stress a lot on just understanding what your situation is. Just kind of give you an example of that, I had a client that thought she’s eligible for social security because she was married, but he passed away when they were within eight months of marriage. And she was shocked [inaudible 00:04:23] the whole time, let’s say the last seven years, she was planning on it and then didn’t qualify for it. So it was shocking, and unfortunately for her, she was hitting 62 so it made a big difference to her overall plan.

Speaker 1: Gotcha. Okay. So good information there. Surviving spouse’s benefit is based on what?

Nick: So essentially kind of the caveat to this is whether or not people have been collecting. So if both spouses are receiving their benefits and there is death, then the surviving spouse receives the higher of the two.

John: Not both.

Nick: Correct. Not both, which some people will be surprised about how that works. But it’s important to understand that they receive the higher of the two, not both. And one of the big factors that gets calculated into the firm calculation of the amount of money that the widow will receive takes into account when the deceased spouse originally claimed their benefit. And it gets a little bit confusing, quite frankly, for most people, but it factors in essentially whether or not they took it before or after their full retirement age. So John will walk us through an example on that. But it is important to understand how this works.

John: Yeah. Again, we like to do everything in the realm of planning. So this is where doing the social security maximization strategy is very important. Social security is a big part of someone’s retirement income. So you want to make sure that you’re making the best decisions available to you, because the last thing you is to look back 10 years ago, it’s like, “Oh, I wish I did this. I could have had X amount of dollars or really been enjoying my [inaudible 00:06:05] a little bit more.”

John: So just going to touch on an example of that. We’ll call them Jack and Jill. We talked about some survivor strategies last week, but let’s say Jack’s up for retirement benefits, 2,400. Doesn’t take it [inaudible 00:06:20] 70. Basically, Jill can jump on and actually take … Let’s increase it to 2,976 increases. That will be her new basically benefit for social security, so she gets a nice increase and that’s where we talked about really trying to protect the spouse and giving them more income for life. And if she tries to draw early, let’s say she takes it at 62, which anytime you draw early, you get reduction of benefit or a reduction based off of now the higher amount that he deferred, which is a nice little caveat. We have to really do some planning for a spouse.

Nick: And one of the things too from a comparison standpoint is when we discuss the spousal benefits and how the spousal benefits do not grow past full retirement age, the death benefits does, or the widow benefit, survivor benefit does grow past [inaudible 00:07:15] age, so another reason why that’s really a big factor.

John: Yeah. And one thing that we’ll always do, if we’re incorporating strategies, you always typically want to delay the higher benefit. So if you’re looking at an opportunity to take a widow’s benefit or my own, rule of thumb, and everyone’s different, but rule of thumb is defer the higher ones. I’ll give my family as an example. My father-in-law, his wife passed away young and basically age 60, he was able to actually draw her social security benefit at 60, which a reduced amount. Most of his income is from real estate and investment income, so an earnings penalty didn’t apply to him. So the plan is he’s taking the widow benefit at 60 and he’s deferring his, and then at full retirement age, he’s going to switch over to his and get his full retirement benefit. So from 60 to 66, he was actually able to get some type of benefit and then at 66, will jump to his own and he gets the full amount.

Speaker 1: Yeah. So there’s some good strategies, some good things to think about, good information here when we’re talking about these survivor benefits. So a couple of final key points or key takeaways, guys, just to think about?

John: Things to consider is a reminder that basically when the person passes away, their social security benefits stop. And if the surviving spouse is going to take one, they’ll take either their own or the deceased spouse, whatever one’s higher, just making sure that it’s important to plan and make sure the strategy is best for you based on your situation. Social security … This is everything, not just survivors … it’s very confusing, and there’s a lot of different things you can do, so if you’re working with an advisor, just make sure that they have the capabilities to stress test your decisions, to make sure you’re making the correct decision based on your situation and not your neighbors or as Nick likes to say, up north, his clients, they’ve talked to their plumber.

Nick: Yeah. Everybody likes to get an opinion from somebody else. We will talk about opinions. But so anyways, I think the biggest kind of overlying thing, and we talk about it a lot, but we can’t emphasize it enough, and even when we do overemphasize it, people still ask, but this is not a decision to be made in a vacuum. So many other factors tie into this decision.

Nick: And even when we plan … As an example, I was walking somebody through a plan this week, and they are three or four years out from retirement, and even though we have a strategy set up for social security in the plan on what we plan to do from a baseline standpoint, they asked and I really had to emphasize that realistically this decision doesn’t really get made until maybe three, six months before their retirement.

Nick: So we may plan for a certain strategy for four or five years, but the importance of planning and updating your plan every single year cannot be understated, because especially with social security, if we’re in the midst of a recession, if we’re in the midst of a 2008, we’re not going to have somebody take a bunch of money out of their nest egg even though over the last five years we planned to do that. We’re probably going to have at least one of them take social security, protect the value of the nest egg, give it time to bounce back and then adjust accordingly. The planning is via kind of a living, breathing thing and we always have to adapt and adjust.

Speaker 1: Nope, I think that’s a great point. We’ve said that many times here on the podcast that you’ve got to have a plan and then you have to realize that that plan needs to evolve much like your life’s going to. A lot of times we kind of get a collection of things. We have some investments, we have some insurance vehicles, we think about social security. Maybe you’re lucky enough to have a pension and you say, “Okay. Well, I’ve got this collection of things. I’m good to go. I have a retirement plan.” No, you have a collection of things. So pulling them all together in a full retirement plan is really important.

Speaker 1: That’s what John and Nick do every day at PFG Private Wealth, so give them a call if you’ve got questions or concerns. Get on the calendar at 813-286-7776. That’s 813-286-7776. Don’t forget to go to the website, PFGPrivateWealth.com. You can always subscribe to the podcast and get new episodes, check out past episodes, things of that nature on Apple or Google or Spotify. So check them out online as well@pfgprivatewealth.com and also share the podcast with folks that you think might benefit from it as well.

Speaker 1: This has been Retirement Planning Redefined. Thanks so much for staying tuned into the show. John. Nick, thanks for your time, as always. I hope you have a happy and safe holiday and we’ll talk actually I think in 2020.

Nick: Sounds good.

John: All right.

Speaker 1: You guys-

Nick: Thank you.

Speaker 1: Yeah, absolutely. Take care and enjoy the holidays, everybody, and we’ll see you next time right here on Retirement Planning Redefined.

Ep 10: Social Security, Part 4

On This Episode

Today’s show is part 4 of our social security discussion. Our topic today is spousal benefit options. John and Nick will walk us through the ins and outs of this facet of social security and offer their advice.


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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:

Mark: Hey everybody, welcome into another edition of Retirement Planning Redefined. Thanks as always for checking out and tuning into the podcast with John and Nick, financial advisors at PFG Private wealth. Gents, what’s going on? John, I’ll start with you. How are you buddy?

John: I’m doing good. I’m doing good. How are you doing Mark?

Mark: I’m hanging in there. How’s the little one’s doing? I know they, you had some cold running through the house. Everybody getting better?

John: They’re getting much better, which is good. No more getting coughed in my face a lot less this week, so yeah, that’s a good thing.

Mark: And Nick, how are you my friend?

Nick: Good, good. Looking forward to the holidays coming up here and all kinds of good food.

Mark: Oh yeah, yeah. Are you a Thanksgiving kind of guy?

Nick: I have become more so after my brother started deep frying turkeys a couple of years ago.

Mark: Okay, good. So no YouTube videos of that now, so just be careful. We don’t want to see any flying turkeys.

Nick: He’s got it all under control.

Mark: Fantastic. Awesome. Yeah. At the time of this podcast taping it is just about Thanksgiving. It’s just about here on us. And so we’re going to continue on with our a multi-part series we’ve been doing about Social Security. So hopefully you’ve been checking these out and if you have, great, if you have not, make sure you go to the podcast page, you can find it on their website at pfgprivatewealth.com that’s P F G private wealth.com and you’ll find the podcast page. You can subscribe to it on Apple or Google or Spotify. I think there’s other couple of choices there as well.

Mark: So make sure you do, a lot of good content that we’re discussing. This is a multi-part series all around Social Security and part four here is going to be on Social Security, spousal benefits, not deep frying turkeys that’ll come another day, but a Social Security spousal benefits. So guys, let’s get into this and just kind of break down some information for us on, I guess, what we’re entitled to or how this whole thing kind of works.

Nick: Sure. So just kind of a recap on, you know, how eligibility wears for Social Security. Essentially somebody needs to work, you know, for 40 quarters, pay payroll taxes for those 40 quarters and they become eligible for their own benefit. However, you know, one of the common questions that we may get is one spouse stayed at home, one spouse worked. The spouse that stayed at home didn’t get their 40 quarters. And they want to know are they eligible for any sort of benefit.

Nick: So it’s important to understand that, you know, as long as the couple is married, the person that has not qualified for the benefit is eligible for a spousal benefit. And that spousal benefit is essentially calculated by looking at the full retirement amount benefit for the spouse that was working and multiplying by 50%. So, that’s the starting line. That’s kind of how you understand how they calculate that. And the reason that they did create that was understanding that households, you know, it’s not always cut and dry from the standpoint of one spouse is working. There’s obviously value to the other spouse staying home, helping to raise a family and they want to protect that spouse in situations like divorce or other sorts of scenarios by providing them with this kind of caveat for how the benefits work.

Mark: Okay. And yeah, so the simple way to break it down. So give us some more, John, give us some more things to think about here when we’re talking about the eligibility of spouses, maybe some rules, things of that nature.

John: Yeah. So basically, some of the rules before you can collect a spousal benefit, the primary worker must have filed. So wait until the spouse actually draws and then you can go ahead and take your spousal benefit. Spouses can actually start taking it at age 62, that’s the soonest that you can start taking.

Nick: So a kind of a good example of that is, so let’s say, Mr. Smith has been the worker and Mrs. Smith stayed at home with the family and raised a family. And a couple of years ago, two years ago, she started working, you know, so she’s not eligible for her own benefit. So Mr. Smith is going to continue to work and Mrs. Smith is trying to figure out, “Hey, I’m also 62, can I file for benefits?” So the answer is not until Mr. Smith essentially retires and fights for his benefit. So that’s where the restrictions on the ages kind of come to play.

Nick: And when John referred to that primary worker must filed for their benefits, there used to be some other rules in play where you can kind of navigate around, but they really cut down and things are a lot more restricted than they used to be.

John: Yeah. And just to kind of give some numbers to that, let’s say Mr Smith’s full retirement benefit was 2,400, Mrs Smith’s spousal benefit would be, as Nick mentioned, 50% of that sort of 1200. And again, so her spousal benefit is based off of his full retirement amount benefit and not what he actually gets. So example of that would be, you know, when she goes to draw, let’s say if he’d started taking early and he get his full 2,400, she’s not penalize by that. Her 50% is still the 1200, assuming she draws at her full retirement age.

John: If she decides to take early at 62 she will actually have a reduction of her spousal benefit.

Nick: It is important for people to understand that, you know, there’s the dates on when people start to receive the benefits are calculated, or factored in I should say, for each person. Though it factored in potentially when Mr. Smith files and starts collecting and it’s also factored in when Mrs. Smith files and starts collecting. And so there’s a lot of different variations on how that works. And because there are some different variations, we typically recommend to people that, you know, I was helping you kind of walk through the different, let’s test out different scenarios and figure which one makes the most sense because there are so many factors that go into the decision.

Nick: We understand a lot of people like to just, you know, they want a cut and dry answer and unfortunately or fortunately, the positive to there not being a cut and dry answer is that, you know, oftentimes they can be strategic and find something that works better for them and if it were cut and dry. But it does take a factoring in a lot of other things to make the right decision.

John: Yeah. At first the answers to certain questions are, it depends.

Mark: Yeah, that’s the case a lot of times I think.

John: One question we actually get a lot and we talked about in the last sessions was, you know, if you draw Social Security after full retirement age, you actually get a percent increase in your benefit. That does not work for spousal benefits. So if the spouse didn’t want to take or they want to defer their spousal benefit, they do not get the 8% increase on it.

Nick: Yeah. So, we have seen that mistake happen, you know, the primary person has decided, “Hey, let’s wait to collect the benefit” because they are under the assumption that not only will their benefit grow by 8%, but the spousal benefit that their spouse will take will grow, but that’s not the case. Only their benefit grows, the spousal benefit does not. So when we run kind of break even calculations, it can often makes sense to just have them start collecting so that they can get both of them.

John: Yeah. And then, you know, it’s important understand also for to be eligible for spousal benefits, you have to be married at least one year. So can’t be a just getting married and after six months started drawing on Social Security for a spouse.

Mark: They’re not going to just make it too easy for you anyway. All right, so that’s some good rules. That’s some good basic information there. What are some strategies? Give us a few things to think about when it comes to the spousal benefit options.

John: Yeah. And like we said, everyone’s situation is different. It really depends and it’s important to customize what works for you. And I think we offered in the last session, but if anyone wants it, we actually are working on a Social Security machination strategy, which we’re happy to do so. But one thing that we’ll do with some spousal strategies, depending on the situation, we might have one spouse claim early and the other spouse, depending on the situation, you know example of that would be, let’s say we have a high earner and they want to protect the spouse in case of a premature death. So we might go ahead and have the high earner, who’s Social Security benefit is higher, actually delay theirs. So, if they were to pass away prematurely, that spouse can actually jump onto a higher amount, high Social Security benefit, which is nice strategy to protect the surviving spouse.

John: I’ve used that a couple of times when there’s an age gap on the spouses or if I’m there, you know, sometimes clients will come in and they’re just concerned saying, “Hey, I’m really concerned something could happen to me. Is my spouse going to be okay?” We’ll go ahead and implement some strategies like that.

Nick: Another time where that can be used is if the primary earner has worked at in an occupation where they’re eligible for a pension and they’re going to receive a pension and they, you know, kind of through planning or whatever it may be. Or like the example of John mentioned where on of the spouses is maybe quite a bit younger, so when the other spouse is quite a bit younger, it pulls down the pension amount that the primary person would receive. So to offset that a little bit, we might recommend, “Well, hey, instead of doing a hundred percent survivor benefit on the pension, let’s do a 50% so that you can have a higher pay out. But to offset that, what we’ll do is we’ll have you wait to take Social Security until 70.” So the pension amount that the spouse would receive would be less, but we can offset that waiting on Social Security a little bit and still have more income coming in the household.

Mark: Gotcha. Okay. All right. So a couple of different strategies there to consider and I think a lot of times people sometimes don’t plan ahead for that part. It’s like we’re sitting there talking about different, when you’re getting your retirement plan done, I think sometimes we look at it overall and say, “Well, we want to turn Social Security on as soon as we can and yada, yada yada.” Instead of saying, “Okay, how can we most maximize our Social Security for both of us in an overall inclusive retirement plan?”

Mark: So it’s certainly important to do. And as John mentioned, you know, they can run that Social Security maximization if you have some questions on that. If you want to get that done or have a chat with them, give them a call at (813) 286-7776 that’s (813) 286-7776 and you can also check them out online at pfgprivatewealth.com.

Mark: As I mentioned before, there are financial advisors here in the Tampa Bay area, so if you have some questions about that, again, as always when you’re listening to this show or any other show before you take any action, always check with a qualified professional about your specific situation because everybody’s, it can be so different, so make sure you have that chat.

Mark: All right guys, I think in the interest of time we can probably squeeze in a couple more things. Can you give us a few things to think about on divorced spousal situations?

John: Yeah, so it is important for people to understand that they are still eligible for a spousal benefit if they were married for 10 years and they are not remarried. So a scenario that we may see with that is they were previously married to a high earner, maybe they worked a lower paying job, they were married for 25 years, became divorced, they went back to work to cover expenses, et cetera. They may be in a relationship currently, but they’re not officially married and we kind of go through calculations and we determined that, “Hey, the spousal benefit that you could receive from you former spouse would be higher than the benefit that you would receive on your own and or higher than the benefit that you would receive if you were to marry your current partner.” And obviously a lot of other factors go into that.

John: But, from a purely financial decision, that could work out really well because again, you cannot collect that spousal benefit from a former spouse if you are remarried. We have had questions along the lines of, you know, “Hey, I was married twice. Both were over 10 years. Am I restricted to choose just the most recent one?” And the answer is no, you can pick the higher. We had a nice young lady one time that had four different ten year marriages and she asked if she could add them all up together and unfortunately you can’t, it’s just the higher.

Nick: But she had a lot of options.

John: Yeah. It’s good to have options.

Mark: Like window shopping apparently.

John: So, yeah. So those are a couple of things to keep in mind.

Nick: Yeah. And one question we get a lot with divorced clients, they say, “How soon can I draw on the ex-spouse’s Social Security?” And really you can draw on an ex-spouse once that ex-spouse hits age 62. Unlike a kind of a normal situation, when we wait until the spouse draws Social Security. They put this rule in really to protect the ex spouse because we’ve seen scenarios where certain people might delay drawing to intentionally hurt the other spouse and so they can’t draw on them. So basically the rule is once the ex-spouse hits over 62, you can actually start drawing on the spousal benefits for divorcees.

John: Yeah. It does not matter whether or not they’re collecting. And also some people are happy about this, some people are not. But when you do get that benefit from a former spouse, again it does not affect their own benefit. There is no negative impact to doing that to them.

Mark: They don’t even know about it.

Nick: They would have no idea. And it actually wouldn’t affect any new spouse for somebody. So we get that question quite a bit where it says, “Hey, an ex-spouse draws on my Social Security. Does that affect my new wife or husband?” The answer is no.

Mark: Yeah, exactly. Yeah. And there’s interesting on the time period on that, it’s funny that you kind of brought that up. My mother, who’s 78, actually was given that information and did a refile with the Social Security for her first husband. She was married twice as well. And so yes, she was able to do that and they hadn’t been married in like 40 years, but they were married over 10 years. So they were like, “Yep, that’s something you can do.” So I was like, “Okay, well knock yourself out.”

Mark: So yeah, it’s interesting. There’s definitely some few things to consider in there. Different kinds of a spousal benefit options, divorce spousal benefit options. So again, a lot of it comes down to having a conversation about your specific situation with your advisor when it comes to Social Security, because there are a lot of things in Social Security obviously, which is why we’re on a four part series, going to be a five part series actually around this.

Mark: So with that said, I think we’re going to depart this week on the program. I’ll say John and Nick, thanks for your time. As always, we appreciate it. Folks, make sure you reach out to them, give them a call if you’ve got some questions at (813) 286-7776. (813) 286-7776, again, that number to call. And as always, make sure you subscribe to the podcast. Retirement Planning Redefined. You can find it on Apple, Google or Spotify.
Mark: You can also just find it on their website at pfgprivatewealth.com and as I said at the beginning of this, that it was prior to Thanksgiving when we were taping this. Now we’ll actually air it after Thanksgiving. So we certainly hope that everybody had a great holiday season. And we’ll see you for more of our conversation around Social Security through the month of December, right here on Retirement Planning Redefined. For John, for Nick, we’ll see you next time.

Ep 9: Social Security, Part 3

On This Episode

This is part 3 of our social security conversation. This week we talk about what aspects you should consider before you decide to start taking social security. Everybody’s situation is different, but this may help you get a better idea on when you should start reaping your benefits.

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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 tuning in to a another edition of the Retirement Planning – Redefined Podcast. As always, I’m here with John and Nick, Financial Advisors at PFG Private Wealth. Nick, what’s going on buddy? How are you this week?

Nick: Doing pretty well. How about yourself?

Speaker 1: I’m hanging in there, not doing too bad. Are you guys still sweltering down there? We are here in North Carolina. It’s been pretty dang hot the last few days, and it’s in October, so we’ll see how this plays out. You guys still burning up?

John: Yeah, we had two days of a little less humidity.

Speaker 1: Uh-huh (affirmative).

John: And then it just came right back.

Nick: Yeah, yeah, the humidity dropped off and it kind of was a little bit of a tease like taking the dog out in the morning. It was like, “Okay, this is not bad.” Especially even in the shade during the day. But came back with a vengeance the last few days. So hopefully we kind of get back to the… The heat, I don’t mind as much as the humidity, but winters.

Speaker 1: Yeah. When you got to use a butter knife to cut the air, because it’s so thick with moisture and whatnot. Now that was Nick’s voice. The other voice is John’s. John, how you doing buddy?

John: Great.

Speaker 1: Hey, well that’s good. Oh great. I like that. Well, very good. Well good. Then you’re going to be ready to roll on this conversation. It’s part three of our ongoing chat about social security. And we covered a few things the past couple of weeks. If you’ve been listening to us, we talked some mechanics, we’ve talked taxation, we’ve talked funding, some overviews of some of those things there. And if you did not listen, well go sign up at the website. It doesn’t cost you anything to subscribe to the podcast. So go to pfgprivatewealth.com, that’s pfgprivatewealth.com. That’s their webpage. You’ll be able to find lots of things about the team, as well as the podcast. And subscribe to that on Google or Apple or whatever you’d like.

Speaker 1: You can also just call them if you ever have questions, or get tripped up and you want to have a conversation. And you should before you take any action. You should always check with a qualified professional like John and Nick. They are financial advisors. (813)286-7776 is the number to reach them at. (813)286-7776. But again, we’re talking social security. We covered a lot of those things. So now let’s talk strategy a little bit, gents. Big question that always pops up, and that’s usually number one for most people is when should we apply for benefits?

Nick: Yeah, so this is always a good one. My dad actually just hit his official social security birthday. He just turned 62, and of course the thing that he wants to do the most more than anything in the world, is start taking income.

Speaker 1: Turn it on. Right?

Nick: And so the first question that we have to anybody that hits 62, and is interested in potentially starting to take their income is, “Do you have any other earned income?” So the social security system is set up where if you have earned income, so earned income specifically on an individual basis, then there is an earnings test on how much you’re making. And if you decide you want to take your social security benefit, whether or not there’s going to be a reduction. So what we mean that is again, using my dad as an example, he’s a retired fireman, he has a small business, so he has some income from the business, but he has a pension.

Nick: So pension income does not count towards this income test. It’s only the earned income that he gets from his business. At the same time, the income that my mom makes as a nurse, does not count towards his test for his social security. So understanding that it’s based upon an individual’s income, and that it’s an individual’s earned income, that limit is about $18,000, 18 to $19,000. It changes a year-to-year and it’s been inflating up.

Nick: So for every dollar that you earn above that amount, they start to reduce your social security benefit by 50 cents. So it’s about a 50% reduction. So what we’ll tell people is, a lot of these other factors start to come into play on whether or not they need the money, what they’re going to do with the money. And we’ll kind of get into some of those details a little bit more. But understanding that there is a penalty, or a reduction in the benefit that you receive if you take it before your full retirement age. And understanding how they calculate that’s really, really important.

Nick: So a really basic example is, if we say that somebody is going to earn $24,000 of income, so they’re going to be about 5,000 over the limit, and there’s going to be a reduction in their social security. That reduction isn’t nearly as bad as somebody that’s maybe earning 40,000, where they’re almost going to zero out their social security benefits. And since they took it early, there is a permanent reduction anyways. So it does become kind of a more complicated response and an answer, but it does help to get people thinking and understanding and kind of strategizing on what makes the most sense for them.

John: So to jump in here, in the year you reach your full retirement age actually that penalty goes away. So basically, let’s say your full retirement age is 67, and you turn 67 in June, once you hit your birthday, you can earn as much as you want. And from that point moving forward, there’s no penalty on any earned income for that individual. And kind of back to what Nick was saying, very important that people do understand that it’s based on the individual’s income and not household. Because I have run into some scenarios where some clients previous to us got some bad advice, and they actually did not take the social security, because an advisor told them it was based on household income. So there was a couple of years that they wanted to take it and they didn’t, because they got bad advice.

Speaker 1: Yeah, that’s not good. So yeah, you want to make sure-

John: No, that’s why Nick kind of stressed that.

Speaker 1: Okay, so let’s talk about 62 as a magic number, first. If you go as soon as you can, Nick, you mentioned your dad. A lot of people do that. They’re like, “I’m going to run right down and turn it on as soon as I can.” That might be the right decision for you, but it may not, because you could be looking at a reduction in your benefit. Correct?

John: Yeah. So I’ll use my parents’ example here.

Speaker 1: Oh go for it.

John: So once they hit 62 they were done. They were done working, they wanted to retire. And we had the conversation of whether they should take it or not. And we decided that it was best for them to go ahead and take it at 62. So the negative to that is you do get a reduction of benefit, which could be anywhere from 70 to 75%, which was okay for them, because they actually had some pension income.

John: So when we were doing their plan, we looked at it and said, “Hey, we’re going to take a little bit of a hit in your guaranteed income from social security.” But they had some pension income, which helped out, which is why we kind of decided for them that it was okay to take. And again, everyone’s situation’s different, but just understand that when you do take at 62, you get a reduction of benefit, and that reduction of benefit is permanent.

Nick: So then kind of going from there, that range between 62, which is when you’re first eligible, up to your full retirement age, which is actually determined by the year that you were born. So for somebody that’s in their early sixties now, their full retirement age is most likely 66. For somebody that might be in the thirties and forties, it’s 67 or later.

Nick: But once you hit that full retirement age and your statement that you receive on an annual basis, or when you log in to see it, it does tell you, that’s kind of the point at which you can receive your full benefit amount. There are no earnings tests anymore, there are way less rules, is kind of the easiest way to think about it. However, let’s say that your situation allows you, maybe you have a younger spouse, and your younger spouse is still continuing to work. Their income still is enough to support the household and you don’t need additional income. You can let your benefit continue to grow, and it grows by 8% simple interest. And that number caps out at age 70.

Nick: So once you get to age 70, there is absolutely no point in waiting any longer, because your benefit does not grow at all. So an important thing to kind of take into consideration as far as that goes, is we’re going to have a separate session on spousal benefits and widow benefits. However, spousal benefits do not grow with those 8% increases. Spousal benefits do maximize at the full retirement age. So again, we’ll kind of get into more detail on that a little bit later on. But just wanted to make sure that we took that into consideration. And one of the most common questions that we’ll get, “Should I take it at 62 should I take it up for retirement age? What about in-between?”

Nick: So there isn’t a hard difference between 62 and full retirement age. The benefit will continue to increase. So we’ve used my dad as an example a few times. So although he just turned 62, we looked out over the next year, and we realized that the need to take the benefit this year didn’t necessarily make a whole lot of sense, but we’re going to revisit it next year. So this is something that you can kind of reevaluate on a year-by-year basis, or really even a month-by-month basis. Essentially what happens is that benefit grows by about a half percent per month. So that can does continue to grow. So it’s not like if you wait between 62 and 63 you’ve been penalized or anything like that. It is something that does continue to grow.

Speaker 1: Yeah.

John: So one of the main questions that we get when deciding is really the break even point. So deciding, “Hey, if I take at 62, I’ll have this amount of money versus full retirement age.” And the break even is usually mid to late seventies, let’s just say 76 to 77 years old. Looking at it in a vacuum, without any other parts, that’s when people determine, “Hey, if I waited until 60, my full retirement age, once I hit 77 it would’ve been better to wait for that.”

John: But one thing to consider is that, just looking at a vacuum, really we’re missing a lot of key points here. So a reason to take at 62 could be health. So as far as, I’ll use myself as an example, because I’m currently injured with my back. But in my twenties, I could do a lot more than I can in my thirties. So someone might want to take it at 62, so they can enjoy between 62 and 75, and have more money to go on vacation. So those are things that you really need to consider besides the break even point.

Nick: Yeah, I would say from a strictly planning standpoint. So if we take out some of the lifestyle decisions that factor into this, if we take a look at it from the standpoint of strictly finances, there tends to be, dependent upon people’s situation, there tends to be kind of a magic number for the nest egg. So in other words, dependent upon how much people need to take out of their nest egg, if waiting on social security forces somebody to take an unreasonable or an unsustainable, which are all right from their nest egg, we’re probably going to go ahead and have them take the social security.

Nick: Because maintaining that nest egg for as long as possible is really important. And if that number isn’t there, if they just for whatever reason haven’t been able to save, or get to that number that’s right for their specific situation, a lot of times taking that social security is going to alleviate the pressure on the nest egg. It’s going to help us sustain through maybe some negative points of the market, and allow them to live the lifestyle that they want to live in that early five to eight year first portion of retirement. So that’s a huge driver from a financial standpoint, to kind of make the overall plan work.

Nick: Things like life expectancy come into play, although that can be a little bit tricky from, we’ll kind of refer to that as the crystal ball planning. Where we try to plan for a long period of time not maybe what happened with your parents or things like that. So there are a lot of different factors but that helps kind of bullet point some of the key things to consider when trying to decide on when to apply.

John: Yeah, no I just kind of jumped in with something that just popped into my head about something to consider where, client situation, where they had a really good strong social security benefit and pensions, but they really didn’t have a lot of liquidity. So not a lot of assets.

John: So strategy that we’re using for them, is we’re actually taking the social security once they hit the full retirement age, because they are still working. And instead of letting that benefit build up, we’re actually saving that into some type of retirement plan. So when they do fully retire, in this situation it’s age 70, they’ll actually have some type of nest egg that isn’t just income. It’s actually a nest egg they can pull on. So we are taking the benefit, full retirement age, but we’re actually saving it to provide some liquidity in retirement.

Nick: Yeah. And so maybe a real world example of that is we work with a decent amount of local faculty at some of the local universities, and their plans have structures where they can save money into the different retirement plans. So in that scenario, maybe they have a pension, they’re going to have a good pension when they retire, they have social security benefits. It’s going to cover their expenses. But because of those things they save, let’s just call it maybe like $200,000 into their nest egg.

Nick: So what we can do is turn on that social security, and bump up the savings that they’re putting into their 403(b), or some other sort of employer-based retirement account, offset the taxes from an income tax standpoint as they’re taking that. Because again, going back, that benefit’s going to be taxable or at least includable in their taxes, offset that, build that up, try to really bump up their nest egg by another hundred, hundred plus thousand dollars a year. And give them a little bit more peace of mind when they retire.

Speaker 1: Well, really, really good information here on this podcast edition of Retirement Planning – Redefined. We’ve been talking about really kind of the strategy of taking social security. This is part three of our ongoing series of social security. When should you apply for benefits? A lot of good information covered. The great thing about a podcast is if you’re going through and you’re listening to it and you didn’t quite catch it, or you’re not quite following, you can always back up and listen to it again. Unlike a radio show or something where you just kind of catch it in passing. And especially easier if you subscribe to them.

Speaker 1: So make sure you go ahead and subscribe to the podcast at pfgprivatewealth.com. That is pfgprivatewealth.com. But if social security is tripping you up, do not feel alone. It definitely can be that way for a lot of folks. Reach out and call John and Nick and have a conversation with them. Get yourself on the calendar at (813)286-7776. That’s their number if you’d like to reach out to them. (813)286-7776, serving you here in the Tampa Bay Area, at PFG Private Wealth, where John and Nick are financial advisors.

Speaker 1: And with that we’re going to say goodbye this week for the podcast. Tune in next time, when we’re going to continue on with social security, and talk about spousal and widow benefits in part four of our ongoing social security series here on Retirement Planning – Redefined with John and Nick, financial advisors at PFG Private Wealth. Boys, I’ll see you next time. Thanks so much for being here and for everybody listening we’ll talk to you next time here on the podcast.