Tom’s Thoughts on Maximizing Your Social Security Potential
Transcript:
Katie Nealis:
So my friend told me I’m better off taking Social Security dollars rather than withdrawing from my IRA, because only 85% of my benefits may be taxable. Is this correct?
Tom Vaughan:
Yes, well, it’s correct in the taxation standpoint. So for example, if you take $10,000 out of your IRA, it’s 100%. taxable, if you take, you know, $10,000 worth of Social Security, it is only, you know, 85% taxable, that’s the highest rate. And that’s if you have other incomes, most people end up in that 85% bracket. With social security. However, I would actually challenge several other components of that, because past full retirement age, if you continue to delay your Social Security, even if it means possibly taking some money out of your IRA, you are getting an 8% increase in your social security on a guaranteed basis per year, plus any cost of living increase, I think the cost of living increase this year is 1.6%.
So, for example, you would be making 9.6% growth on the income in your social security for that year, guaranteed, and what’s the market gonna make, you know, so that is not guaranteed. And so that’s where I would seriously look at that very critically, and we run these through social security maximizers, we use the financial planning program to figure out the optimum time to take so security, I think that’s a really critical area. Because sometimes it does make sense to start early, or take it even at full retirement age.
And but a lot of times, when I run this, the calculators, it talks about the possibility of waiting as being the best. So that’s something to think about making 9.6% guaranteed and 2021 is a pretty good deal. So I’d be hard pressed to say that it was a great idea, just from a tax standpoint, you know, to take from the IRA, I mean, to take from sell securities to the IRA anyway.
Easan Arulanantham:
So we talked about like taking the money early, are there any scenarios that it’s kind of more cost effective? Because I know there’s a kind of like a break even point when you do taking it early versus taking it later. And so what are some factors that really affect that decision? Health would be number one, because so let’s say your breakeven is 7880. That what he was talking about, there’s actually a calculation, you can figure out, Okay, if I take it at this age, versus this other age, you know, how long do I have to live, to make up what I lost by not taking it early, okay, so. So if you think your health is really poor, and you got some dip, then taking it early makes some sense, because you don’t think you’re gonna make it to that eight. Now, maybe you do. But that’s a big issue. And I run across that a lot. And so, you know, there’s different things going on in people’s lives that make sense, I think another factor that really has to be considered is just how fantastic your other assets are doing. So if you’re going to be waiting on taking Social Security, and end up taking money from something that’s doing just incredible, I mean, it really well a lot better than the 9.6%, you might make,
Tom Vaughan:
you know, you can make an argument to take it early in that particular situation. So it really depends on kind of the structure. Those are unusual scenarios, or somebody has something that’s just really, really working. And so that those are kind of the pieces that you’d look at, you can factor that into a plan and really see what the plan tells you. You can use Monte Carlo simulation where it runs through 1000 scenarios, to say, hey, this would work or that would work. You can put in different life expectancy ages and maybe say, you know, years is short and see what it says, you know, should I take it early or not? Those are two big ones that I’ve seen is really health and the rate of return, you know, kind of expected from those other assets that you have that you might be living off of if you don’t take Social Security.
Easan Arulanantham:
So Social Security has been around for so long. But now that there’s such an aging population, there’s a lot of funding issue. So do you think social security is going to change kind of how they when you got to take it? Will they make you take it later?
Tom Vaughan:
Yeah. Will they also change how they increase the interest rate? If you take it later? Yeah, that all of those are on the table. Actually. Here’s a couple of things. I you know, I do seminars on Social Security. And the number one question or the number one issue and the number one reason people one of the main reasons let’s say that people want to take it early is because they’re afraid Social Security is going to go out of business. And I go to this class, you know, every year, it didn’t last year, but will this year
and we sit and talk about so scary for like three days and Medicare. And it’s kind of funny. I mean, one of the years they brought out all these headlines like Time Magazine, and going back to the 40s. And so security’s been going out of business, according to the press, since the 40s, is still here. And and it’s a really critical component of, you know, American life, actually. And I think it’s 55% of American retirees basically just have social security, you can’t, you know, how are you going to cut that? Or let it go out of business?
So, yeah, they’ve already made adjustments, right. So my father got his maximum, not maximum, he got his full social security at age 65, mine 67, maybe my kids will be 69. And there’s a lot of different proposals to do with the cost of living increase, and whether they’d have won or not have won or cut back, they have already adjusted the formula that they use, it’s less than it used to be. So there’s quite a few little tweaks that they’ll make, I do believe that future generations will get less than previous generations that is going to happen, and partly because future generations are also going to live longer, at least, you know, historically, that’s what we’ve been seeing, you know, so scary was originally put into place back in the 30s, when not that many people lived aged 65. And now, obviously, that’s not true. So yeah, I wouldn’t be surprised to see, you know, I mean, I saw a study that showed that the Social Security, you know, trust fund, so we have an excess that’s going in, will be, you know, out of money in terms of the excess amount by 2035. But if they just adjust it to 69, and adjust the cola, it could go out for another 80 years or something crazy.
So it’s not that hard to fix, I think they’ll do that, I would assume. And what has happened in the past is that people are that are already in retirement, nothing happens, you know that that’s their deal. And then people that are about to be in retirement, nothing happens. So it tends to affect somebody who maybe has a little bit of time to make some adjustments to their overall plans, because they just adjusted the Social Security, you know, in a negative way. And so, but I think it’s going to be a business and you get out in the professional arena of the people that are working on talking about and studying. So security, I mean, in depth with eight hours a day, for three days. We all believe those security still going to be here. We also believe that they’ll probably make some adjustments to make that happen. And I actually personally feel that that’s probably fair, that’s just the way it works. And I don’t begrudge my father getting his at 65 and me getting it 67 I mean, I don’t have a problem with that whatsoever. But anyway, that you know, and I wouldn’t graduate, my kids got it at 69 To be honest, but so that that’s, I think that’s how they’ll make those adjustments. It’s a good Good point.