Ep # 83: Discussions For When The Social Security Election Isn't Clear Cut

Benjamin Haas | Sep 22, 2022

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Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!

Adam Werner 00:27
What are we going to talk about today?

Benjamin Haas 00:29
So, we often get into some technical stuff and we're going to talk about Social Security today, but I think from a completely different angle. We said this a couple minutes ago in prep. Social Security is one of those universal things that everyone's probably comfortable talking to others about. Where you may not talk about money, you all get to make this election if you're over 62 years old and starting to think about it so I think there's a lot of conversation that can occur from person to person. My thought for today, our thought for today was, what about when the decision is not clear cut? And, we as planners can kind of assess and go - well, I don't think they can make a bad call that would dramatically, sometimes we are in the spot where we say, here's what I think you need to do. Here's what's best for your situation. If that's not the case, Adam, let's talk about then what, what kind of breaks the tie? What kind of like gets you off that middle of the fence to go do I elect or not? And then how would we go about talking to clients through that?

Adam Werner 01:34
Yeah, I'm very happy that you had that observation on this is a topic when it comes to money that pretty much everybody is going to be affected by and that it is universal, the conversations can happen. I never considered that aspect of the Social Security decision but we do hear it from people all the time. I talked to somebody, I don't know if it was a week or two ago. He just had general questions on Social Security or at least he wanted to get some feedback on it. The way that he framed it is, the guys and I sit around smoking a cigar, drinking some bourbon, and we're talking about this stuff. Everybody's got a different opinion on what works for them and what doesn't, but it is that kind of universal, that people are at least having these conversations. As we've said at nauseam, what may fit for one person and their situation is going to be potentially completely different for what fits for somebody else.

Benjamin Haas 02:32
I want to hit on, to clarify for where we're going, sometimes those things that matter most that would make us want to give a clear-cut piece of advice may be somebody's in poor health. Why wait, take it, right. Maybe they just need that income. That's the easiest way. What's the stat - more than 50% choose to take it early because they need the income in retirement. So, we're not talking about those situations where there are kind of those extenuating circumstances. You're talking about those situations where you really feel like you got a choice and now you're weighing it and you're like, I don't really know what to decide. So, mister planner, Adam, what should I do?

Adam Werner 03:15
Yeah, so that's where I think it does get into those individual factors and so recent client situation. He is not quite full retirement age or maybe he is.

Benjamin Haas 03:31
If we're thinking about the same person, so he just crossed it. I'm bringing it up in conversation and he's defaulting to well, I like seeing that 8% credit. Why don't I just continue to delay because I haven't been taking it?

Adam Werner 03:43
Yeah, and that's the tempting part because you see the Social Security estimate and that jump from (doesn't matter what), but at least full retirement age, even if you go all the way back to 62. Delaying to 70 is a huge, huge bump. In the sense of guaranteed lifetime income, doesn't get much better than that. But that's where it does the individual factors of if not Social Security, then how am I filling an expense gap if there is one? That's where it really depends where those funds are coming from and I know we've talked about this in different places but if you're pulling that from savings, just cash savings at the bank or a non-retirement investment account that doesn't have significant tax impacts, then maybe it does make sense to continue to delay. But we're in this situation where we see maybe the tradeoff is if that if you're filling that expense gap by pulling from a retirement account, just call it your 401(k) or your IRA, now you're paying taxes on those withdrawals to fill that expense gap. The argument there starts to shift a little bit to maybe you do take Social Security a little bit earlier. Preserve your assets. I guess this goes back to what you said, it all depends on what they value. What that person or what that couple values for their situation because the one thing with your individual assets that can pass to your spouse, that can pass to your kids like that is an asset that you control, where social security, it's the income stream as long as you live. If you pass, your spouse may be able to continue your benefit but beyond that, it's done. It's gone. It doesn't ever make it to the next generation.

Benjamin Haas 05:32
Yeah, and I think that's where this specific client situation like, I remember sitting through it with you having a conversation about it. I came over to you, I was like, am I thinking about this right? Because it was really hard to quantify that in like, a mathematical way to pay that 8% credit is it's such a high hurdle. Why would you take it to, yeah, but the taxes. Then I mean, part of this came up because they do want to, they're in the go-go lifestyle right now, right? Where they've got kids to go see and new grandchildren, they want to travel to go see. They're going to spend more now in this go-go than what he referred to - I'm going to give him credit for this - 10-15 years from now we're going to be in the slow go before, eventually, we're in the no go. Can we take more income, it started to not feel right to delay Social Security because it was just going to deplete this asset, as you said, that could be part of their legacy plan and let's take it one step further. We're not in the best of markets right now. So, you know, the other thing hard to quantify because too many assumptions to make it any one of those mathematical models to say, here's your breakeven. Yeah, letting his IRA recover a little bit more in this environment doesn't feel horrible either.

Adam Werner 06:47
So on that note, it's not only the location or the taxability of where you're accessing these funds, but in this circumstance, it's what's the withdrawal rate? Is it sustainable?

Benjamin Haas 07:00
Bingo.

Adam Werner 07:00
Even if you're paying taxes, if you're taking, you know, a 2% withdrawal rate. Say you have a million dollars, and you're taking $20,000 a year to fill your income gap, in our mind that is extremely sustainable and maybe the argument is a little bit different. But if you're, again, just using those million dollars as a nice round number, if you were taking $70,000, or $80,000, something that we would say is probably not sustainable for the long run. On top of now your point, here we are in a negative market, stocks are down, bonds are down. If we're still leaning on our pool of assets, maybe more than feel sustainable, while the markets down, that can have a negatively compound effect that makes the decision that maybe starting them sooner from Social Security a little bit easier to wrap your head around.

Benjamin Haas 07:46
Right. So, using your mathematical model there, you start Social Security and that gives you $35,000 a year, now you've taken your withdrawal rate down to the other $35,000. Which on a million dollars is three and a half percent. We're back in sustainable world. So yeah, solid point and thank you for putting math to that because I think it proves that point. It's some of it again, just does come back to the non-monetary side of it and that is, they want to travel. I didn't want to tell them they shouldn't be doing that because I do think they're going to have long term success, knowing that Social Security was coming around the corner. But as we started to talk through it, I was talking myself into, you know, why delay? Because that IRA asset, you made the point, I'm just hammering it again. If the objective what matters most to them is not just to live the lifestyle they want right now and see the kids and grandkids, but it still leaves something behind, that IRA is a part of that legacy plan. Social Security is not.

Adam Werner 08:44
Yeah, so another factor in all of this equation too is, and again, this is extremely situational. But not only is it in this circumstance, we'll call it the husband was the primary earner, the wife was an earner herself, but wasn't earning to the degree that the husband was, so his benefit is much larger than hers. There are the spousal benefit rules and how, we don't necessarily need to get into all the weeds, but that can factor in too. Thinking of this exact scenario we're talking about. He was full retirement age. She was already collecting Social Security early at age 62 on her own record, which is a strategy. She will be able to step up to the spousal benefit but that can't happen until he actually starts his benefit. So not only would we be delaying one benefit, but we'd be delaying a little bit of a bump on the other person or the you know, the wife's benefit here so it's kind of twofold. The key component of all of that, it's just Social Security. It is a complex system. There are so many moving pieces but it was just one of those other factors for them, that was not only would you be starting your own social security income, by the way, your wife would now be getting a few thousand a year increase as well, that, by the way, does not increase beyond full retirement age. So had he delayed through to age 70. Her benefit has already essentially been capped at full retirement age, there was no increase on her spousal benefit if he continued to delay. So that would have just been money that was kind of gone into the system.

Benjamin Haas 10:28
Yeah, and that's a whole other situation. I'm glad you went there because in this realm of like, where it gets cloudy, on what decisions do you make and at what time? I mean, gosh, we could put a very technical podcast together, all the different situations. I'm going to go back to my first comment, I think this is where people get frustrated because they're like, well, I didn't collect a widow benefit. You know, why didn't I when my friend said that? She did? And when could I collect? And when couldn't I? Did I miss something? Situations are different, depending on whose earnings, whose record, the timing of when they collect. What percentages are they going to get then of that. Earnings records matters. There's just so many different components to it. I'm glad you brought that to light because I do think outside of the decision on withdrawal rate. I'm sorry, on where are you withdrawing assets from, the other common situation are the spousal versus widow or widower benefits, when the extra layer of complication comes in based on those options. So, I guess we could maybe share a scenario there too. I'm trying to think of which client to like lean on. But if you have the option to collect on somebody else's, let's note that rules changed in 2016, through the bipartisan act. This whole idea of filing under somebody else's and then delaying, a lot of those loopholes were closed so it's making this feel a little bit easier to figure out. But if you're talking to somebody that was able to do that in 2014 and then you didn't go and file and now 2020, you're all the more confused on what's really available to you and how you should go about electing.

Adam Werner 12:14
Yeah, that's a great point. I think, you know, even for us being in this industry, you know, when that rule was changed, we're still having a conversation now because for people that were getting close to retirement that was kind of in their head as a potential way to maximize what you can get out of Social Security and that they used to call it the file and suspend. Where essentially, the spouse would start the spousal benefit and allow their own benefit to continue to accumulate and grow and it was essentially a way to kind of double dip a little bit. Well, of course, the Social Security Administration closed those loopholes as you said in 2016. So really, those strategies are the claiming strategies to really maximize Social Security, have pretty much gone by the wayside. The one that I talked about earlier. So now, instead of collecting the spousal benefit and allowing your own to grow, now once you file, you are deemed to file for any and all benefits that you are entitled to and that essentially sets the timeline for what the percentages of your benefit that you can get. So, if he's elected at age 62, that locks you into the lower your own benefit being lower but then it also locks you into the lower spousal benefit. It all has to do with the filing dates. But yeah, there's so many different moving pieces there and old rules versus new rules. Yeah, it can certainly get confusing so to your point, conversations that you may have had with a friend or a family member from a couple years ago may not even apply now based on the updated rules.

Benjamin Haas 13:57
So then I'll go to another scenario where it's maybe more universal and not just talking about, sadly, widow benefits or spousal loopholes that we kind of just said, hey, some of those don't even exist anymore. I'm thinking of a situation where we're trying to make assumptions for people on how they're going to recreate their paycheck not just today, but maybe 20-30 years down the line. I think one of the harder things to kind of wrap the head around is that Social Security will give you cost of living increases. But I think in our experience, those cost-of-living increases may not match how your expenses are going up. So, I'm thinking about a situation where somebody has a pension from an old company that has zero cost of living adjustment. Now they're trying to figure out when do I take Social Security. Hard to quantify, but I think, hey, how you make the decision may be based on all those other assets, recognizing that you're going to need those assets more. You're going to have to rely on them more heavily later in life to make up the difference because your fixed incomes of Social Security and pension are not keeping up.

Adam Werner 15:05
Yeah, and that's one of those thoughts I think, for most people, they just assume well, we know Social Security has a cost-of-living adjustment. But the reality is and historically that is great. It's better than no cost-of-living adjustment. But what we've kind of seen is that it doesn't necessarily keep pace with the actual rate of inflation. So, to your point, if there is an expense gap that needs to be filled by your actual liquid savings, right, from Social Security and pension, that doesn't exactly cover your ongoing expenses, then that difference has to come from somewhere. That gap continues to grow later in life as inflation and expenses continue to increase. As your pension or Social Security don't quite keep pace with that, that gap gets wider and wider and that's what ends up needing to come from your savings. All of that to make your point of even more important to have, I guess it's hard to quantify. But the more you can start with in your asset pool and allow it to either just sustain itself or hopefully continue to grow until later in life when that gap is really needed, it just gives you more flexibility, I think, in the short term to make that decision today. But hopefully, in the future, you have that liquid asset where, God forbid, you need health care. The rising costs of not just your normal day to day health care expenses but a long-term care event. Something like that, that you would want the flexibility to be able to pay for and if the monthly income isn't quite enough to help do those things, having the liquid asset is hugely critical.

Benjamin Haas 16:53
Yeah, I think maybe it does just boil back to what do you value most? And have to stay a little bit focused on that because we are running these projections or thinking about assets and where you're pulling from, we're still making a bunch of assumptions on how things are going to go. I don't think either one of us, three years ago for drafting financial plans with 8% inflation in it. We just weren't. We weren't assuming that would happen. Now, you have to make pivots but we're making those assumptions. We're also in all those planning tools, usually using some straight-line data that isn't thinking about the series of withdrawals, right? Some people it's, well, we're taking the trips this year but we're not next year so we're up or down or left or right. It has to come back to what do you value and the value of Social Security is to have some consistent, predictable paychecks. I think depending on what all those other wrappers are around how you create what you need to create and do what you want to do over what period of time, it is going to get gray on your friends doing something different than you are. That's not to say that either one of you are wrong. You may be just value things a little differently.

Adam Werner 18:05
Yeah, that's fair. I think we talked about where we're withdrawing money from is sometimes the key. I think we talked about very briefly, some of those loopholes on whose benefit are you pulling from and then we talked about just those extenuating circumstances of like, what else do you have going on? What do you value most, whether it's predictable income, legacy planning, whatever it is, I don't know. What other notes did you have that kind of hit on this kind of gray area of when to elect? I think that sums it up pretty well.

Benjamin Haas 18:41
Well, then wonderful.

Adam Werner 18:46
The key component being it's not a one size fits all. The decision or thought process, as we'll probably say at the end of every podcast, but here, I think it definitely rings true. It truly is situational. If you have questions, you want to review your situation, that's what we're here for. We'll gladly take a look and give some feedback.

Benjamin Haas 19:07
Yeah, and I think it's a plug for planning in general because I think if you just make that decision based on the conversation you had or on that Social Security statement without considering all these other things, it's an irrevocable decision. You don't want to look back 5, 10, 20 years from now and go, man, I wish I knew then what I know now because I would have made a different decision.

Adam Werner 19:31
Yep.

Benjamin Haas 19:31
So yeah, let's talk about it. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which Some strategies or investments may be most appropriate for you, consult with your accountant, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Great Valley Advisor Group and Haas Financial Group are separate entities.

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Ep # 83: Discussions For When The Social Security Election Isn't Clear Cut