Social Security... "Mike, can I retire yet?"

Posted by Jerry Mee, CFP®

Feb 28, 2023

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In this episode, Mike and Jerry sit down to talk about the Social Security Trinity: the three things every advisor must consider when helping a client decide when to start taking social security.

The BIF Bites podcast covers topics that are important to those seeking CFP® certification and really anyone that wants to better understand the financial services industry in general.

Jerry Mee, CFP® is the Director of Student Support at the Boston Institute of Finance (BIF) and has nearly a decade’s worth of experience in the financial services industry.

Mike Long, CFP®, ChFC®, CLU® is the Co-Director of Curriculum for the Boston Institute of Finance (BIF). He has made his career in financial services and financial services education over the past 40 years.

 

Full Transcript:

Jerry Mee 

Hello everyone and welcome back to another awesome episode of the Biff Bites Podcast. I'm your host Jerry Me joined in the studio today with the one and the only Mr. How's it going? 

Mike Long 

  1. Yeah, a lot of people are saying, yeah, thankfully there's only one of that guy I got to put up with on a regular basis. But it's always the highlight of my day, Mr. Jerry, to be here with you. So thank you for inviting me. And for all the work you do serving, you know the greater community out there with these podcasts and certainly ours. So thank you for that.

Jerry Mee 

Well, glad to have you in the studio today, Mike. It's been a while since we had a chance to. Sit down and. Chat and I want to talk about something that you are a subject matter expert on. The Holy Trinity, the trifecta of Social Security, and you know the decisions that we as advisors have to help our clients make who are maybe thinking about retiring this year, next year. Actually, Mike, I'd like to really retire this year. Can I retire? 

Mike Long 

Sure, sure. I mean. I mean, standard of living aside, you can. Always call it quits, Jerry. 

Jerry Mee 

Yeah, let's let. Let's do the math. I think my Social Security payment, you know, age 34, I'm probably going to get, you know, like $100 a month maybe. 

Mike Long 

So I don't know how holy this Trinity is it? It may be the holy crap Trinity as it relates to Social Security. 

Jerry Mee 

Of the unholy Trinity, yes. 

Mike Long 

But you know this is something where we're at the beginning of the year here. So a lot of clients are thinking, you know, should I retire? This year, or maybe I want to be retired January 1st of next year. And so they're talking to advisors about these decisions. And then we're also just wrapping up an exam cycle for the CFP exam. And these were three topics that generated just a bolt load of questions in this cycle. So I thought, well, you know that's a nice combination of. Of being able to tie it into the planning business, but also see if the business and you know. So I wanted to just talk to you for a few minutes about these three things that are very important in this planning. 

Jerry Mee 

Yeah, for sure, because it is super important. I joke, I joke about retiring, but you know, even for me it's important because my parents are that age where they're deciding if you know, they want to take Social Security or not. And they turn to me. And they're like, Jerry, you're the. You're the finance member of the family, you know. Tell me what I should do and you know you. You have to be able to counsel your either your clients or your family members or your friends and you know, help them come to these. These really important decisions because it is a really, really important decision to make. 

Mike Long 

Yeah, my experience has always been that, be it a client or an advisor CFP student. They know bits and pieces of it really well for whatever reason. However, they've acquired that knowledge, but they may not have the whole trifecta in place of exactly how the three pieces fit together and so hopefully this will help fill some of those gaps. You know, starting with the one that. Folks are maybe most familiar with and that's the fact that if we. If we draw, if we claim our Social Security retirement income and that's the focus of this is retirement. If we draw it before our full retirement age. That our benefits going to be reduced, that's maybe the one that kind of everybody has some knowledge about. And that you know, that range can be from 6862 is the youngest that one can ever claim their Social Security retirement benefits and the full retirement ages go out to age 66. Even anyone born January 2nd, 1960 and beyond is going to have an age 67 full retirement age. I expect in the future that would get pushed out even further. 

Jerry Mee 

Yeah, that's what I was going to say that's in that tends to be kind of the hot button topic with Congress and you know all the top political talking heads like to bring that up about you know how this party wants to increase the retirement age and this party doesn't and you know it tends to be I feel the one at the most forefront to people's minds because it tends to come up in politics a lot. 

Mike Long 

Definitely. Definitely. Yeah. And it's. A. It's a hot football. Because they need those votes from old people like me. So there's no mess with mine. You know, if you not want to mess with. The young people I'm slightly. 

Jerry Mee 

Yeah, that's why I always see the cutoff dates. Like if you were born after 1960 or 4. Human age is this. If you were born before 1960 and that's how it was, right, you know, 1960 is the current cutoff, I believe, correct. 

Mike Long 

That's correct that that, that's correct. And so the maximum possible out there as a full retirement age. Is 67 and So what we have to understand as a as a as a Social Security beneficiary or a client or an advisor, is understand that range of 62 to 67 and. Particularly on the younger than full retirement age and if a person sets up a a my Social Security account, which I think we all should have one, you can go in there and. Look on any. Day up-to-date for, you know, maybe the month or two prior. What your benefit? That's and then what it's projected to be. So that's a great source to work with. The client is have them set the account up and then look at it with them. But particularly when they're thinking about claiming it early, that's when we really want for them to be aware of how that might impact. So you need to know what their Social Security. 12 retirement age Jan is and then back up it and see how many months early. Their situation is in claiming or you know if they're taking it at 62 and their full retirement age is 67. That's sixty months that they're claiming early and their benefit would be permanently reduced based on a formula in Social Security. And we, we don't need to get into it. Maybe hard numbers with all that, but there's one reduction level that applies for the 1st 36 months when you're counting how many months. Total. Are we going back? Before full retirement, there's one reduction level 5 ninths of 1% for the 1st 36 months and then if it goes beyond 36 months early, then it's five twelfths of 1% for maybe another 20-4 months to cover the full the full 60 months and that's permanent. So it can be a really significant, it could be up to a 30% reduction. 

Jerry Mee 

I didn't. Even I. 

Mike Long 

Probably every month. 

Jerry Mee 

I feel that so that's not that's not something I was very aware of and I think a lot of advisors aren't necessarily aware of that, that it's not just some straight line reduction that. You know it, it curves depending on how far before full retirement age you are. 

Mike Long 

It doesn't. It's literally by the month, I mean each month causes a greater reduction. Or on the flip side, each month your weight increases it and those first 30, the math of those first 36 months, if it's exactly 36, that's 20% permanent reduction. If they go beyond that, it's 512. To 1%, but that could add if they go a full 24. Beyond that another 10% for a total of a a 30% permanent. Reduction every month for the for the rest of their life. So that's just super important to understand because that's a lot of money. And then you had that has to be countered in one's own math. Their own resources is yes. But I will be receiving that money for a longer period of time. That's true. Hopefully they would live a very long time and you would need to know your own break points there. 

Jerry Mee 

Right. 

Mike Long 

If there are other moving pieces as far as resources and things and then the other piece to this is if one wait. After their full retirement age, then the benefit would actually go up until they're age 70. If they you can wait up to age 70, it's not going to increase anything after 70, but it would actually go up at A at a rate of 8% annually. Again, literally on a monthly basis, but it's 8% for the year, so that's called delayed retirement credits. And you're starting to see more articles and things about that, about maybe waiting and extending it. But there again becomes the argument of. Yeah, but how many months would I collect versus a higher paycheck for a shorter? Period of time. All very personal decisions in my estimation. And there's that's why I think the articles are dangerous of everybody should wait or everybody should take it early. It really depends on the client. And what resources they might have and what their income goals are and such, but we need as advisors. We need to be aware of how that's going to work when we're counseling that, but that's the first piece of this trifecta. 

Jerry Mee 

Yeah, I mean that's great cause. I mean, like we said, it's probably the one that people think of the most, and yet it's probably the one that people know very little about because. Like you said, that month to month change night, I don't think I've ever really heard anyone talk about that before. You know, no one's really ever talked about, you know, like literally the day that you decide to file could determine, you know, if it's the 31st of the month versus the 1st of. The next month, you. Know could have could impact your payout. 

Mike Long 

Yeah. And that's what's so cool about the my Social Security account, because you can literally go in there and see as the months grow, you see your own benefit growing for not having taken it at the at right at age 62. So it's a little, it deserves a more attention perhaps from the advisor standpoint of understanding, you know exactly how that works and then that flows into the next piece and that is OK what if I'm claiming early? 

Jerry Mee 

Yeah.  

Mike Long 

I haven't reached my full retirement age. But I'm going to keep work. I want to start getting my Social Security check. But I'm going to keep working. Then we have to be aware of the second piece of this trifecta of rules, and that is the impact that that earned income might have on my benefits. And this is one that fewer people know about that that this could come into play. It only comes into play when we're claiming early. Because after we've reached our full retirement age, we can have as much earned income as we wish and it's not going to cause benefits to be withheld. So we have to be aware of those thresholds now. One big footnote on this second piece of the impact of earned income when we're retirement when it's. Only earned income. It's not unearned income. It's not our dividends, it's not capital gains, it's work income. That's all that comes into play here and this. Whereas in the claiming the benefit earlier, early, that's a permanent reduction, the second category of claiming early and having earned income. That's going to. Be perhaps that that may cause a temporary withholding. Of benefits, it won't be permanent and most people don't know that at all. That if our earned income. Exceeds thresholds that that Social Security puts out. Then it may cause some of our Social Security benefit to be withheld. Until we reach full retirement age. So again, the threshold changes each year as far as income. But the first threshold that applies from age 62, if we claim that early up until the year in which we reach. Full retirement age, then that threshold. If we exceed that threshold, then one benefit of our Social Security retirement check is withheld for every two dollars that were over that were over the threshold that applies in that year, and then the threshold goes up one the income threshold goes way up in the year that we reach our full. Retirement and the reduction or the withholding formula becomes $1.00 of Social Security withheld for every $3 that we're over the threshold. And that's just in that year that we. Reach our FRA. But then everything that's withheld because of that. When we reach our FRA, those dollars start being they, they recalculated and those monies are put back into the monthly check. So it's not gone forever like the first piece is when we just simply claim early. So we would want to be aware year to year of what those income thresholds are and where the clients. That with that to be able to explain that because in my experience all these years. Clients are really clueless to the fact that that it's just a temporary thing that some people will manage the hours that they work. If they're an hourly worker, let's say, just so they don't exceed it. 

Jerry Mee 

So it's not so much that. So it's not so much that the Social Security monies are being taken away from them. It's just being deferred because those monies they're going to get back in later paychecks once they reach full retirement age. 

Mike Long 

If they've exceeded those thresholds and so Social Security withholds some of their benefit. Back eventually that will come back. Unlike that first category where they just they claimed it 62 when they had FRA of 67. That money's never coming back, but money that they get withheld from Social Security because while claiming early they had earned income, that money's coming back and. 

Jerry Mee 

So that was so once they reach full retirement age, they start, you know, threading that that money that was withheld back in and spreading it out over all the future ones. 

Mike Long 

I mean, I've seen people manage the amount they make to the threshold and then thinking I can't work. Any more than that? Because they'll forever take my money. That's just not the case. They'll reduce some of it, but you're going to get it back. So maybe they would want to work more. Maybe they have the opportunity to earn more income and would and don't mind working the amount of time, but they haven't been out of fear that ohh I don't want to lose Social Security. Well, you're not. It's going to come back if that's the situation and it's just being temporary. And instead of the permanent reduction piece. So that one. Yeah, go ahead. 

Jerry Mee 

Are the withholdings calculated month to month for that as well? You know is it is, are these Social Security looking at your paycheck every month to? See how much you. 

Mike Long 

Now it's really on a yearly basis. 

Jerry Mee 

  1.  

Mike Long 

You know they're going to look back on it. Well, this was a situation last year and they count on the taxpayer to, you know, really manage. That is the situation going to be the same or not the same for the coming year, but it's always reconciled then, but that one's not month to month of. We'll withhold this. Not this this much this month, and not as much next month. They just look at really year by year and then withhold and. Whatever percentage or amount of a check each month until that total amount has been withheld, and then the checks would start up in full again. But it's not, it's not a variable thing every single month. That's a good question actually. So that's those are the first two pieces and then the third piece is and this is in play all the time, whether you're claiming early, claiming late, having benefits withheld because of earned income. The third piece is the taxation of Social Security that's always in play no matter what. The situation on the other two is. Part of 1 Social Security may be subject to income taxes on that line on the 10:40 for Social Security it will you know what the Social Security benefits paid were for the year. And then there's another piece to that line of which is the taxable amount or really the reportable amount for tax purposes that becomes. Part of one's AGI really. And again I there's some awareness to this, but I don't know if everybody's, you know, really firm on how it exactly works. So each year what has to happen with the tax fine is. We have to come up with what's called provisional income. And provisional income starts by including 1/2 of 1 Social Security benefits. And then the big variable here that a lot of people don't realize is in this provisional income calculation, tax exempt income is also recorded. It is also included. In that worksheet, and then once all other AGI type of items for their tax return are, are put in there and we come up with provisional income for the CFP exam. The big variable is knowing you start with half the Social Security and you have to add back tax exempt income. They love to test. That so once we know what the provisional income is, then there are brackets. There are thresholds based on filing status and based on where what a client falls in those brackets will determine what percentage of their Social Security income. Has to be reported or what amount of their Social Security has to be reported. It's a little more complex than that. If you look at the worksheet, but in general we can understand it by knowing there's just some thresholds. For example, for a married filing jointly taxpayer, if their provisional income is less than $32,000. None of their Social Security is subject to federal income tax if their provisional income falls between 32,000 and 44,000, then half, 50% of their Social Security is subject to federal income tax. And then, if they're, if they're provisional. Income is over 4400. 85% of their Social Security is subject to taxes and you know what's sad about this, Jerry? I'm in my. 43rd year uh. In this and I think those thresholds have been the. Same my entire career, they've. Never been adjusted for any kind of inflation. So it sucks. It just sucks that 85% of many, many, many if not most peoples Social Security is subject to. Federal income taxes because of those low thresholds. 44,000. Plan on a married filing jointly taxpayer puts them in the you know, 85% of their Social Security is going to be subject to tax and for a single that upper threshold just 34,000. 

Jerry Mee 

It's, you know, the government's taxing us on the money that we're getting back for the taxes that. We paid over our entire lifetime. 

Mike Long 

It just really sucks that that those brackets have not been adjusted over time, so it's just pushing more and more people that have to pay some tax. Tax on their on their Social Security for the CFP exam, one of the one of the easiest questions that one might draw an exam day is simply how much of 1 Social Security may be subject to federal income tax. And the answer is simply 85%, so students chair. And they see that question on the exam because it's pretty easy to remember that, you know zero, 50 and 85% piece. But though that's. Always in play, so you might have someone. To has claimed early, so they're having a permanent reduction in the first category. They're continuing to work because they need to and so they're having some more benefits of that already reduced amount, right? They're having some benefits withheld because their earned income, their compensation. Exceeds the threshold. And then the third piece is their income, maybe such that they're having to pay taxes on as much as 85% of the Social Security that they're getting. So that's the trifecta of rules that's in play for clients an I just think this is good stuff for an advisor to be up on. 

Jerry Mee 

Yeah, because I can easily see how all three of those are would apply, you know, think of my own parents and them deciding about taking Social Security or not. You know, they fall into all of those. You know, they're not quite full retirement age. Well, my dad's actually getting pretty close there. He's. He's a one year. From it. But you know my dad's the type of person who is never going to stop working. You know, he just. He never he like. Even if he was working for free, he would still want to work just to, you know, have something to keep him busy. So that's going to cause a reduction. And then yeah, like you said, everyone's going to have that taxation piece until Congress. Which I doubt they ever will increase those thresholds and considering they want to go. The other way. 

Mike Long 

Well, they need the money, right? I mean, they it's a funding issue. 

Jerry Mee 

Yeah, that's my question. Like for someone like me who's probably never going to get Social Security because it'll be phased out by the time I retire, what are what are my? 

Mike Long 

Ohh that's why every now and then in a political cycle, someone will run on the basis of it's voluntary participation that you can you can invest your own money. And there won't be any Social Security for you, but you will have had the benefit of that. That say 7.65%. That you pay. Up to those limits, you can invest that and hopefully have your own Social Security that's never gotten a whole lot of traction. But that's where that conversation comes from. 

Jerry Mee 

And that kind of plays off because correct me if I'm wrong if I'm wrong, but public servants already kind of have something like that where they don't pay into the Social Security because they have a government pension. 

Mike Long 

More and more. That's starting to kind of mash together, but that can be true. But again, like a good example of that is railroad retirement in the early stages. So security, the railroad voted not to participate, that they were going to have their own. And they did for many, many, many, many, many years. Now it's kind of mashed together in one tier of their benefits is really based around Social Security, type of calculation, and then they have another tier of benefits based on pure railroads. So you see some of that when you. Get, you know, into the outside of. You know, just working. For a regular for profit company. 

Jerry Mee 

So because that's how it's right now, you know, firefighters, police officers, you know, Department of Public Works, you know, all those individuals, they don't actually have Social Security withheld because they have, you know, town pensions. And we're just seeing. 

Mike Long 

They have other things. And social securities need. To remain solvent is why you see more and more mashing together. Is the access to those dollars that that to help with the funding. So I think it'll become more and more homogeneous as we roll through the years and I think these ages will be pushed out. 

Jerry Mee 

If you think about it, you know, Social Security is probably the most successful Ponzi scheme in existence because the you know the continuation of Social Security relies on new dollars coming in. So I've read the definition of this somewhere. 

Mike Long 

Thought of it that way, but yeah. Depending on new monies coming in so. So anyway I think over the years and certainly in the rest of my life time, it won't go away, right? It won't look like it does right now. I think that's kind of that's kind of certain. But yeah, you know hopefully this discussion helps some folks that maybe are contemplating or advising. Someone who's contemplating how this works and then certainly for CFP students, any one of these three, it's fair game for the exam. And in the BIFF review, we drill down on this and you know, so they're prepared for it, but any one of them individually or they could go all the way and have it have a scenario where all three of these are in play for one client. 

Jerry Mee 

And Mark my words, we're coming up on an election year next year added to your election year bingo card. I guarantee you'll see debates about raising the full retirement age for Social Security. 

Mike Long 

Oh yeah, it's. It's the way that it's battered around to always show solvency. Is, you know, and some of it is stretched so far into the future. That's like the odds of that ever really coming true are slim and none because it's so far in the future. But for this year's cycle reelection cycle, it shows raising money. This is how we're. Going to solve. The Social Security problem and then the next administration. Comes in and blows it all up and has their own thing, so it's constantly a football being kicked around. But you know, we just want to have great advisors that are up on this, not that everybody's going to be a Social Security expert or specialist, but I think extreme awareness just helps serve clients better and better that you know they want to do this at. But you can tell the client isn't aware of this rule or. Or that rule and like I said, the biggest one I've witnessed over the years is that second piece and people's understanding of what happens when you have earned income and you're claiming your Social Security early. That's probably the biggest disconnect that I've seen over the years. 

Jerry Mee 

Well, as I'm Mike, I certainly learned a lot. I know a lot more about Social Security now than I did when we sat down. Hopefully our listeners got the same and you know great session going into. Yeah, we're going into the March exam cycle. So we're going strong. So good luck to all of our March. Exam takers out there? There and you know, we look forward to congratulating you when you get those, those passing results in a couple weeks. 

Mike Long 

And as I always say, study on my friends study on. 

Jerry Mee 

Excellent, excellent. Well, if you are looking for more episodes, make sure to check out the Biff Bites podcast on Apple iTunes, Spotify, and of course, biffbites.com. Until next time I'm Jerry me, and thanks again Mike, for joining us. 

Mike Long 

My pleasure, Jerry. Thanks, Betty. 

Jerry Mee 

Take it easy. Have a great one, everyone. 

Topics: BIF Bites Podcast