Hey, we’re going to let Hi everyone. We’re going to give it a minute or so to allow everybody to join and then we’ll get started here. So, just just give us a a minute and we will get going. Well, let’s go ahead and get started. My name is Malcolm Horn and with me is Kim Kennedy. We’re both financial consultants with Align Credit Union. And a common question they get is, “Hey, are you employed by Align Credit Union?” And yes, we are. We’re part of the retirement and investment services division of the credit union. We are located in Denver, Colorado with offices in Lakewood in DTC, but for anybody joining from other states, we are happy to do virtual meetings. And of course, if you live in Colorado and you’d rather do a virtual meeting, we are happy to do so. At the end of this, at the end of the today’s presentation, we’re going to answer any questions that that you might have. I apologize but this this webinar is not going to be recorded. I think we do have some recordings out there on YouTube talking about social security but this today’s presentation is not going to be recorded. Over the next week we are going to be reaching out to everybody make sure that we were able to answer your questions when it comes to social security. Today’s educa today’s webinar is purely educational. We’re not going to be talking about products or investments. It’s strictly, hey, this is what you need to know regarding social security if you have not applied for social security yet. We do have some upcoming webinars that we want to make sure that you’re aware of. We have coming up on Thursday, September 29th, we’re going to be talking about the good, the bad, and the ugly when it comes to annuities. People say, “Oh, annuities are bad. You shouldn’t do it.” Well, not necessarily the case. We want to make sure that we’re educating you on the different types of annuities and show you some are good, some are bad, and some are really ugly. And so, it’s a very good educational webinar that’s going to be look out for those emails that’s going to be coming up. Also coming up is Thursday, October 8th. We’re going to be talking about the seven principles of a successful retirement. things that you need to be aware of when it comes to retirement. Again, very good educational webinar to attend. And then of course, we have a lot of educational resources for you to get smart on various topics. We are not the only ones that do webinars. There are other financial consultants throughout our division that do webinars. Feel free to attend any of those. We produce a podcast that’s out there on our website on various topics. So you can listen to any of those. And then our website and on our website is financial information if you want a specific topic you want to learn more about or we also have a blog on various topics. So with that that’s all I have for you. I’m going to pass it off to Kim and she will get to the nuts and bolts of social security. Well thanks Malcolm and welcome everybody. And I believe Malcolm mentioned we’ll take questions at the end and just put those in the Q&A in the chat. And let me get set up here.
Right. And yep, we don’t record. All right. So, here’s our agenda for date for today. Will Social Security be there for you? You’ve heard for years the system’s going broke. It’s your turn to retire and collect from Social Security and you need to know if it’s going to be there for you. How much can you expect to receive from Social Security? Well, part of being able to retire is understanding your income and also your expenses. So, Social Security is part of that income. When should you apply for Social Security? You can apply as early as 62 or as late as 70. And we’ll explain the differences of those various claiming ages. How can you maximize your benefits? Not a lot of strategies left. A lot of those options went away some years ago, but there’s a couple things left and we’ll show you those. And then lastly, will Social Security be enough to live on in retirement? Well, I’m sure some will do it at a on a shoestring budget, but Social Security was never intended to replace 100% of your income in retirement. So, the first thing we need to do is understand the value of Social Security. Malcolm and I hear from lots of people that they just tend to minimize it, don’t think it matters, don’t think it’s much. But the reality is that Social Security is a major source of guaranteed lifetime income for most Americans. In a lot of cases, it accounts for 40% of their income in retirement. And retirement has certainly changed. If you look at the triangle on the left, it used to be that you went to work for a company for 30 years and you walked out with a gold watch and a big fat pension and that kind of laid the f foundation of your income in retirement. And then on top of that, you had social security. And then the nest egg on the top, what you saved in 401ks, 403bs, IAS was almost like icing on the cake. Well, today, as you see that triangle on the right is flipped upside down. There aren’t that many companies offering corporate pensions anymore. And if you have one, you’re lucky. Consider yourself lucky. And that means that your decision around social security needs to be really smart because it is going to be needed for your guaranteed income in retirement. And then there’s a bigger reliance on your own nest egg, the monies you’ve saved in 401ks and IRA.
And social security offers you income you can’t outlive. So for example, if your benefit is $2,000 today and you live 10 more years, you will have pulled out almost $263,000 from Social Security. And if you live another 30 years, you can see that you’ve pulled out almost $974,000.
And I realize the dollar certainly doesn’t buy what it used to buy, but that’s almost a million bucks and it’s still a good chunk of change. And why that’s important is because we’re all living longer. A male today, age 65, has about a 50% chance of making it to age 87 and a 25% chance of making it to 93. Ladies, you you can see we have a 50% chance of making it to 89 at the age of 65 and a 25% chance of living to 96. And for couples, at least one person has a 50% chance of living to 93 and one a 25% chance of living to 98. My grandmother lived to be 6 weeks before her 101st birthday. Malcolm and I worked with an adviser who had an aunt that at 103 was still in her own home with some help, but it’s a long life, right? So, think about that for a minute. You know, if you retire in your mid to late 60s and live another 25 or 30 years, that’s roughly a third of your life. That means your money needs to last you a long time. Okay?
Social Security also offers annual inflation adjustments. So it again if for example your benefit is $2,000 a month and just using a 2% annual adjustment in 10 years that 2,000 a month is 2438 a month and in 30 years it’s 3623 a month. And inflation adjustments are important because expenses constantly are going up, right? how they calculate that cost of living adjustment each year. It’s based on a CPIW index, which is the consumer price index for urban wage earners. And the good thing about these uh adjustments is it also applies to our unclaimed benefits. So, if you’re 60 or 62 or even 50, it doesn’t really matter. every time you’re going to get an increase each year on your Social Security statement, even though you haven’t claimed yet. Here’s a historical look at those cost of living adjustments, and you can see they vary a lot. I mean, look at 2010, 2009 after the financial c crisis, you can see uh two zeros. And then if you go all the way over to 2023 when we had that hyperinflation, you can see it was 8.7. 22 it was 5.9. This year 2026 it was 2.8. The way they calculate these is the the number comes out in the fall and then it goes into effect the following January. So anybody who was collecting social security this year got a 2.8% raise over what they were re receiving last year. And I’ve seen some numbers floating out there for for next year. I think it’s somewhere around 2.8 or three last I looked. So, let’s take that 2.8 uh from this year and just apply it to dollars. So, if your benefit was $1,000 and you got a 2.8% raise, it’s it’s only 28 bucks more a month, but does help offset whatever happens to Medicare. And if your benefit was 4 grand a month and you got a 2.8% 8% cola, it’s $112 a month increase to 4112. So the colas matter just based because they magnify on a larger dollar amount, you get a larger dollar increase. Social Security also offers survivor benefits. If both a husband and a wife have benefits and one spouse passes away, the surviving spouse gets to keep the higher of the two benefits, but not both. And this show shows the man making more than the woman. And obviously, this is gender neutral. It doesn’t really matter which way. But just to give you an idea, the surviving spouse gets to keep the higher of the two. So big question, a lot of talk about this. Will social security be there for you? Now, there’s a lot in the news about Social Security going broke in 2032, but let’s take a look and see what that really translates to.
The income coming in was $1.449 trillion. that comes from payroll taxes that we all pay in from our paychecks and also interest on the special issue securities of the items in the trust fund. Expenditures 1.609 trillion that’s checks that are being paid out. And you can now see that what’s being paid out is greater than what is being brought in. And that that started happening in about 2021. So it was designed as a pay as you go system, right? So what comes in goes out, but we’re negative. So let me show you when that started. So if you look at this chart, the green represents the revenues. So if you look at the left back in 1980, the green revenues are greater than the blue line, which is the B benefits that are being paid out. So during those years, there was that surplus being built up. And then about 2021, that was the crossover where the benefits paid out is less than the revenues coming in. So that big date that you hear all over the news about 2032 is when that surplus gets absorbed and it’s no longer there. At that point at 2032, if Congress does nothing to shore up Social Security, Social Security’s not broke, but there’s only enough in there to pay us 81% of our benefits. So, nobody wants a 19% cut to their benefits. And I don’t think that is what’s going to happen. They are kicking around a lot of uh provisions that can or proposals that can shore up social security. And as with anything, this this thing has just been kicked down the can and kicking the can down the road and now 2032, right? This needs to be dealt with with this administration or the next because 2032 is right around the corner. So, let me share with you a couple ideas that they are considering. Number one, eliminate the taxable max on earnings subject to social security. So, excuse me, maybe you’re aware, maybe you’re not, but every year there’s a number that once a person earns that amount of money, they no longer pay social security tax for the remainder of the year. So, for this year, it’s 184,500. So, once somebody’s earned that, they do not pay any more social security tax for the rest of the year. If they eliminated that and had lifted that cap and said every dollar earned pays social security, which is what they did with Medicare a long time ago, that would cover all of the shortfall. Number two, if they raise the tax on earnings by 1%. So, as an employee, we pay in 6.2% of our check and our employer matches us and also pays in 6.2. two. If each of us, meaning us and the employer, pays a half a percent more, so we go to 6.7 each, that change alone would cover half of the shortfall. Number three, raise the normal retirement age, right? Uh right now, age 67 is for those born in 1960, just how it used to be, 65 and then 66 and 67. Maybe our kids and grandkids need to work till 70 before they collect their normal retirement age. That would cover a third. Uh number four, lower the benefits for future retirees. With all the advances in medicine and focus on health care, people are living longer. So maybe the formula needs to be adjusted to account for that increase in longevity. That change would cover a third of the shortfall. And lastly, they’re kicking around using a different metric to calculate that cost of living adjustment. I told you it was the CPIW. They’re looking at something called a chain CPI that has something to do with us uh changing our purchasing behavior based on prices going up. And the bottom line of that would mean that our increases to social security each year would be lower. So, I’m sure none of these things would be popular, but they’re also not the end of the world. I I think these are all reasonable, and there’s a lot of other stuff being kicked around out there. Um, so we’ll see. But the bottom line, what Malcolm and I believe for the baby boomers is you’re going to get what’s promised to you. We don’t believe you’re likely to be affected by whatever they reform. Maybe a change in the cost of living adjustment, but we we think that’s it. So, insight number one, Social Security is inflationprotected income. You’ve paid into it every single paycheck. So, be smart about how and when you collect it. How much can you expect to receive from Social Security? Well, your benefit amount depends on two things. One, how much you’ve earned over your working career. and number two, how old you are when you decide to turn your benefit on. So here’s how they calculate it. So at 62, they take each year’s earnings and they index them forward for inflation. They take the highest 35 years of earnings, not the most recent 10 or the high five or the contiguous six. I’ve heard all kinds of crazy things. It’s just clearly every bit of our historical earnings, index it forward for inflation and take the highest 35 years. From there, they come up with a monthly average and it’s called a AIM average index monthly earnings. And they take that monthly average and then they run it through a formula and the result of that formula is how much you will get from social security at your full retirement age. From there, they simply add the cost of living adjustment each year. So, here’s an example. So, let’s say somebody who earned that taxable max for social security every year since they were 22 years old, their aim or the highest average index monthly earnings anybody could have this year is $14,35810.
So, here’s the formula. So, they take the first $1,286 and multiply it by 90%. They take the next $6,463 and multiply it by 32%. And what’s left out of that $14,000 number, they multiply it by 15%. And they simply add those three up. And you could see that the total or the primary insurance amount that somebody could receive this year, the highest anyone could get is $4,216.90.
You may also have heard or read that they are thinking about means testing social security. Well, I would argue that they already do that. So, think about this. For example, let’s say you were a a low wage earner most of your career. Well, look at the first leg of this formula. You get a 90% income replacement on that first 1286. And you can at the second and the third leg, the more money you made, the less replacement of income in your benefit you’re going to get. So, they already do that. Here’s another chart that proves that as well. So let’s say you over your career you averaged about 50k a year. You’re going to get about 45% of that amount as your social security benefit. But jump over two blue bars. Let’s say your average earnings were 150 during your career. You can see you’re only going to get a 27% uh replacement from that income into your social security benefits. So they already do means test it. how to estimate your benefits. There is a an account that you could set up on the Social Security website that social securitycurity.gov/myaccount. Um, and if you do that, you can log in there anytime. You can see what your benefit would be at any amount. It has a really neat kind of a slide rule thing. You can see full retirement, you can see 62, you can see 70, you can see every age in between. It is a um really good I’ll just say surprisingly good website. My husband’s been on social security for quite a while. So I’ve looked at his account a number of times. I mean you can uh see what date your social security benefit is going to hit your bank account. You can see the deductions. You can see deductions like Medicare Part B taxes if you elect to have those withheld. If you want to change your address. If you want to change your bank information. If you need a new 1099. If you lost your Medicare card. It’s really useful. And we had a a identity theft webinar a couple years back and there was a former FBI gentleman that gave the webinar and he said this is way safer than um doing everything through the mail with social security. So take a look at that. That’s one way you can get your benefit. Um you can uh go to the my account and do an estimator. It’s really the same thing. Go to the slide rule. The biggest uh other question we get is the last one. There there’s a lot of calculators out there on the website where you can do some planning. So for example, I had a client who um wanted to retire at 55. She had a pension. She worked for Kors and she knew she wasn’t going to take social security until the earliest of 62. So she wondered how long or how much that 12 years of not earning was going to impact her social security benefit. So there’s a calculator out there where you can go in and plug in all of your historical earnings including in her case those zeros for the 12 years and see what the impact um to the social security benefit would be. And in her case surprisingly it was only $200 a month which isn’t bad for 12 years of zeros. So just different situations where there it might call for a specific calculation. They have a lot of those out there on their website. Full retirement age. So this is the age when you get your benefit without any reductions. So it depends on the year you were born. So if you were born between 1943 and 1954, your full retirement age is 66. And then down at the bottom, if you were born in 1960 or after, it was 67. And then you can see the years in between, it’s 66 and some months. This is what I would expect if they decided to bump it to 68 or 69 or 70 for for future retirees. You know, some kind of graduated scale like this. But for your purposes, now you know what your full retirement age is. Now, what you can apply as early as 62 for social security. So, what happens if you apply early? They’re going to cut your benefit and they’re going to cut it permanently. I make a big deal about that because you can find information on the Social Security website that reads as if, well, if I turn it on early, it’s less, but once I hit full retirement age, it bounces up. And that is not true. So, just know that if your full retirement age is 66 and you turn it on at 62, you’re getting a 25% reduction. And it’s a little worse if your full retirement age is 67 and you turn it on at 62, you get a 30% reduction. Now, you can see also the closer you get to full retirement age, the amount of the reduction is less, right? at 65 it’s, you know, 6.7 on the on the 66 column or 13.3 on the 67. Another question people usually ask is, well, what if I want to turn it on at 63 and a half? Well, those reductions are prorated by month. So, you you can do that if you choose, and they’ll just do the math and figure out what your reduction would be. Now, the other thing that happens to you if you decide to turn on your Social Security benefit early come comes into play if you decide to work and you are subject to what they call the annual earnings test. And here’s what it says. If you apply for Social Security before your full retirement age and keep working, there’s a limit um to when they will start reducing your Social Security benefit. So this year, $1 in benefits will be withheld for every $2 you earn over $24,480 this year. That number changes a little bit each year, bumps up a little bit. Now notice I said $1 would be withheld. So what they do is they withhold those dollars and then once you turn full retirement age, those withheld dollars get thrown into the basket and they recalculate it. Um, so for quick just for a quick if you were to earn let’s just say 75,000 three times that number all of your social security would be withheld. So we heard it a lot especially in the financial crisis and things where people are like I’m I’m laid off. I don’t have a job. They turned it on. Um, boom. Now what? you know, so you’re better off earning as much as you can in that scenario and having it all withheld and then it would be almost like you never took it. The other point I would make about this is people say, “Well, I can retire. I can work part-time. I can earn 40k a year. I can pick up my 62 social security. I’m good.” And not realize that they’re not going to get all of their social security because their earnings are over this this threshold. Um, you know, and I’m not trying to discourage you from working, but I’m just want you to be aware of what that annual earnings test is so you know exactly, you know, what you’re going to get if you do do that. And if you want to avoid the earnings test altogether, if you wait until full retirement age and turn on your social security benefits, you can keep working and earn as much as you want and they will not reduce your social security benefit at all. So the key is your full retirement age. Um, the other thing about social security is what if you decide you want to apply late, like after your full retirement age? Well, as with a lot of things in life, good things come to those who wait. What you end up getting if you wait is an 8% delayed credit. So, it’s simple interest, but if your full retirement age is 66 and you wait till 67, you get an 8% increase of that benefit. And if you wait till 68, you can see 16 all the way up to 32. And if your full retirement age is 67 and you waited all the way till 70, you’ll get 124% of whatever your benefit was. And guess what? They also add the cost of living on top of that. So, let’s say it’s 2%. That’s 10% a year for waiting. I realize the market has uh done more than that of recent years, but who knows how long that will last. It’s kind of nice ace in the hole.
All right, this chart, I just put this in because it’s just a nice picture of viewing your full retirement age and taking it early or late. The top half is 66, the bottom half is 67. to the left of the full retirement age box by age you could see the percentage of reduction and to the right you can see the addition of the delayed credits. It’s just a quick easy way to kind of see the differences there. So the big question is well how long am I going to live and when should I take it? A lot of times we hear people saying I should take it early and save the money invest the money. So here is a what we call a break even analysis and let me just compare somebody taken it at 62 versus 66. So the 62 person is the orange line, the 66 person is the yellow line. That crossover or break even age is 78. So what that tells us is that if you believe you have a reasonable chance of living to age 78 or beyond, you would pull more money cumulatively out of the social security system by starting your social security at full retirement age versus 62. Now let’s compare somebody full retirement age in yellow versus someone who waits till 70 in green. You could see the break even age is 82 and a half. So, same comment. If you’ve got longevity in your your your family and you think you have a reasonable chance of living beyond age 82 and a half, you would pull more money cumulatively out of the social security system by waiting till 70 rather than full retirement age. Now, if you go all the way to the right of this chart and if we had numbers on these lines, you know, between they’re about a half a million dollars um between each other. So, somebody 62 to 66, that’s about a $500 gap. And the yellow line 66 to the green line 70 is another 500,000. So, it’s a it’s a big gap. But the question is, do you know if you’re going to live to 100? And if your if your game or your goal is to beat the social security system and get the most money you can, when do you know that you beat that? I mean, let’s say you’re out here at age 95 on your deathbed saying, “Yeah, I really stuck it to social security and pulled as much out of the system as I possibly could.” That is the standard view of a break even analysis, but I’m going to give you an alternate one today. So instead of thinking about how much money you can get out when and it on your deathbed you really stuck it to the system, think about it, you know, 85, 88, 90, 92. How much money or how much are those checks coming in every month at a time when you may be paying more for health care or prescription drugs? I mean, just how much money is coming in that will help you um meet the expenses of your life? I’ll tell you, both of my folks, long before I was in this business, both took their social security at 62 because my uncle did. It’s never a good idea to just follow along. And they in their 80s, I mean, they spend a good percentage, I’d say 30% on on uh health care premiums and prescription drugs. You know, every new prescription drug is never on a formulary list and cost, you know, hundreds of dollars a month. my two sets. Insight number two, your monthly benefit will be reduced if you claim early. It it could also be reduced for taxes if you choose to have taxes withheld from your benefit. And once you’re on Medicare, they automatically take the Medicare PartB premium out of your Social Security. You can elect to have other healthc care things taken out of there as well if you choose. And if you turn it on before full retirement age and you work, if you make more than that annual earnings test limit, your social security benefit might be reduced because of that. So just things to think about. You know, it’s not just going to be an exact here’s what the benefit is, I’m going to get all of that. These other things could impact you. Well, let’s talk a little bit about spousal benefits. when so social security was instituted in an earlier era when most women did not work outside the home, most married women did not work outside of the home. So to create a measure of financial security for women, social security came up with what was called spousal benefits. Um, and basically what it amounts to is that a spousal benefit is equal to 1/ half of the primary worker’s full retirement age benefit if the spouse starts at full retirement age. So in this case, here’s an example. John’s benefit is 2 grand. Jane did do some work on her own and her benefit is 800. If Jane waits and applies for Social Security at her full retirement age, she would get $1,000 because half of J’s benefit is more than all of her benefit.
Obviously, if Jane didn’t work at all, she’d be getting the same thing. So, here’s some rules that apply to so spousal benefits. So, first the primary worker must have filed, meaning Jon has to turn on his benefits before Jane has the ability to access it access them. And the spouse must be 62. So, Jane would have to be 62 for a reduced benefit or full retirement age for a full benefit. So, we said Jane at full retirement age would get 50%. So, that’s full. If she tried to get a spousal benefit at 62, she’d only get 35%. So, it definitely goes down. And remember those really great 8% delayed credits that I spoke about if we wait for after full retirement age. Those do not apply to spousal benefits.
Well, I’m already widowed or divorced. So, how does that figure in to my Social Security? Well, Social Security has something called divorce spouse benefits. So, you they’re the same as spousal benefits. If your marriage lasted 10 years or more, the person receiving divorce spouse benefits is unmarried, meaning you can’t be married and then try to get a benefit off your ex. Your ex needs to be at least 62 years old. And if the divorce was more than 2 years ago, the ex does not need to have filed for benefits. You could imagine the games if a if an ex knew that if he or she didn’t apply, that meant the ex couldn’t access the benefits. So, Social Security figured all that out. And there’s not a requirement there unless the divorce was less than two years ago. And they’re just trying to make sure people aren’t trying to gain the system. So, here’s the rules for divorce spouse benefits. More than one ex spouse can receive benefits on the same worker’s record. Benefits paid to one ex do not affect those paid to the worker, the current spouse, or other exes. So, let me let me give you a little example of all that mumbo jumbo. So, let’s say Bob Let’s say Bob was married three times, divorced three times. Each of those marriages was more than 10 years. Um, let’s say Bob’s benefit with Social Security is two grand. So, ex-wife number one goes in to claim a divorce spouse benefit at her full full retirement age. What is she going to get? A,000 bucks. Ex-wife number two does the same thing. She also gets a,000 bucks. And so does ex-wife number three. And let’s say Bob the Charmer has a current spouse, which would be wife number four. she could get a spousal benefit also of $1,000. So, it’s not a pie that gets divided up. Each of those ex- spouses and the current spouse would get that 50% uh benefit, you know, based on the age of claiming and all of that. So, I think when Social Security instituted these divorce spouse benefits, divorces weren’t as prevalent and clearly not multiple divorces. Uh, last bullet point on this slide is divorce divorce spouse benefits stop upon remarage. So certainly then you’d be entitled to the spousal benefits of your current spouse instead of the divorced spouse benefits.
Okay. Survivor benefits. We talked a little bit about this upfront. When one spouse dies, the survivor gets to keep the higher of the two benefits. So here’s an example of um how that works. Joe and Julie are married. Both are over full retirement age. Joe’s benefit is 3,600. Julie’s is 1,500. Joe dies. Julie notifies Social Security and her $1,500 benefit is replaced by a 3600 survivor benefit. So, yep, Joe passes away. Julie gets to keep Joe’s at 3600 as her survivor benefit, you know, as long as she’s full retirement age. So the only thing about this slide is it says Julie notifies social security. Honestly now um hospitals, mortuaries, hospice. So they’re notifying social security right away. My dad just passed away last month and my mom called anyway and they already knew. So anyway, it’s just something that I think they’re cuz what they do if you died this month, they’re going to come in and take whatever payment they gave you back. So, I think they’re trying to get smarter and notify sooner so things don’t carry over for more than one month. Now, here’s an example of delayed claiming. Joe and Julie are married. Joe’s benefit is 3600, but he decided to wait till 70. So, he got 124% of that benefit. So, he’s getting $4,464 a month. Then, he dies. Julie will get the $4,464 a month, not the 3600, as long as she’s full retirement age or older before she claims it. So, that’s good to know. The rules that go along with survivor benefits is the couple must have been married at least 9 months at the date of death. The survivor must be at least 60 for a reduced benefit or full retirement age for a full benefit. So my example of Julie being full retirement age when she goes to get the survivor, she would get Joe’s 4,400 bucks. Survivor benefits are not available if the widow or widowerower remaries before age 60. I guess they think you’re long young enough that you can um get that from your second spouse. Unless that spouse unless that excuse me, unless that marriage ends, then you could go back and get the survivor benefit from your first deceased spouse. I guess you get whichever one is greater. And the last bullet point here, divorce spouse survivor benefits are available if the marriage lasted 10 years. So, if you remember Bob and his three ex-wives and his current wife, if Bob dies, all of those ladies just double their money. They’re each now getting 2,000 a month.
Okay, survivor benefits is one of the most convoluted uh uh calculations within social security, but that it depends on two factors. So number one, the survivor benefit will depend on the age at which the deceased spouse originally claimed his benefit. They call that the original benefit. So think of Joe. How old was Joe when he turned his on? If Joe claimed before full retirement age, the survivor benefit for Julie is limited to the higher of the benefit or eight the current benefit or 82.5% of his full retirement age benefit. If if Joe claimed after full retirement age, then the survivor benefit will include any of those delayed credits. And that was the example I gave you of Julie. So the second piece of the puzzle with survivor benefits is the age at which the widow or widowerower claims the survivor benefit. They call that the actual benefit. So in my example, if Julie claims before full retirement age, the survivor benefit will be reduced. She can claim as early as 60, but it drops all the way down to 71.5% of the full amount. And if the survivor claims at full retirement age or after, then the survivor benefit will equal 100% of what Joe was getting or the original benefit. So, a little complicated. If you’re in this situation, when Malcolm or I reach out to you, um we can help you if you’ve got some numbers, we can help you walk through um this calculation if you like. So remember in the beginning when I talked about social or survivor benefits or taking excuse me when I talked about taking social security prior to full retirement age I said if you claim early you are stuck with a reduced benefit for life. Well survivor benefits is the only place in social security where you can take it before your full retirement age that doesn’t affect your own benefit. Right? because it’s based on a deceased spouse. So, this is the only place where you can do something before full retirement age and not impact your own social security benefit.
Okay. Point number three, if you’re widowed or divorced, you may be eligible for survivor benefits, divorce spouse survivor benefits, divorce spouse benefits that can increase your monthly check. So again, if you’re in any of these categories, we are happy to help you uh take a look at the math on that and see if there’s anything that you might be eligible for that would increase your monthly benefit.
When should you apply for Social Security benefits? Well, there are a lot of factors to think about when you decide to apply. Number one, your health status. Are you healthy? Number two, your life expectancy. Number three, your need for income. You know, if you need if you have an awful health situation and you’re not expected to live a long time and you need the money, well, by all means, take it early. Quit working. Enjoy what time you have left. Number four, whether or not you plan to work. That has to do with if you want to retire early and work and you’ll you be subject to that annual earnings test. And then lastly, your survivor needs. If you’re married and let’s say you’re the man that makes more money than your wife, uh, but you think you might pass away early, doesn’t mean you should necessarily take it early because you would be leaving your wife with a, um, potentially lower benefit. So, in married situations, you kind of need to factor in both your life expectancy and your spouse’s. So why delay your benefits? Well, bigger checks to start number one. So if we just look at the top line, age 62, you’re going to get if your full retirement age is 67, you’re going to get 70% of that. So let’s say you’re going to get 21,00 bucks. There’s no COLA. That’s the first year. Let’s drop down to age 67. So at age 67, you get a 100% of your benefit. Let’s without the COLA, that’s a $3,000 uh monthly check. With the COLA, it’s $3,312.
And if you drop all the way down to 70, where you’re getting 124% of those delayed credits, that first check is 3720, but when you factor in the cost of living adjustments, that first check is $4,359. So, the colas definitely magnify the amount of money you’re going to to get. And I I didn’t bring it up when we were talking about statements, but when you look at your Social Security statement, let’s say you’re 64 and you go online and you see what your benefit is, that amount does not include the cost of living adjustment. So, when you do your planning, you know, with us or whomever or on your own, just make sure you factor that in. So, uh, here’s another reason why you might want to delay benefits. There could be more income later on. So, let me walk you through this. There’s three people. Somebody took it at 62, 67, and 70. Now, they’re all 70. So, the first line is the person that claimed at 62. They’re they’re now 70. They’ve been getting checks for eight years, and at 70, their check is 2,460 bucks. The person that claimed at 67 is now 70. Been getting checks for three years. And at 70, that person is getting $3,515. Now, the 70year-old, uh, his first check at 70 is $4,359.
Let’s say all three of those people live 15 more years. So, if you drop down to age 85, the person that started at 62 is getting $3,311 at 85. The person that started at 67 is getting $4,731 a month at 85. And the person at 70 at 85 is bringing in $5,866 a month. not quite double what the person who started at 62 is. So again, it’s just part of thinking about longevity, inflation, uh your spouse’s longevity. You know, all of those are pieces of this puzzle. And you know, unfortunately, none of us have a crystal ball to know how long we’re going to live. That’s for sure. Um how can you maximize your benefits? Like I said earlier, most of the strategies um have been kind of taken away. Social Security made some big revisions some years ago, but here are a few things you can do. I mean, the first thing you could do is improve your earnings record. So, go look at your earnings record out on the Social Security My Account. Is it accurate? Mistakes are really, really rare, but every now and then, especially if you’re self-employed, um there could be an error. Are there any missing years? We had a gal come through our office and she brought her social security statement and right in the middle of her work history, there were like three years of zeros. Of course, that begs the question, hey, were you not working those three years? Were you in school? Were you taking care of little kids? is. And she’s like, “No, I’ve always worked. I’ve always paid into Social Security.” Well, come to find out, she was working for a company that was withholding Social Security from her paycheck, but not uh sending it into Social Security. A big no no. Some people went to jail and all of that, but almost everybody in her company’s record got fixed ex except hers. So, six months back and forth with the IRS and Social Security, her record finally got updated. And lastly, can you improve it by working longer? Remember, I said your Social Security benefit is based on a 35year average. Well, let’s say you only worked for 32 years. So, do you know what they do for those three years that you don’t have an earnings history? They use zer. So three zeros in a simple average is really going to bring down the the resulting number. So maybe it makes sense to work a year and replace a zero. Or if you don’t have any zeros, but you have some, you know, early years where your earnings were lower, maybe it makes sense to work and replace some of those lower earning years just to beef up your benefit. And again, one of those calculators out there on Social Security’s website, you can plug in all the numbers and say, well, if I work, you know, two more years and earn, you know, X amount of money, what will that do to my benefit? So, you can look there and go through that process and decide whether you think it’s worth it for you or not. Okay. applying for social security at the optimal time. You know, like my parents, just because your neighbor or brother or whoever applied at 62 doesn’t mean you should. Everybody’s got an individual situation. You need to look at your income needs, not just now, which I hear a lot. People say, “Look, if I take it at 62 and I do this, I’m good. But what about 10 years from now? What if taxes go up? What if inflation goes up?” So, I want you to think about your income needs both now and in the future. And then, you know, the the $20 million question, your life expectancy and your spouse’s life expectancy. So, there’s a couple ways to coordinate spousal benefits that are left that can can help. The first one’s called the maximization strategy. This is where the lower earning spouse’s benefit is more than half of the higher earning spouse’s benefit. In this strategy, both spouses delay until age 70. And what this does is it maximizes lifetime benefits over average or long life expecties. There’s also a hybrid strategy and in this case the lower earning spouse’s benefit is less than 50% of the higher earning spouses. So the lower earning spouse claims early and the higher earning spouse waits till 70. What this does is it generates some income sooner while maximizing the higher earning spouse’s benefit over both lifetimes, i.e. while that person’s alive and then also as the survivor survivor benefit for the surviving spouse. So that’s a couple different strategies that are still left out there. Okay. So when to apply? If you these are just summary points. If you apply early, your benefit starts lower and stays lower. Cost of living adjustments magnify the impact of early or delayed claiming. The longer you live, the more beneficial it is to delay. If only our crystal ball was working. Your benefit may be taxed and reduced to cover Medicare premiums. Don’t let the earnings test discourage you from working. Just understand how it impacts you. and delaying benefits may give uh your surviving spouse more income. Let’s talk a little bit about taxes. Some people are surprised to know that benefits are even taxed. Um so here’s the tax chart of how it works. They look at something called provisional income. So down at the bottom, provisional income is comprised of adjusted gross income. So earnings, dividends, rental income, pension income that’s taxable, all of that plus 1/ half of your annual social security benefit plus any tax exempt interest like from MUN bonds. Even though the interest is tax-free at the federal level, it’s considered part of this provisional income. So if you add up all that stuff at the bottom of the page, then you take it to these tax tables. If you’re married filing joint and all that adds up to over $44,000, you’ve just triggered the maximum taxation on your social security, which is up to 85%. It’s not an 85% tax. What it means is is if you take your total social security, 85% of that amount is what’s going to land on your 1040 and be taxed at your ordinary income tax bracket rate. If you’re single, it’s a little worse. you only have to hit 34,000 before you trigger that 85% tax benefit. So, you know, when this was started um back in the I think the 50% layer layer was mid 80s and the 85% layer was early 90s, they’ve never adjusted these brackets for inflation. So, you know, it probably didn’t affect a lot of people back then, but now, I mean, it it it’s not easy to stay below this. So we usually get the question what’s excluded from that provisional income calculation. So across the top is the formula adjusted gross income tax-free interest and 50% of your social security. That’s what’s used. What’s not included? Roth IRA distributions if you’re lucky enough to have a pension or annuity that’s non-t taxable. Qualified charitable distributions. If you’re giving away, if you’re over 70 and a half and you’re giving some of your IRA or other pre-tax money directly to a charity, you don’t pay tax on that. Inheritance, gifts, life insurance proceeds, qualified medical distributions from health savings accounts. Those are all the things that are not included in that provisional income calculation. So, ways to minimize um again, there’s not a lot. Those benefits or those tax brackets are pretty low. If you have income that you don’t need in other investments, consider repositioning those into tax advantaged investments, not mun bonds. I mean, what we’re talking about here would be uh cash value life insurance or tax deferred um non-qualified tax deferred annuities. Uh think about your IRA required minimum distribution. So, all the money we have in our pre-tax 401ks, 403bs, traditional IAS, none of that money’s been taxed. So at 73 or 75 depending upon when you were born you have to start taking money out and the first year is about 3.7 3.8% but that’s going to fall into your adjusted gross income and probably push you into a higher tax bracket. So maybe it makes sense to pull some of that money out to reduce that requirement by the time you hit that age. Convert traditional IAS to a Roth IRA. We Malcolm and I love Roth IAS. Uh but you know PE but don’t run out and convert a half a million dollar 401k to a Roth because you’ve just added $500,000 to your taxable income for the year. I mean we we help people with Roth conversions and Roth conversion strategies all the time. Makes sense to maybe do it at a certain time when income is lower um or you’re retiring midy year, you got you know six months worth of income. uh delay social security. It reduces the number of years your benefits are subject to tax. That’s it. I’m gonna skip these. Um so we want you to consider social security in the context of everything else you have going on, right? Don’t make a decision in a vacuum. Do you have pensions? Do you have IAS and 401ks? What do your required minimum distributions look like? What other investments do you have? And are you planning to continue working? We realize you probably have questions. When should you apply? What if you want to keep working? What if you’ve already applied? What will your benefit be? How can you coordinate? What’s the best long-term strategy for you? What do you do next? Malcolm and I offer a complimentary planning session. We call it a discovery session and where we gather some information from you and we run it through our software um and and just talk about kind of whatifs. What if you apply? When’s the best age to apply? What if you retire at this stage? So, I’m going to give you just a quick example of how that looks. So, this is Richard and Deborah. They’re both 62. Richard wants to retire at 67. He’s got some health issues. He thinks he’ll only live to 85. Deborah wants to retire early at 65 and she thinks she might live till 95. They have savings and they each have a 401k. Um, both of them are contributing the max to their 401k and their employers give them a 3% match. They each make 150. There’s their social security benefits. Richard at full retirement age is almost 41K. Deborah at 65 is almost 35K. Richard has a little pension. We factor in their living expenses. It has an inflation rate. We always break out health care because it’s a higher inflation rate. Travel, we break out because you’re probably not going to travel till you’re, you know, 95. Our software pulls in the actual IRS federal tax tables. We can pull in state tax tables from any state. In this example, I’ve picked Colorado. So, here’s their cash flow overview. So the red line that goes across the screen is those expenses that I just went through. How we’re going to cover those expenses are determined by the color of the bar. So on the left you see those teal blue bars. That’s the two of them working for three years. Then Deborah retires. Richard works for two more years. When Deborah retires, she’s turned on social security. That’s the Navy blue blocks. Richard retires in 2030. Now, there’s social security from both of them. The mint green is his pension. And then you can see there’s a little bit of yellow u on top of that getting them to their expenses. And that just indicates that they would need to withdraw money from somewhere to meet their expenses. But you go out about six or seven years and you see the orange that is above the expense line. And that orange means that’s the year that they must begin required minimum distributions. And at that point, you can see that they have more income coming in than they have planned expenses. And if it worked exactly like this, and we know it won’t ever work exactly like this, and uh Deborah lives to 95, she’ll have about $2.4 million left. Um we can look at tax bracket and see, you know, in those early years why they’re the first five years why they’re both still working. there there are some taxes but not over 24% and then when they’re both retired you see that block of you know six or seven years from Deborah’s retirement until they turn RMD age no taxes so those are the great years to do Roth conversions. So then we can do a whole bunch of whatifs. So the first thing I’m going to show you is what if Richard decides to delay his social security to 70? What is the benefit of him doing that? So, our software would lay that choice on top of the original choice of full retirement age. And you notice when he retires in 2030, on top of that blue bar, there’s a little bit of gray and there’s gray for a number of years. That means they would have less in their portfolio. Well, of course, because he didn’t turn on social security, and that doesn’t catch up and become a benefit until he’s 80. So that’s kind of the break even of that decision for Richard. So at 80, it would be a benefit to him. And from 80 till, you know, the end of Deborah’s life, that would add $240,000 to their portfolio.
Some B not not a great benefit if he thinks he’s only going to live to age 85. Uh, but other benefits, I mean, if it doesn’t necessarily help Richard, it would increase the survivor benefit for Deborah, right? If she would get the age 70 benefit instead of the full retirement age, it’s a bigger social security benefit, so more of the income would be tax advantage because 85% of it is subject to tax. And while they wait to turn on social security, they would potentially be spending down IRA money, which would reduce the RMD. So, those are some possible other benefits of that decision. But what if we went the other way? What if Richard said, “Well, what if I want to retire early and turn on social security at 63? Is that a possibility?” Well, yeah, you see a lot of gray on this chart. And it costs them about a million dollar at the end, but what does that do to the cash flow? You know, they’re still fine, right? I mean, and so now at Deborah’s 95, instead of leaving 2.4 4 million to the kids, she’s leaving 1.3. And maybe that makes more sense to them. That might be a better value position if Richard does have health issues and wants to just get out and enjoy life. So, you know, all that is um if the numbers work, then it just becomes what’s in your heart and what what makes the most sense to you where you are in life. So, the bottom line is that social security is just too important for guesswork. Uh, you just got to make the decision in conjunction with everything else you have going on. I’m going to skip this because we’re running a I’m running a little late. Um, we’re here to help answer your social security questions. We can help you plan a retirement withdrawal strategy. We can help you decide by running a plan if it makes sense for you to spend down some of your IRA money and defer or take social security a little later. We can help you look at your employer plan and and determine what rollover options are available. We can create a Roth conversion plan for you. We can help you decide on what your best long-term strategy is. If you decide that it makes sense to move any of your retirement account money, we can make sure it’s done in the right way and there’s no taxes. Um the So, those are just some of the things we can do. We also we’ve partnered with a company called Trust and Will and anybody who becomes a retirement client with us, not just having money at the credit union, but if you go through a process with us and you decide you want us to help you with your retirement um investments planning, those types of things, we can provide this estate planning service to you at no cost. And as you can see, there’s a lot of different things there that this would offer. Um, so as I mentioned, we do complimentary foundation planning. We can do advanced planning uh for Roth conversions and look at taxes. I mean, we are not tax people, but obviously we have to be smart enough and our software is smart enough to look at the tax implication of things. just talked about in it’s estate planning, investment management. I mean, a lot of people don’t even realize Alliant has an investment management department. That that is what where Malcolm and I work and that’s the type of advice we serve and help our clients with. And there’s all kinds of different investment choices out there. And you know, we can help you decide which one is appropriate for you based on what you need, what amount of risk you’re comfortable with. Are your expenses a lot higher than your your income? Um, do you hate the stock market? Do you hate safe investments? You know, all those kinds of things come into making a decision. So, with that, uh, we’re going to open it up for questions. I know I ran a little bit over. Sorry about that. Um Malcolm’s going to come back on and I believe he’s going to start a poll. Oh yes.
So the poll is um we’re going to reach out to all of you anyway. But if you want to get in touch with one of us sooner than later, you know, answer yes to this poll and um we’ll be happy to reach out to you first. Guess I didn’t turn my camera on. Let me see.
Let me see. Your camera’s on, Kim. Oh, it is. I can’t see. Yeah. Okay. I can only see you. All good. Okay. Good. Good. Good. Me anyway. Yes. All right. So, here’s a question. Uh, could it be advantageous to take social security before 70 to cover the Irma expense rather than having to pay to pay it from investments? I will not need to depend on social security for income.
So take it at before 70. So I think what is I think what he’s saying is he’s expected to have Irma expense. So his pure mean is going to be higher. Should he take social security to cover that, you know, higher cost of health care or continue to delay it? He doesn’t necessarily need social security for it. Well, he might be better off trying to do something to reduce the investment side of things so your income’s lower. I mean, yeah, that’s a strategy, but maybe Roth conversions are better. I mean, it depends on how many years you have between now and then. The next question, which you know, I don’t think we really get into much, but does anything change if you retire or reside outside of the US as an expat? I I’m going to say I don’t know. Talk to a tax accountant. Yeah, I think that’s into that too much. It’s very complicated. So, we don’t try to steer clear of that. I know there are certain countries that you can go to and it’s treated the same way, but yeah, talk to an accountant and because every country is a little bit different and we’re just not an expert when it comes to there. No. Yeah. So, uh, what other questions? I think that’s what I got off easy today. Yes, you did. I’m already running a little late. There you go. For clarification, is rental income a a potential if the 24,000 max limit for work before the $2 reduction every the annual earnings test. So, no, it’s it’s a W2, you know, sweat of the brow income. So, passive income doesn’t count on the annual earnings test. It does count on the AGI for provisional income, but not on the annual earnings test.
That’s it. That’s it. That’s it. Guess your job. There you go. All right, everybody. We appreciate you um tuning in today and uh if you come up with any other questions, we’ll look forward to answering those when we talk with you over the next week or two. Thanks.