Troy Sharpe: There are three common ways that people lose out on their Social Security benefits.
In today's video, I'm going to teach you about them, and I'm also going to
teach you how to fix them if you choose to because one of the ways I'm going to talk about
goes a little bit against conventional wisdom, and you may not want to fix
that one. [music]
Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner professional,
host of The Retirement Income Show, and also a Certified Tax Specialist. The first way that
people lose their benefits is by simply taking it early. The numbers, as I said, I want you to
know the numbers, how much you actually lose, and then we're going to look at comparison
numbers, but then I also want you to understand situations where if we work this into a plan and
you have an investment strategy, an income plan, a tax plan like we do here for our clients, it may
not or may make sense for you to take it early. Like I do on so many of these videos, I'm trying
to educate you about concepts, but all of your situations are unique. How much income you have,
your longevity, all of these variables are unique to your circumstances, so you need a plan
to make these decisions most optimal for your family. Just a brief interruption here. If you
like the content, go ahead and subscribe to the channel and that'll keep you connected to us,
which allows us to keep you more connected to your money. Hit that like button, and also,
don't forget to comment down below. Taking it early is a 30% reduction,
but it's also important to understand that if only one spouse has a Social Security benefit,
the spousal benefit is already reduced by 50%. Then it gets reduced by a further 30%
if that spouse takes it early as well. Not only will your Social Security benefit reduce by 30%,
if the spouse doesn't have a Social Security and she's relying on spousal benefits,
it's already reduced 50%, and then another 30% if it is taken at 62.
FRA is full retirement age. Now, we call full retirement age the sun in retirement planning
because all of these other numbers revolve around full retirement age. If you take it early,
it's reduced 30% from your full retirement age benefit. If you take it later, it's increasing
based on your full retirement age benefit. Spousal benefits, dependant benefits, survivor benefits,
all this stuff is based on full retirement age. Here I've just simply put some numbers
to this full retirement age and these examples that we're going to look at in a comparative
analysis in a minute, but the full retirement age, if it's $2,000 for you,
then your spouse, if there is no work benefit, work history, and they're going to rely on
your record, 50% of that is $1000, but if we take it early, this is a rough estimate of how much
the Social Security benefits would be at 62. Again, it's about a 30% reduction, and then
here, it's a 50% reduction, then another 30% for the spouse. Instead of having $3,000 a
month at full retirement age, we're looking at about $2,100 per month if we took it at 62.
A lot of people take Social Security early and that's just because they feel, "Hey,
I'm done working. What else am I going to do here? I don't want to get a part-time job.
I should just take Social Security at this time." Well, the true answer is based on one,
your longevity, two, your investment risk tolerance. Are you a more aggressive investor
or a more conservative investor? Then, also your account balances, how much money have you saved?
Is it inside a 401k? Is it outside of a 401k? Taxes, come into question there. That's why
that matters. All of these decisions you need to take into consideration these other factors.
This is why retirement planning is so important. Now the numbers when we delay Social Security
beyond our full retirement age, we have an 8% per year. This is simple interest,
it's calculated off your full retirement age benefit up to a maximum of 24%. If you were born
after January 2nd, 1960, your full retirement age is 67. If you were born a little bit before that,
it may be 66 years and 10 months or 66 years and eight months. Either way, it is going to increase
8% simple interest per year for a maximum total of 24% for delaying Social Security
beyond that full retirement age number. Now we're going to look at a Social
Security chart where we compare taking Social Security at different ages and also different
life expectancies. Then we're also going to look at a combination of possibly taking it
at different times. What is the best scenario for that income level, that Social Security, and also
the longevity? Now, one thing to keep in mind here is we're looking at this as a unique situation
where they have a certain amount of assets. It's a hypothetical financial plan. I just want to show
you some of the things that you should think about when it comes to making Social Security decisions.
One spouse has $2,000 a month, the other spouse has no benefit, therefore
she will be taking the spousal benefit from her husband. Here, we have the working spouse's life
expectancy, and then here, we have the non-working spouse's life expectancy on the Y-axis.
If we cross to a certain point, so if 85 and 84, it makes sense to take the primary Social
Security strategy, which is the working spouse at 70, the non-working spouse at 68 years old.
In almost all these scenario areas that is the right strategy for this particular hypothetical
financial plan based on life expectancy. Now, of course, we don't all know our life
expectancy, but we can make some educated guesses based on our health and our family history.
We see the yellow, this just simply shows us if one spouse lives to 76, the other to 81,
it would make sense to take it at full retirement age. Then the red is if we're basically both
spouses are going to live to their mid-70s or less, then this shows us, this little piece of
the pie here simply shows us that taking it early would make the most amount of sense.
Now, the best looks much more like a Rubik's cube. This is if we knew exactly how long each
spouse was going to live, just want to show you how complicated this decision actually can be.
For example, if we knew one spouse was going to make it to 82, the other at 83,
we see that this light pink box actually tells us that the husband should take it at 69 years
and six months, and the spouse at 69 years and one month.
We can see there's a lot of different combinations here, but in financial planning,
we simply want to have a good estimate, and then we make the decision based on that information.
One of the common ways people miss out on Social Security benefits is they take it too early. Now,
for some of you, it may actually make sense to take it early, though, because you're not going
to live to 85 or 90 years old. Additionally, if you have an aggressive risk tolerance,
taking it early, allows more money to stay in your portfolio, and if you assume a higher rate
of return, you could come out ahead by taking less money out of the portfolio sooner, and then
letting your investments grow. Lots of things to consider there, but a lot of people in retirement
would much rather have a bird in the hand rather than two in the bush, meaning hoping the market
grows, and we're able to consistently make good returns. A lot of things to consider, but again
comes down to your financial planning situation. How to fix this one is you have to have
a retirement plan. You have to have these conversations where you're looking at the various
outcomes based on different decisions with all of your variables input into some type of analysis
software. For some of you, it may be taking it early, for others, it may be taking it late.
For some of you, it may be the spouse taking it here, the other spouse taking it here. These are
all the combination of scenarios that should be looked at in conjunction with your assets,
your investment tolerance, your longevity, all the variables we've talked about so far.
The second most common way that people lose their Social Security benefits is from what's called the
earnings test. The earnings test is simply if you take Social Security prior to full retirement age,
so let's say 62, if you earn a certain amount of income, you're still working above a certain
threshold, they're going to take some of your benefits away. They're going to withhold
some of that paycheck, that Social Security check, not your paycheck from working.
Here's the threshold, so prior to full retirement age, $19,560. If you take Social Security at 62
or 63 or 64, and you work and you earn more than this, for every $2 earned above that,
they're going to take away $1 of benefits. I'm going to give you
an example to do this calculation. Now, if you hit full retirement age in 2022,
the threshold is higher and so is the amount you're allowed to earn above this threshold, so
if you turn full retirement age this year and take Social Security for every $3 that you've earned
above this threshold, they're going to take $1 away. This is the one
that applies to most people though, but I wanted to make sure I threw this in here.
Here's the basic calculation. Let's say you earn $30,000 of income, and this is the threshold you
take Social Security at 62. We simply subtract these, this is the amount that you've earned above
that limit. You divide that by two and you get $5,220. They're going to reduce your Social
Security check by $5,220 or $435 per month. Now, there is a special rule for the first year
of retirement. If you work from January to June of this year, let's say you made $75,000 that's
above the earnings threshold, but because you're retiring this year, if you don't go back to work,
they won't apply that earnings test. Only if you go back to work after you retire
and make more than the threshold will they reduce your Social Security benefits.
Now, this only applies to earned income. What is earned income? Earned income is wages,
earned income is commissions, but also if you're self-employed. The IRS pays special attention
to those that are self-employed because it's not just your earned income because if you're
self-employed, and you have a small business, and you're doing something on the side, they're
concerned that you may be taking deductions that maybe aren't really deductions to reduce
your income to actually get a higher Social Security benefit and avoid that earnings test.
For self-employed people, they do look at your what's called net Schedule C income,
which is essentially revenue minus operating expenses to get to profit,
which goes on your tax return on Schedule C, it's your net operating income, but they also look at
the amount of hours that you've spent working. If you've worked greater than 45 hours in a month,
they say you're not retired regardless what's on that tax return, so keep that into consideration.
If you work between 15 to 45 hours per month, they say you're retired unless you
operate a sizable business or have operated a business that requires a special skill.
You're going to need to contact the IRS or the Social Security Administration to get
a little bit more detail there. I'll show you where I got that from. It is, and we're going
to put a link to this description. It's a PDF the Social Security Administration puts out,
it's called How Work Affects Your Benefits. We're going to come back to this a little bit later
and go through a different example but we're going to have a link to this PDF from the SSA
down below, you can click on it, read through this document if you think any of this
information applies to you. If you work less than 15 hours a month, they say you are fully retired.
Now, many people choose not to work in retirement, they take Social Security,
or they choose to not earn past the earnings test limit because they don't want their benefits taken
away. This may go against conventional wisdom but I want you to keep in mind, just because
they take your benefits away, they will give you that money back later on when you do fully
retire. You're not going to receive a lump sum, you're going to receive what they've withheld
in the form of a higher monthly payment. Here's the thing to also keep in mind,
that if you do go back to work and you've taken Social Security, and they withhold your benefits,
if you have a higher income earning year, because the way they calculate your Social Security
benefit is looking at the 35 highest years of income over your career, so the 35 highest years.
If you earn $14,000 in 1979, they don't just assume that's $14,000, they index it to inflation
to get a present value, essentially, of how much that $14,000 back then is worth today.
If you go back to work now and earn more than any of your previous inflation-adjusted income
numbers, you could have a higher Social Security benefit, not only from them giving you back
the money they withheld from working if you took it early, but also because you earn
more and you replace one of those years that were previously calculated in the highest 35.
One, they are going to give you that money back so it is not lost forever. Now, if you don't live
that long, then you have lost out on that benefit. Keep in mind that you can also have a higher
Social Security benefit, not just from them repaying you, but because you've
earned more and they recalculated your benefit and it's replaced one of those
previous 35 highest years in your work history. This was one of the benefits where you may not
want to fix because if you can go back and earn more income, why not go back and earn more income?
Now, if you're going to continue working, maybe you shouldn't have taken Social Security in the
first place, but here's something I wanted to point out. They actually, on this document,
so this is, again, How Work Affects Your Benefits, it's from the Social Security Administration,
we're going to have a link to this document in the description. They give you this
example here of, let's say someone is 62, their payment is $910 per month, and then they return
to work. Then down here says you earn so much between the ages of 62 and 67 that all benefits
in those years are withheld. In that case, we would pay you $1,300 a month starting at age 67.
Well, guess what? If you didn't take it at 62, the calculation of your full retirement
age benefit is $1,300 a month, so it's the same as if you just defer. When you're thinking about
going back to work, don't think, "Well, if I earn over a certain amount, they're going to take my
Social Security away." Yes, they are going to take it away, but you're going to get it back
and it looks to me like this calculation is saying that your benefit is going to
be the same as it would have been otherwise based on your age when you fully do retire.
The third way that people lose out on their Social Security benefits is taxation. I'm not
going to go too deep right now, because I did a great video diving into this topic. It's called
Amazing Retirement Planning Facts About Social Security and there's a link right up there you can
click, go watch that video after this one, but I just want to go through the
basic concepts so you understand. Social Security is an extremely
tax-advantaged income if we don't have other incomes. A lot of times when new financial
advisors come to work for us, we go through a training, and this is something that I recently
covered with them, and oftentimes, even financial advisors, some that have been doing this for many
years are shocked by this. If we don't have any other income, it's just Social Security, we could
have around $100,000 of Social Security income and pay zero taxes. This is one of the ways of really
maximizing retirement by deferring that Social Security, not only do you get a higher income,
but you can have that higher income with less tax. It could make sense to spend down your retirement
savings in the beginning years, so we reduce required minimum distributions
or we just simply don't have, or we simply have more income from Social Security.
If we look at a similar $100,000 income scenario where we have $48,000 of Social Security,
but $50,000 from either IRA distributions or pensions, taxable income essentially,
our tax ends up being $6,000 per year. The same $100,000 of income, as far as living
standards is concerned, one of them though, all from Social Security has zero taxation,
the other half Social Security income, half IRA, we're paying about $6,000 in tax. If we see here,
the taxable benefits of your Social Security are about $31,000.
Just understand that Social Security does have built-in tax advantages, but once we start to take
from other accounts, whether this is dividends or interest or IRA distributions, it starts to bring
more Social Security income into the tax picture. Most people don't understand how taxes work,
I want you to be educated so this is an overview. Click on that link to go watch that video in-depth
and learn about how Social Security is taxed. These are the three ways that you could lose out
on Social Security benefits. The first one was taking it early. Remember, it's a 30% reduction
from FRA, full retirement age to age 62, but if you delay it, it's an 8% increase. Most important
takeaway there and how to fix that, you optimize your Social Security decision when you take it
based on your financial plan. Everything needs to be entered and there needs to be discussions about
your particular circumstances. That's how you optimize your Social Security election decision
with respect to your current income, your other assets, your investment tolerance,
your health and longevity, all of those things go into making that decision.
Number two was taking Social Security early and still working and earning above the earnings test.
Remember, just because you take Social Security if you have income above that earnings threshold,
it may not be a bad thing because you're going to get that money back when you fully retire,
and if you have a higher earning year than one of your previous 35 total years that
Social Security uses to calculate your income, you could actually get an additional step up in
your Social Security income when you do fully retire, so that one you may not want to fix. If
you do take Social Security early and go back to work, hey, it's not the worst thing in the world.
Then the third way was taxes. How you fix that one is you have to understand, first and foremost,
how Social Security is taxed, and again, you need an income, an investment, and a tax plan.
This is what we do at Oak Harvest Financial Group for all of our clients. If you work with us,
great, if you work with your financial advisor or you're trying to do this yourself,
make sure you have those components, especially the income and the tax plan.
Because when we extrapolate out into the future and we're running these different analyses and
we're looking at taking Social Security at different times versus income versus your
assets and what all that works together, how all that works together, a lot of times when you look
at the tax side of things, it very well could make sense to spend some assets down now, defer
Social Security because of the tax advantages that come with how Social Security is taxed.
If you enjoyed this video, make sure to share it with a friend or a family
member so they can understand how all of this works together. Of course,
subscribe to the channel, comment down below, and if you like the video, hit that thumbs up.
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