Talking to Myself About Social Security
Question: Why am I here? Does this mean you are going to be talking to yourself again? Shouldn’t that be left to the professionals, like Terry Pluto from Cleveland.com?
Answer: Yes, I am talking to myself again. What’s wrong with that? And Terry does not have a copyright on talking to himself. At least as far as I know.
Q: Great (sigh). What are we talking to ourselves about today?
A: Social Security.
Q: Two things. 1. Aren’t you a bit young for Social Security? 2. I thought your specialty was Equity Compensation?
A: Yes, I am decades away from Social Security, even though I have lots of gray hair. And Social Security applies to my retiring and retired clients too.
Q: Okay. What are we talking about specifically with Social Security, ya old man?
A: Scary headlines. And not just because it is Halloween week. I’m talking about articles, reports and headlines that always send people into a panic when it comes to Social Security?
Q: A little more information would be helpfu,l Mr. Financial Planning nerd.
A: I’m talking about the annual report from the Social Security Trustees that always leads to nervousness.
Q: If it happens every year, why the big deal of talking to yourself this year?
A: Good question. I’m not sure why, but I have had a lot more conversations this year about whether Social Security will be around.
Q: Give me some highlights. No reason to keep this all to yourself.
A: This year’s annual report said funds would deplete a year earlier and Social Security would be able to pay out 76% of current benefits.
Q: Well, that is eye-catching. Maybe people should start thinking about taking their benefits as soon as they can. It sounds like Social Security is going insolvent.
A: And you just summed up what I deal with right there.
Q: Huh? I must be a genius, although I have no idea what you mean.
A: Again, two parts. Let’s tackle the latter comment first. Insolvency is a scary word and this assumes Congress will do nothing to replenish Social Security. Odds are high they will, but it will be at the last minute. This has been their history. Next, everyone taking Social Security early does more to hurt beneficiaries than Social Security, in my humble opinion.
Q: I get the Congress thing. They always wait until a deadline. But walk me through how I would be harmed by taking Social Security early.
A: Most people are first eligible for Social Security benefits at age 62. The top end of eligibility when you maximize benefits is age 70. Somewhere in the middle is what Social Security calls Full Retirement Age, better known as FRA. If you wait to start Social Security at FRA you get your normal benefits. By delaying until age 70 you get a higher payout. Starting earlier provides a reduced benefit, which is the issue.
Q: Ah, because I am a genius I follow what you are saying. Sort of. Give me some more details though.
A: Let’s say your benefit at Full Retirement Age is 100%, so a baseline. If you wait until age 70 your benefit will be 132% in some cases. It all depends on your actual FRA. So, waiting a few more years provides a much bigger payout. Now, if you take it age 62 you will get roughly 75% of your FRA benefit.
Q: Makes sense. Delay and the payout gets bigger. Start earlier and the payout is smaller. I still don’t get the issue.
A: Let’s talk numbers. For this example, your Social Security is $3,000 a month at FRA. If you do a kneejerk reaction based on this annual headline and start your benefit at age 62 your new monthly benefit is $2,250. Or, $9,000 a year less. If you live until age 85 you will have passed up on over $200,000 worth of benefits. And I’m not even talking about any sort of inflation-based adjustments in this number. To put this in perspective, this is in line with what people say the average retiree will spend in healthcare related expenses in retirement.
Q: Okay, so those are some real numbers and real impact. But what if Social Security really runs out of money?
A: That is a concern, but I have a feeling no elected official will vote against replenishing Social Security. I mean, unless they don’t want to be reelected. There’s a reason why it is called the third rail.
Q: Third rail. What?
A: I believe it refers to the electric source for subway systems. You touch it and die.
Q: Weird, but all you finance guys are like that. So, what should people be doing when these reports come out? And don’t give me the answer “talk with your advisor.”
A: You’ve boxed me in as that was going to be my answer. And this is because it is the truth. Every situation is different. Over the years, I have had clients where it made sense to start Social Security as early as possible. This may be due to not having enough of their own assets saved, health issues, or they simply wanted it as soon as they could regardless of the reduced benefit. On the flipside, it doesn’t always make sense to wait until age 70. I had a recent conversation with a client where one spouse needed to start at FRA while the other waited until age 70 to optimize benefits for both of them. So, it really does depend and you really need to talk with a Certified Financial Planner to make sense of the whole picture.
Q: Still sounds like a pitch, but I get what you mean. Since the issue seems to be driven by headlines, give me a soundbite answer on what people should do.
A: Mmm. That’s a tough one. How about this – “Don’t trip over dollars to pick up pennies.”
Q: Who says stuff like that? What the heck does that mean? Wait I think I know.
A: It was one of the few useful things I picked up from my years at Merrill Lynch. It simply means to slow down and focus on the big picture. Don’t make a hasty decision based on a clickbait headline that could cost you lots over the long run.
Q: Got it. You could have just said not to cut off your nose to spite your face, but you finance guys have to make things difficult. Or maybe it is just you.
A: I’m just here to make your life more difficult😉
Q: It seems that way. All I know is I promise I will step back next time I see a headline about Social Security and slow down in my reactions. This has been helpful. Seriously. Now go make yourself really useful and make the market move up.
A: Can I really talk about that and the fallacy of how investors think advisors control the market?
Q: ABSOLUTELY NOT! Go get ready to hand out candy to the trick-or-treaters.
A: Dang. I could’ve created a sweet PowerPoint presentation. Only 45 pages or so.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.