May 2024
Here are some key takeaways from their conversation:
• Many Americans fear Social Security may not be available in the future, thereby considering taking benefits early.
• They examine the risks of taking Social Security early, including reduced benefits for earning above certain thresholds before full retirement age.
• Chris and Brittany discuss the break-even analysis, which determines the age at which the total benefits received if one delays Social Security equal the total benefits received if one starts them earlier. This analysis helps individuals decide the financially optimal time to start collecting benefits based on their expected longevity.
• Before jumping to conclusions and letting fear drive your decision to take Social Security early, it is important to have intentional conversations with your advisor/planner to see what makes the most sense for you.
Watch previous episodes here:
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Ep. 84 California Real Estate with Mikey Taylor
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by financial planning manager Brittany Yudkowsky. Brittany, thank you for joining us.
Thank you for having me.
Interesting year. Election years are always fun and typically around election time, the whole thought about Social Security comes up.
And we know this from talking with clients about Social Security often that people bring emotions into this decision, which is completely normal and fine. We just want to be aware of the impact of taking Social Security early or reacting emotionally, because a lot of the headlines point to the fear of Social Security's running out so act now, and that may or may not be the case.
Exactly. There is that initial fear there won't be that money there for me. And I've been paying into Social Security for all of these years. That's my money. It's going to go away.
But is it really their money?
I well, I mean, that's really the question too, because how does Social Security get funded? It gets funded by the actual workforce now, and you pay up to like 79% of the benefit that people are taking now for Social Security. So it's really someone else's money. This shouldn't really be an emotional decision.
But that's the challenge, right? Because any time we're dealing with taxes or money, like emotions get involved and we have our personal opinions and we're going to have a visceral response to it. Right? And it's very common to say, like, I paid into this program, I deserve my money out of it. But, you know, the fact is, is that the current workforce is paying for the benefit of the people that are that are currently retired.
So you're not wrong that you did pay into it. It's just it's not your money that you're taking out. And so that's why the labor force, it's so important and crucial to, you know, the longevity of Social Security and making sure that, you know, you get your kids and grandkids to work for as quickly and as long as possible.
Exactly. That's the message. Get your kids to work.
But really, like the workers pay for 79% of the benefits. So all these headlines about the trust is going to run out in 2033. Well, Congress has options. I mean, even way back in 1983, they waited until three months before the trust ran out to extend the full retirement age for when you take Social Security and to increase the payroll taxes.
So not that we should wait until the last minute, but that's a little bit kind of how it works. But there are options. So this 2033 date like... Congress has options to fund the trust and fully fund the benefit before we get to that point.
Yeah, even those headlines are a little misleading because in 2033ish, there are some other articles that say maybe close to 2035. Basically, people's benefits are looking to be reduced if there are no changes. Meaning if we don't extend the age they can come to people like me and say, hey, Chris, you know, full retirement age is no longer, you know, age 72.
And I'm going to say thank you for the 30 years notice. You know, I'll figure it out. They'll go to you and say the same thing. You'll say thank you for the 40 years notice and, you know, be just fine. So, they've done this before and they've extended the age at which you can access Social Security. You could also increase the percentage that you pay into it through payroll taxes a couple of ways.
You can either increase the percentage or the amount.
Yeah. Exactly. So that's what they did in 1983. They increase the percentage. But right now there's essentially a cap. You only pay Social Security taxes up to a certain amount. For this year it's a little under 169,000. So anyone earning over that doesn't really pay Social Security taxes. So they could potentially raise that ceiling and get more revenue that way to increase the trust.
In another article that I read, it talked about, the projections of the labor force shrinking. Right. So, you know, our population, we're not having as many kids as we used to. And so the labor force is looking to shrink.
And even with those projections, they're assuming that the labor force of workers to retirees were reduced from a 3 to 1 ratio down to a 2 to 1 ratio, which would be a significant decline in workers. But if they were to increase that payroll tax and the Social Security by 3.5%, you know, split by the employee and employer, their calculations assume that Social Security would have enough funding all the way into 2098.
And you know, I love the work that we do from a financial planning standpoint because emotions are involved with money, and it's often how we react to certain things that cause the outcome. You've said a couple of times when you're running scenarios, tell me how long you're going to live, and I'll tell you exactly when you should start taking Social Security.
That's impossible to figure out. So what are the ages that people should, you know, be thinking about? Okay, if I'm this age, I should be thinking about Social Security.
So you can take Social Security at age 62. So that's the earliest you can take it. Full retirement age for most people is 67 at this point. And then you can delay it to age 70. So when thinking through when you should take it, there are kind of a few factors. Once we kind of take the emotions out of our we deal with emotions.
I want to take emotions out of it. We're humans. We bring lotions to everything that we do, and they're important. But what factor should we really be thinking about? So growth rates in terms of what your portfolio is getting. inflation. What's happening in the environment, economic environment? And then again, how long you're going to live?
Financial planning would be so much easier if we knew that, here. But, you know, thinking along those lines, having those factors in mind, knowing the age that you can take it, birth rates if we have a really high growth rate environment, it might make sense to actually take Social Security earlier, potentially, if you can get a higher return.
Now, if you're you need that money to live. Not really as much of a factor.
Yeah, I'm glad you pointed that out because I mean, obviously if you need the money to live, you're making a different choice. But if you're still working and you're under the age of 67 full retirement age, it probably doesn't make sense, depending on your health, to start taking Social Security because every year you delay between age 62 and 67, it's around a 6% growth rate.
And then by delaying between age 67 and age 70, it's an 8% growth rate. So what's interesting about that is if we're in higher inflation times like we are today, you're not only getting that 6 or 8% jump, but you're getting the cost of living inflation bump as well. And so if your portfolio is only growing it, you know, 1011, 12% Social Security in this environment could actually be outpacing that performance-wise.
But part of what we start to think about, too, there are things called, breakeven age depending on when you take it. And that's really the age when it's worth it to have if you're taking it earlier or whenever you take it. So if you take it early at 62, the breakeven age is around like 70s.
So, so between age 62, my choice is age 62 and full of retirement age, you know, age 67. The break-even is later 70s.
Later on there. So then once you are okay, you take it at your full retirement age breakeven could potentially be in the early 80s. You take it to age 70. It could be up to the mid-80s. So really in that sense too. And it would be so nice if you knew how long you were going to live. But thinking about those factors if you don't have a great health history, it might make sense to take it earlier even though you're getting less right.
Because if you take it early, you're getting a check for longer. But it's less. Yeah. So really kind of taking those factors into account. We have to take all three of those factors because we don't know for certain when it comes to longevity, even though we can make decisions in the current economic environment about growth rates and inflation.
We've seen people take Social Security for a whole assortment of different reasons. I just think that it's it's a lot better to engage in a conversation with us.
We can run some analysis and projections, and then you're making the decisions that's best for you and not necessarily just what your friend or somebody else did. Because, I ran a scenario for a client the other day that actually didn't need the money to live off of and was going to take the money and reinvest it, and it made sense for them to start taking it at age 67 versus waiting till age 70, because the compounding growth of investing that money, the break-even was close to age 86, 87.
That's why there's a range when it comes to the break-even age, because it really does depend on your circumstances, whether you need it, whether you don't need it, can you invest it, what can you do? And it gets even more complicated if you're part of a couple because then you have two income streams.
And that's why it's really helpful to run those projections in the scenarios coupled with the context of your specific financial plan. Because as you know, like one size fits all, financial planning is not what we do here and not what we believe in. So yeah, there are a lot of factors. So having that conversation with your advisor and your planner about this is really, really important.
I'm glad that you brought that up in terms of, you know, planning with a spouse or a partner as well. Those rules have changed in recent years and have been more simplified, but that doesn't mean it's an easier decision. Yeah. so, you know, if people are reading the headlines and as we get closer to the election year and entitlements come up and Social Security runs out, just remember that, you know, fear sells newspapers and headlines really, really well.
But engage in a conversation with us. Let's talk about your personal life situation and figure out what's best for you.
Disclosure: The information presented herein is for educational purposes only and is not intended to constitute financial advice. Morton makes no representations as to the actual composition or performance of any asset class. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. Morton makes no representation that the strategies described are suitable or appropriate for any person and should not be assumed that Morton will make financial recommendations in the future that are consistent with the views expressed herein. Past performance is no guarantee of future results. You are encouraged to seek tax and/or financial advice from your financial advisor and/or tax professional to thoroughly review all information before implementing any transactions and/or strategies concerning your finances
