Retirees rely heavily on Social Security for income but they often overlook how much planning it takes to get the most out of your benefit. Most people assume they should turn it on as soon as possible and start collecting the income, but there’s so much more that needs to go into the decision.
On this episode, we’re going to clear up some of the most common myths and misunderstandings surrounding this retirement program. From how to get the most out of your claim to taxes to whether it will eventually run out of money, Ryan will help you better understand Social Security and what goes into planning for it.
Here’s some of what you’ll learn on the podcast:
- The Social Security Administration won’t help you decide when it’s best to start your benefit. (3:18)
- There are spousal benefits that many people can take advantage of. (5:52)
- Why you might have to pay taxes on your benefits. (7:33)
- Will the Social Security program run out of money? (10:03)
- Why you probably shouldn’t claim the benefit as early as possible. (14:17)
If you have any questions, you can contact us online here: https://cravitzfinancial.com/
Take advantage of our free Retire Ready Checkup to get an assessment on where you stand: https://cravitzfinancial.com/retire-ready-checkup/
Ryan: And so the question that I get from time to time is, "Well, if there's no money in the trust fund how can they pay out 77 cents on the dollar?" And the answer of course, is because people are continuing to work, pay into the system while other people are taking their retirement benefits.
Announcer: When it comes to financial planning, you need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial &Insurance Solutions.
Ben: Well, hello and welcome back in to Candid Conversations Retirement Talk with Ryan Cravitz. Ryan, good to talk to you again. How you doing?
Ryan: I'm doing well. How are you?
Ben: Doing good. Doing good. A few episodes into the podcast. Have you got any feedback yet from anyone?
Ryan: Not yet.
Ryan: But I'm sure I will be soon.
Ben: Yeah, I'm looking forward to kind of hearing both from your clients that get a chance to listen to it and people that come across the podcast and reach out to you. Hopefully we'll get with to hear from them here from time to time and soon enough. But we got some good conversations. I know we've gone a couple through a couple things so far, but I want to dive into Social Security right now. I know it's a key pillar, I guess, of the planning process and I want to get into some of the myths that are out there today because there's a lot of information about Social Security, but we're not always completely up to date on everything with Social Security because it can be kind of confusing, right?
Ryan: Definitely. It's one of those income sources in retirement that I say is often overlooked. And so I know we'll talk about it more here today.
Ben: Yep. It is often overlooked, but it is a key piece of the income planning. So we will discuss that today and both bust if you myths for you and hopefully clear up some things that maybe you've heard or maybe you believe but maybe might not quite be the complete truth once you get into your retirement. Again, if you have questions for Ryan a couple different ways you can get in touch with Cravitz Financial. It's first online, CravitzFinancial.com is the website, and then also you can call directly (714) 462-9155 and make sure you get that retirement ready checkup as well. All right, let's jump in. First myth here, and I mean I guess let's start off... I got something I want to start with. The income I know the cost of living adjustments to COLA's before we even jump into all these myths. It's been interesting to kind of watch that this year and it's been kind of front and center because of the increases with inflation. Have you been surprised at all? Have you gotten much feedback on the big bump that we're seeing heading into the new year?
Ryan: It's crazy because for several years now, we really haven't seen very much in the way of cost of living adjustments, but this year we've got a big one, it's up 8.7%. There were several years there. I think there were three years in the last 10 where there was no cost of living adjustment whatsoever. And so this is welcome news for sure, especially with the inflation that we've been experiencing this year.
Ben: For sure. And it's probably got people thinking about, "Hey, I want to go ahead and get that benefit turned on as quickly as possible." But we'll maybe clear that up a little bit why that might not be the case for everyone. All right. Let's start off with this myth, Ryan, the Social Security Administration, while they're there to assist you in some regard, the myth is often that they're going to help you make the best decision about when you should start your benefit, but that's not the truth, right?
Ryan: Yeah, and this is something that's very often misunderstood. The Social Security, their job is that when you walk into the office, they're going to get you the highest benefit on the day that you walk in there, which sounds good. We want to get the most benefit that we can from the Social Security system. But the thing is that they're not there to help you to figure out how much you can get over the course of your lifetime. Really looking at it big picture, how do you coordinate your benefits best maybe with a spouse or a divorced spouse benefits or survivor benefits, that sort of thing. They really can't give advice. They're just not allowed to do that. And so it's not a knock on them whatsoever. They do a great job of what they do, but again, they're just there to get you the highest benefit on the day that you walk into the office.
So as an example, let's say you're entitled to a survivor benefit and maybe the survivor benefit is a little bit less than your own retirement benefit. Well, they may just set you up on your own retirement benefit where it actually might have made more sense for you to take this survivor benefit even though maybe it's a little bit less. But meanwhile, you would be able to allow your retirement benefit to continue to grow and earn the delayed retirement credits. And then potentially over the course of your lifetime, you'll get much higher Social Security benefits. They also can't help you coordinate your benefits with your overall retirement plan. In other words, does it make more sense to take your Social Security benefits now and then take maybe a smaller amount that you may only need from your retirement accounts like a 401K or an IRA, or would it make more sense maybe to delay your Social Security benefits and take more from your 401K or IRA or other type of retirement account? So there's different things there that planning-wise, obviously they can't go into all that with you.
Ben: Yeah, I think that's so important. They're going to help you get to the right forms, help you fill out everything you need and help you submit your claim probably, right, that's kind of what they're there for, but in terms of strategy and making sure that you're maximizing that benefit, that's not their role. So that is a common misunderstanding when it comes to the Social Security Administration. All right. What about this myth, Ryan, you won't get any Social Security if you are a stay-at-home mom. I know there's a lot of stay-at-home moms and they might have that concern, but is that the truth?
Ryan: No, it's definitely not the case. And this is certainly something that is misunderstood, that there's a difference between needing to take your... Or having to have certain amounts of earnings in order to get your own retirement benefit. And then there's other rules in order to get a spousal benefit. So in order to get a spousal benefit off of your spouse's earnings records, it's not very difficult. Generally you just need to have been married for at least one year and then you can get that spousal benefit. You don't even had to have worked ever, and you'll still get that benefit. Now, it's different when we're talking about your own retirement benefits, and that's where I think a lot of people get confused.
So to qualify for your own retirement benefit, you need to have 40 credits and you can earn four credits a year. So basically you need to have 10 years of income. So as long as you earn at least... This year, it's 1000. In 2022, it's $1,510 for each credit. So not too hard to earn that much in a quarter. And so as long as you get that, you get 40 credits, that's 10 years of earnings, and then you get your own retirement benefit. But that's the distinction there between your own retirement benefit and your spousal benefit.
Ben: Okay, that's important to know for anyone that maybe hasn't worked or hasn't worked in a long time, that there are benefits still available to you. So again, work with your advisor to get that sorted out. All right. Myth number three. This is one I'm guessing that most people might get caught off guard a lot with in retirement, but the idea is that you won't pay taxes on your Social Security since you've of course already paid taxes on that money when you paid into the system, but not completely the case.
Ryan: This is one of those things where it is true for certain people and it's not true for other people. So some people won't have to pay any taxes on their Social Security benefits in retirement. Other people will have to pay taxes on their Social Security benefits in retirement. And the difference is it depends on what your other income is. So if you have other taxable income that could make your Social Security benefits taxable, so it depends how much that other taxable income is. Now, if you have other income, but it's coming from a tax resource such as like a Roth IRA, that would not make your Social Security benefits taxable.
So there's some things to think about there, but if you have no other income whatsoever and you're living on Social Security, you do not pay taxes on your Social Security benefits, at least not on the federal level. I do know that there are 12 states that tax Social Security, in California it does not. And I don't know the specifics on those states as to exactly how that works, but again, on the federal level, if you have no other income, you don't pay taxes on your Social Security.
Ben: But there's just, I guess in a lot of cases, not too many people that are relying solely on Social Security. So that's why most people might not be in that classification.
Ryan: Definitely not. And the other thing about it is that Social Security I describe as tax advantaged income because again, you may not pay taxes on your Social Security at all, but on the high end, the worst case scenario is you'll only have to pay taxes on up to 85% of your Social Security benefits, so not a hundred percent. So it doesn't matter if you're making a million dollars a year, still 15% of your Social Security benefits won't be subject to tax.
Ben: Alright, good to know. Again, that's why you want to work with someone that can help you plan that out and again, make any tax adjustments that you need to for your retirement income. All right, couple more myths here. What about this one? I've heard this one a lot recently, and that's that there's not going to be any Social Security benefits left by the time I retire. How true is that, Ryan? Should we be concerned about them running out of money?
Ryan: I can tell you that 100% I believe that Social Security will be there for many, many decades to come.
Ryan: Yeah, it's not something that I am concerned about one bit. Each year, the Social Security Administration, they put out their trustees report, and this year in 2022, what it says is based on their projections by the year 2034, there won't be any more money left in the Social Security Trust Fund. So when you hear that, you think, well, Jesus, there's nowhere money in the Social Security Trust Fund, that means they are running out and there's not going to be any more Social Security benefits in what's that about 12 years from now?
But the reality is, and the other part that they put into the trustees report is that even if that happens based on their projections, they'll still be able to pay out 77 cents on the dollar. And so the question that I get from time to time is, "Well, there's no money in the trust fund how can they pay out 77 cents on the dollar?" And the answer, of course, is because people are continuing to work, pay into the system while other people are taking their retirement benefits. Now, if you're getting 77 cents on the dollar, that's a 23% reduction, and nobody wants to have a benefit reduction for sure. But the reality is that Congress is always thinking about different ideas. They come up with different ideas for bills in different ways to shore up the system long term, and which of the different methods that they're looking at that they would utilize or a combination thereof is really anybody's guess at this point.
It comes down to two things. Either they're going to have to increase taxes or they're going to have to reduce benefits. I mean, that's it. One thing that I do think that they absolutely will do is I think they're going to raise the retirement age, not for anybody that's currently retired or anyone that's going to be retiring soon, but I do think that they are going to do that for younger folks. Right now, if you were born in 1960 or later, your full retirement age is 67. Well, I think that what they'll probably do is, for instance, maybe if you're born in 1965 or later, your full retirement age is 68, something like that. I'm purely speculating, of course, but that's one of the things that I can see them changing here in the future.
Ben: So you would expect they make adjustments long before they let the system go dry?
Ryan: Well, I don't know if they would do it long before, but I do think that they will do it before because it's-
Ben: That's a good point, yeah.
Ryan: Yeah. I mean, they've been kicking the can down the curb for quite some time because it's a hugely popular program, Social Security, and it doesn't matter what side of the aisle you're on, you don't want to upset your voters. And so I think as we get closer and closer, we're going to start to see those changes. The interesting thing is we had the great increase this year in the Social Security benefits for retirees, but also what a lot of people don't realize is that they did raise the payroll tax limit as well. That comes along with that. So depending on what your income is, if you're still working, if you're above certain thresholds, you may have to pay more in Social Security taxes than you had to this year. So next year you'll have to pay more than this year.
Ben: Okay, well, that's good to know. And I'm sure reassuring for some folks, although it's not a certainty, it definitely makes you feel better about the future, especially if you're not within five or 10 years of retirement. So good to know. All right, got one last myth I want to try to bust here before we get out of here. And that's this idea that you should claim Social Security as soon as you're eligible. And I know everyone wants to turn it on for a lot of that reason we just talked about they feel like, oh, I need to get my benefit going before they run out of money. But that's not always the best strategy.
Ryan: It's definitely not. And you're right. That's one of the reasons that people say, "Hey, I might as well just take what I'm entitled to get it now before they run out of money." And obviously I don't believe that that's anything to be concerned about. Other things to think about though are your overall health and what you think your longevity is like. If you don't think you're going to have a long life, if you're single, it may make sense to take your Social Security benefit early, but it might not. Other things to think about too though, for instance, and this is a common one, this is something that I see mistakes being made a lot is with married folks. So take for instance, you have a husband, he was the higher wage earn of the two, and maybe he's a couple years older than his wife, and he thinks, I don't think I'm really going to live a real long life. I've got some health problems. I might as well go ahead and take my benefit early.
The problem there is that if in fact he does pass away early, when he passes away that will now become the survivor benefit, assuming that benefit is higher than what his wife was, and if he was the higher wage earner, it would be. So his wife is now going to have a much reduced survivor benefit now for the rest of her life. And that's a very real risk that a lot of people don't think about. And the other one too is the earnings test. Do keep in mind that if you have not yet reached your full retirement age and you're still working and you plan to take your Social Security benefits, your Social Security benefits may get withheld if your income is over certain limits and those limits aren't that high. So you do want to consider that as well. Understand though if your benefits are withheld that it's not like you're never getting that money back. They credit you with a positive adjustment when you get to your full retirement age. But it's definitely something that you have to be aware of if you're planning to take before your full retirement age.
Ben: It's good to know. And again, you want to have a strategy for Social Security whenever you get to that point. You don't just want to turn it on because again, it's not really a decision you can reverse very easily. So you want to make sure you have all your I's dotted and your T's crossed before you get to that point. But with Social Security, again, there are a lot of misunderstandings and hopefully we cleared up some of those for you today on the podcast. But again, reach out if you want to talk with Ryan, you want to sit down with him as team at Cravitz Financial, you can do so by visiting CravitzFinancial.com. He's got over 20 years of experience in this industry and happy to help you and answer any questions you might have about Social Security. And the phone number, once again, (714) 462-9155. All right, Ryan. Good stuff today, and I'm definitely more a little more reassured about my opportunities to claim some benefits later on in my life. Hopefully it's still around, but appreciate all the insight today.