Episode: 05-10-2022 | Social Security Benefits

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP® Dollars & Common Sense · Social Security Benefits Social Security Allison Dubreuil, Wealthway Financial Advisors  Good evening. We are going to spend tonight talking about one of my favorite topics. My favorite topic when it relates to financial planning is Social Security – because […]

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Social Security

Allison Dubreuil, Wealthway Financial Advisors 

Good evening. We are going to spend tonight talking about one of my favorite topics. My favorite topic when it relates to financial planning is Social Security – because it applies to all of us. It is complicated. And it’s a huge important decision. So we want to jump into Social Security benefits. How to understand them. How it works. And some ideas around when to claim and when not to claim.

Social Security: Retirement Benefits Versus Disability Benefits

Kevin Zywna, Wealthway Financial Advisors 

We will jump into that discussion after we get to our first caller. So as promised, when we get a call on the line, we’re going to pause what we’re doing and speak with George and Hampton now. Good evening, George, you’re on Dollars & Common Sense. How can we help you?

Caller 

Yes, I used to work in the post office. And one day I hurt my foot and I couldn’t work. So eventually, I took disability. The doctor did some paperwork so I was forced to retire. Someone told me recently, this happened a little over five years ago, I still might be entitled to Social Security disability. So I’m trying to get some information. Because I left only disability. Am I entitled to any social security disability?

Kevin Zywna, Wealthway Financial Advisors

How old are you George?

Caller 

I’m I’m 78.

Allison Dubreuil, Wealthway Financial Advisors 

And when was it that you weren’t able to work anymore?

It had to be over five to seven years ago. You know when you get my age memory is the first thing to go.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. And when did you say that when you couldn’t work anymore? You tried to pursue disability benefits, but you couldn’t qualify?

Caller 

I took the short term disability. But I got to a point my doctor wouldn’t sign the paperwork. To recieve my money so I was forced to retire.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. And have you already claimed your Social Security retirement benefit?

Caller 

I waited until 65. I took it early because I didn’t think Social Security would be around. But I took it. I’ve been receiving it, they cut it in half. Once I retired they cut it in half. Because they said I work in the post office. I tell him Hey, man, you forced me to give up Social Security money.

Allison Dubreuil, Wealthway Financial Advisors 

Because of your pension with the post office. Well, yes. If you pay into Social Security, there is a disability Social Security benefit, and a retirement benefit. And when disability Social Security kicks in, is when you are unable to work. Before your full retirement age. That’s when you can get a disability benefit. But if you’ve already claimed your retirement benefit, then you have already accessed all the the benefit that would be available to you through Social Security.

Caller 

I can’t get an increase in payment? Because, like I say, they cut it in half. I can’t increase the amount they give me?

Allison Dubreuil, Wealthway Financial Advisors 

Yes, so I thyou’re talking about two different things. There’s the disability benefit through social security, which is what you can claim if you can’t work before your Social Security retirement benefit turns on, but you turned that on at 65. So that’s already taken care of, and there would be no additional disability benefit available.  I think what you’re talking about is the Government Pension Offset. That once you claimed your postal service, pension, your Social Security went down. And there’s not a whole lot around that offset. I know that’s something that affects a lot of people, and it’s always up for discussion. They’re always trying to get those rules changed. But as of right now, it has not been changed.

Caller 

Right. Thank you.

Market Timing To Mitigate Taxes

Kevin Zywna, Wealthway Financial Advisors 

We’re going to go out to Virginia Beach now and speak with Paul. Good evening, Paul. You’re on Dollars & Common Sense.

Caller 

Okay. A general question – I’m retired on Social Security, basically no other income. I do have IRAs, et cetera. But last year, I had a huge capital gain on mutual funds, which is going to cost me in taxes. And now this year, I noticed I got an $11,000 loss on three companies. All of which I like. So, I’m thinking of selling them now, to harvest the loss of about $11,000. And buying the same companies back in 31 days. Do you think that is a good idea? Or should I just buy and hold? I’ve always been a long term investor. I’m not a trader.

Kevin Zywna, Wealthway Financial Advisors

Yeah. Okay. Well, conceptually, yes. We think that’s a good idea. How it works is you sell the stocks for presumably a loss or are they in a loss position, first of all, Paul and not just decline in profit?

Caller 

No, they’re in a loss position.

Kevin Zywna, Wealthway Financial Advisors 

Okay. Are they in an IRA or in a brokerage account?

Caller 

No, they’re in a brokerage account.

Kevin Zywna, Wealthway Financial Advisors

Okay. So conceptually, you can sell the stocks for loss, book that loss, and then write the loss off on your taxes against any gain you have for this tax year. Then you can buy them back, as you point out, after 31 days. So you avoid any wash sale rules there that would negate claiming that loss. However, you have to be out of those stocks for 30 days, and who knows what’s going to happen over those 30 days with those stock prices? So you take a risk of potentially selling out low, and then buying back higher just to book a tax loss. So conceptually, yes, the idea can be a good one. But in practice, you’re playing a little bit of a market timing game there. That’s not something that we generally would recommend. It’s certainly not something we do. In our practice, I would say invest for investing reasons. And let the tax consequences sort of take care of themselves. Unless you’re selling for other reasons, like say you needed to create income to live off of through your investment portfolio. Then it might be good to comb that investment portfolio, look for some investments that are in a loss position, sell those, if it was appropriate, and then you would book that loss there and use that to offset other gains. So you know, it’s hard, we’re talking about a little bit of market timing here. We’re talking about what’s going to happen with the the value of those stocks going forward. No one really knows that. So all I can say is conceptually, it’s a good idea. But in practice, it could actually go against you. So be careful.

Caller 

I appreciate your help.

Kevin Zywna, Wealthway Financial Advisors 

All right, Paul, thanks for the question. I’m sure there’s many others in your type of situation. They’re thinking the same thing. The market has been very volatile as of late.

Caller 

Worst I’ve ever seen.

Kevin Zywna, Wealthway Financial Advisors 

Well, you should have been here 2008, 2009. Because that tops anything we’re seeing now.

Caller 

Okay, thank you for your help.

Kevin Zywna, Wealthway Financial Advisors

Thanks for the question, Paul.

Allison Dubreuil, Wealthway Financial Advisors 

Oftentimes a lot of strategies you can use to try to mitigate taxes, everybody loves to mitigate taxes, everybody hates paying taxes. We are all united in that front. But is that really going to help you achieve your true long term goals? Or are you just letting the tax tail wag the dog? That’s what we always try to bring it back to. Is this really helping you long term with your rate of return? Or are we focusing a little bit too much on some of the details?

How To Handle A Matured CD Wrapped In An IRA

Kevin Zywna, Wealthway Financial Advisors 

All right, Todd, in Virginia Beach. Thanks for hanging on the line patiently. You’re on Dollars & Common Sense.

Caller 

I signed up for an IRA at Navy Federal. And I guess I got a notice where it’s going to be maturing or I’ve got to roll it over. So I guess it was just like a two year thing. But I’ve been putting, after tax dollars in it, and I guess I just didn’t know how IRAs work. So if I, if I cashed that out, do I pay fines and fees on my after tax dollars?

Kevin Zywna, Wealthway Financial Advisors 

Alright, let’s set the stage a little bit. You open up an IRA at a bank at Navy Federal Credit Union. It sounds like that IRA you purchased CDs, like a two year CD. And then you contributed after tax dollars. These were not deductible contributions, correct?

Caller 

Correct.

Kevin Zywna, Wealthway Financial Advisors

And it’s not a Roth IRA. It’s a traditional IRA. Correct?

Caller 

Correct.

Kevin Zywna, Wealthway Financial Advisors

Okay.

Allison Dubreuil, Wealthway Financial Advisors 

And have you been keeping track of the contributions that you’ve made to that account Todd?

Caller 

Yeah, yeah.

Allison Dubreuil, Wealthway Financial Advisors 

Okay, good. Well, there are two different pieces at play here. So one is the IRA wrapper and how your contributions are treated when you put them in and when you take them out. The other is the instrument within the IRA or the investment within the IRA, which it sounds like is the CD. So I think your initial question is what happens when the CD matures? Do you have any tax consequences or penalties? Is that your question? Right?

Caller 

Yes.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. So when the CD matures, that means that you have just cash sitting in your IRA, that you can then make a decision what to do with. You could put it into a new CD, if that’s what you wanted to do. Or you could decide to put it in a different savings or investment vehicle, but it would stay in the IRA wrapper. As long as it stays in the IRA wrapper, there would not be any tax consequences for you.

Caller 

So should I have been somehow contributing like a payroll deduction?

Kevin Zywna, Wealthway Financial Advisors

I don’t think that makes any substantial difference. How you contribute, whether you wrote a check transferred the money from a savings account, or did it through payroll deduction. The fact that it’s designated that you were not able to deduct the contributions due to income limitations, right Todd? Does that sound familiar?

Caller 

Correct. Yeah.

Allison Dubreuil, Wealthway Financial Advisors 

And do you have an employer sponsored plan? Do you still work? Do you have a 401k plan?

Caller 

Yeah, I still work.

Kevin Zywna, Wealthway Financial Advisors

Right. And anyone can contribute to an IRA. The question is, is it deductible, or non-deductible contribution, or Roth IRA contribution? Those are the three major distinctions of the types of IRA contributions that a person can make. So like Allison said, any savings is good savings, but non-deductible IRA contributions come with some administration around them and some record keeping. So it is important that you capture through your tax filing all of your non deductible contributions to that IRA. Because when that money comes out of the IRA wrapper, a portion of that withdrawal is not going to be subject to taxes. And you have to have that documented on your tax return through the years in order to take advantage of that feature. If you don’t capture that information, or it gets lost through the years, then you run the risk of getting taxed on that money twice. You get taxed on it when it came out to you through a paycheck and when it comes out of the IRA. If you can’t prove it was non deductible, then it will come out as taxable. So that’s what you have to be careful of. For most people, we don’t generally recommend non deductible IRA contributions, even though you can, it’s because the administration around it can be somewhat tedious and laborious. And if you don’t stay up with it, you’re going to get caught.

Caller 

So yeah that was what I was kind of thinking. So I was just going to kind of maybe cash it out. And as long as I can deduct or show them, hey, this was after tax dollars that I put in, then they’re only going to be looking at the interest that was earned.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, if it’s been in a CD, just earning interest, you’re right. You would owe taxes and penalties on any interest that you earn if you’re under 59 and a half.

Caller 

Okay, yeah, that’s what I was looking at. And I just figured I’m going to try to get out of it just to save myself a headache down the road.

Kevin Zywna, Wealthway Financial Advisors

What’s a ballpark amount Todd?

Caller 

Two grand.

Allison Dubreuil, Wealthway Financial Advisors 

Okay.

Kevin Zywna, Wealthway Financial Advisors

Yeah, that’s not a huge dollar amount. Do you have any other IRAs?

Kevin Zywna, Wealthway Financial Advisors 

No, I just got a 401k and a pension through the company. Okay. Are you eligible for Roth IRA contributions?

Caller 

Maybe I don’t know.

Allison Dubreuil, Wealthway Financial Advisors 

You’re not sure. Okay.

Kevin Zywna, Wealthway Financial Advisors 

All right, Todd.

Allison Dubreuil, Wealthway Financial Advisors 

All right, we’ve been talking about all sorts of things tonight. But we were kicking things off with Social Security.

Kevin Zywna, Wealthway Financial Advisors 

Okay. John, up in Hampton. Good evening, you’re on Dollars & Common Sense.

Caller 

Hello. I had been disabled for a long period of time. And when I was 69, they sent me a letter, Social Security did,  retiring me. I didn’t ask for this. But there it was on 77 years old right now. And I got a notification at the possibility of having to re-apply at 77 for a much larger payment. Is that possible?

Allison Dubreuil, Wealthway Financial Advisors 

Are you married, John? No, I’m single. And when did you receive this notification?

Caller 

I was 69 years old.

Allison Dubreuil, Wealthway Financial Advisors 

And so at 69. They said you may have to reapply for your benefits.

Caller 

No, they mentioned that I was retired. I didn’t ask for this retirement.

Kevin Zywna, Wealthway Financial Advisors 

Was that maybe just converting disability benefits to retirement benefits? Re-classifying them?

Allison Dubreuil, Wealthway Financial Advisors 

Yeah. Do you know how old you were John when you claimed your disability benefits?

Caller 

That was at 87.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. So well before your full retirement age well before 65. Yeah, okay. Well, big picture how Social Security Disability benefits work, are if you are unable to work before you’re eligible for a Social Security retirement benefit, you may be eligible for a disability benefit which you qualified for. It sounds like back in the 80s and you’ve been on. Once you reach your full retirement age, then disability benefits can typically convert automatically to retirement benefits. So it’s still the same benefit amount, but it goes from being classified as disability benefits to retirement benefits. Now, I’m a little perplexed why that wouldn’t have happened until age 70, or 69, or 70. And I don’t know of any reason you would need to reapply for benefits at 77.

Caller 

Well, it’s not possible. I won’t try it. So I’ll just say things the way they are.

Kevin Zywna, Wealthway Financial Advisors

Well, I will say, John, it never hurts to contact the Social Security office, the local office near you. Make an appointment. They are now back in the offices. For a long time, due to COVID restrictions, they were all working remotely. But now a lot of offices are opening up. You could make an appointment at one near you. Go in and talk to a Social Security Professional face to face. They might help you work through some of the nuances of your unique particular situation.

Caller 

Okay, I’ll do that. All right.

Kevin Zywna, Wealthway Financial Advisors

Thanks for the call, John. Good luck to you. As you can see, Social Security is complicated. And a lot of people don’t really appreciate how complicated it is, until they go to apply for some form of benefit. So it’s something that, and I should add, while some people at the Social Security Administration are informed and knowledgeable about how the program works, even some people who work for the administration aren’t as expert as they should be about all the inter workings of the Social Security program. So you should tread carefully there. Try to do some of your own research. If you are a do it yourselfer. Get up to speed on your options and or work with a financial professional who does this more routinely.

Allison Dubreuil, Wealthway Financial Advisors 

Right asking questions, I think, is really important. And we certainly have clients that have asked questions and gotten three different answers from Social Security, which can be very frustrating. But that’s why it’s never a bad idea to do your own research and to have other professionals looking over your shoulder when you go to talk to the Social Security Administration. It’s not to say they’re not knowledgeable. There are some very knowledgeable people there. But there’s a lot of people there. You never know who you’re going to get.

Kevin Zywna, Wealthway Financial Advisors

All right. Thanks to all the questions, we really haven’t gotten too much or any of our social security material for this evening. But I’m going to pause right here take give you some Social Security fun facts, let’s call them. As listeners might have guessed, the Social Security Program is pretty complicated. But there are three general types of benefits that you get to the Social Security benefit. Most of the time, when we talk about Social Security, we’re talking about the retirement benefits – those that you’re paying through your payroll tax. You put in half about 7.2%, your employer puts in about 7.2% that goes into a big pot up in Washington, DC. Then when you claim your benefit, you get a pension or annuity for the rest of your life for retirement benefits. But there are also survivor benefits and disability benefits as well. Survivor benefits are if a person who’s contributing to Social Security system passes away before they claim benefits, then their surviving spouse, and or children may be entitled to a benefit under their work record. And then the disability insurance, if you get classified as disabled through the Social Security Administration, then you can get a payment belowretirement age, 62. And get that for a period of time as well. It used to be very difficult in the past to get classified as disabled under the Social Security definition. That has been relaxed a fair amount through the years.  We have another call on the line. We’re going to go to Joe in Norfolk. Good evening, Joe. You’re on Dollars & Common & Sense.

Caller 

I listen to your show and I had a couple of questions. Well, actually one. I’ve got my retirement started, but I’m not quite 62. My wife is. Should we try to get her Social Security? And mine would probably be quite bigger. She worked some when she was younger, but mostly with the kids later. And then you mentioned something about the offset, which I had heard about before. I’m not real sure what that does. Could talk a little more about the offset?

Allison Dubreuil, Wealthway Financial Advisors 

Sure, Joe, let’s tackle that first. So you said you have a retirement? So are you receiving a pension income?

Caller 

Yes.

Allison Dubreuil, Wealthway Financial Advisors 

Where is your pensions? Or what did you do?

Caller 

Through the government.

Allison Dubreuil, Wealthway Financial Advisors 

Government. Were you a GS employee?

Caller 

Yes.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. Do you know if you were under FERS or CSRS?

Caller 

FERs.

Allison Dubreuil, Wealthway Financial Advisors 

Okay. So for FERS, you’ve been paying into Social Security, as long as you’ve been under FERS the entire time, and you should not be subject to a Pension Offset. Those that were under CSRS did not pay into Social Security the entire time. And so their pension does reduce their Social Security benefit. But you should not have that problem if you were under FERS the entire time.

Caller 

Yeah,  when I first started, they were just switching to FERs. At first they didn’t have a TSP. And then a little bit later, later in the year, they started it. And they let us double the TSP payments if you wanted to. Because they started later, after we already started working. Didn’t know if that matters any.

Allison Dubreuil, Wealthway Financial Advisors 

Nope, your TSP shouldn’t impact your Social Security benefit in any way. And I think you don’t have to worry about the government offset pension. So then we can tackle your other question, which is a really big question. Should your wife claim Social Security? Do either of you have any earned income right now?

Caller 

Just rental stuff.

Allison Dubreuil, Wealthway Financial Advisors 

Rental. Okay, rental. Thank you. Okay, and do you need income on a monthly basis?

Caller 

Not really, I just didn’t want to not claim hers and us miss out on it. You know, if she didn’t claim it until I claimed it, which probably would be later on when I get closer to 65. fAnd I didn’t know if it was a good way to proceed with that, or should we go ahead and claim or what?

Allison Dubreuil, Wealthway Financial Advisors 

Well, it is a good question to ask. Know that when you claim Social Security at 62, your benefit is reduced. It can be reduced by close to 30% if you claim at 62, for the rest of your life. So claiming early means a smaller benefit, but there can be good reasons to claim at 62. If you need the income, if that’s your sole source of income, and you need that to live, that can be a good reason. Or if you maybe have health issues and are not sure that you’ll live past your 80s. And you want to just get your benefit today that could be a reason to claim. But you mentioned that she has her own benefit, but your benefit is much higher. Do you know how much higher your benefit is than hers?

Caller 

Well, I know for instance, she worked for probably 10 to 15 years and I worked about 43.

Allison Dubreuil, Wealthway Financial Advisors 

Have you looked at your statements and compared the Security statements?

Caller 

It’s been a while but I have and I know mine is a bit more than hers would be.

Allison Dubreuil, Wealthway Financial Advisors 

Well, I asked because she may have the option to claim her own benefit or a spousal benefit. So she claims her own benefit, it would be whatever her Social Security statement says her benefit is at the age that she claims. But, if her benefit is low because she doesn’t have as many years of work, she may be entitled to a spousal benefit, which would be 50% of your benefit. But she can’t get that until you turn yours on. So now we’ve got all these different factors factoring into when should you turn it on? When should she turn it on. And it’s probably much more complicated than what we can solve for you on air today

Kevin Zywna, Wealthway Financial Advisors

Hence the complexity around the claiming decision.

Allison Dubreuil, Wealthway Financial Advisors 

But you’ll need to look at, whether her benefit is higher than the spousal benefit, which would be 50% of yours. That might give you some direction in when to claim.

But she would miss out on hers, right? And once she claims it she can never claim the spousal benefit. If she goes just hers, she’s not able to claim another later?

Allison Dubreuil, Wealthway Financial Advisors 

Well now, you can’t claim a spousal benefit until the spouse turns on their benefit. You used to be able to claim your own and then switch to a higher spousal benefit. I would want to double check that detail for you, Joe, because there’s been some law changes in the past few years. Where there used to be some creative strategies you could use, but a lot of those have gone away. And typically, when you claim early, you lock in that benefit, even if you would have had access to a higher benefit. So you want to be really careful before you claim her Social Security.

Caller 

Yeah, yeah, I got you. Okay, that makes sense. It just doesn’t sound like for sure, unless we check it out or something.

Allison Dubreuil, Wealthway Financial Advisors 

Right, so you could call the Social Security Administration, and they could walk you through all of your claiming options. I recommend if you don’t work with a financial advisor, consider working with a financial advisor on this because we know through our practice that looking at Social Security claiming strategies in a vacuum doesn’t always lead you to the best strategy. It’s really important to look at your entire financial situation together. Which would include your rental income, it would include your investments and your nest egg and how much you need to live. And that could really drive …

Kevin Zywna, Wealthway Financial Advisors 

How old you are? Are you married? How old is your spouse? Did your spouse work? How much did your spouse earn?

Allison Dubreuil, Wealthway Financial Advisors 

Right. So looking at your entire financial situation may actually lead you to a different Social Security claiming decision than just looking at the Social Security numbers.

Okay, that makes sense. And I really appreciate it.

Allison Dubreuil, Wealthway Financial Advisors 

Okay, you’re welcome.

Social Security Benefits Round-Up

Kevin Zywna, Wealthway Financial Advisors

All right, Joe, thanks for the call.  Going back to some of the fun facts about Social Security, three different main types, Retirement Benefits, Survivor Benefits, and Disability payments. About 65 million people are receiving some form of benefit from the Social Security Administration. So that’s about 20% of the population that is getting a check or direct deposit these days, from the Social Security Administration, either from retirement, Survivor Benefit, or from being disabled. Now, I know for a lot of people, it continues to be a hot button issue… Will there be Social Security when I’m eligible to claim a benefit? And it’s our position that yes, Social Security will be there in some form or fashion. And no, it’s not going to go to zero, it’s not going to really run out of money. Yes, they do have to make some tweaks to the program, in order for it to maintain its current level of benefits, and those tweaks will most likely fall on subsequent generations. So if you are a beneficiary of Social Security today, if say you’re a typical retiree, in your 60s, it’s most likely that your grandchildren or great grandchildren will have to pay more into the system or accept a reduced benefit or have to wait longer in order to get a benefit, than the current beneficiaries enjoy today. But we cannot foresee a plausible outcome where Social Security just goes away. So a lot of times younger people say well, I’m not even counting on Social Security because they won’t be there.

Allison Dubreuil, Wealthway Financial Advisors 

Yes, it will be. Imagine the uproar. I can’t conceive. Not going away.

Kevin Zywna, Wealthway Financial Advisors

It’s too entrenched in our society. Too many people feel entitled to the benefit to allow that to go away. But the changes will have to be made to the program. Right now there’s too much money flowing out of the system and not enough going in. So that will have to be re calculated. And that’s where I say that subsequent younger generations will probably have to pay more into the system or get less out of it, or wait longer to receive a benefit than the current beneficiaries enjoy. So that’s kind of how we see that going.

Allison Dubreuil, Wealthway Financial Advisors 

There may be some sort of means testing.

Kevin Zywna, Wealthway Financial Advisors

There could be means testing. I personally hope that that’s not part of it. Because that, well, let’s talk about that, because a lot of people bring that up. If there is means testing to Social Security, meaning that if you earn too much money or have too much money, you might not get a benefit, or you get a reduced benefit, because you’re quote unquote, too wealthy. If that becomes part of the equation to Social Security, then it moves Social Security, away from an entitlement pension type of plan, to more of a welfare type of plan. And now you change the discussion in the United States over what is Social Security supposed to be about? What is it supposed to be for? Because certainly we already have welfare programs in the United States. Social Security was designed to help workers and their families have a dignified retirement, much like a pension plan. People paid people and their employer paid into the system with the idea that they were going to get that money back in retirement, not just a handout from the government. So I think I said that without being too political, and tried to stick to the facts. But regardless, this has been great conversation. Thanks for all our callers: George, Paul, Todd, John, Wayne, Joe.

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