Allison Dubreuil, Wealthway Financial: Tonight, we want to talk about one of my favorite topics, which is Social Security. There’s been a lot of headlines around social security lately, the annual trustees report was just released. So we can talk a little bit about that. Also, there’s some conjecture out there about the COLA increase that Social Security beneficiaries may start receiving in January. It’s a big one. We can talk about general Social Security claiming options as well. And then also, something we haven’t talked about in a while, is Social Security do-overs? What are your ways of fixing a claiming mistake? If you did something you shouldn’t have done.
Kevin Zywna, Wealthway Financial: Or just having some other options. A lot of people don’t even know, because for most intents and purposes, once you make a Social Security election, it is irreversible. But there are some very few targeted selections where you can do a little bit of a do over if your circumstances change. And if time permits, we’ll get into that.
Allison Dubreuil, Wealthway Financial: Yes, so the first headline I wanted to address was the Social Security trustees report that has just been recently released. where now they’re saying that the OASDI and disability insurance trust funds are now projected to be depleted one year earlier than they were as of last year because of the effects of COVID. So the OASDI trust is now projected to be depleted in 2033. That means that it will be able to pay 76% of benefits. And then coupled with that the disability trust for those that are out on social security disability. That trust is estimated to now be depleted in 2057. Eight years earlier than last year’s estimate, actually which is a big difference. At that point, it would still be able to pay 91% of benefits. So we want to kind of unpack these pieces of information to give you a little bit of perspective around what that means.
Kevin Zywna, Wealthway Financial: Let’s not panic just yet and run into the streets and create turmoil and chaos. If Social Security trust fund is depleted, that does not mean no one gets paid. It means that benefits would be reduced from their current payout levels, about 20 ish percent from what you’re getting right now. Because tthe current contributors, the workers who are out here in the workforce right now paying the source of their social security benefits, that would go into the trust fund, and then be paid out in benefits. It’s just that, due to largely the baby boomers, they’re more of the beneficiaries, more of them than there are of us. And so there’s more people taking out of Social Security, than there are paying in. Those that paid in through the years, while they did contribute something they didn’t contribute enough actuarially to justify the benefits that are coming out now. And a lot of that has to do with life expectancy. And the fact that people are living longer than the Social Security Administration anticipated when they designed the plan. So tweaks have been made to the years to try to true things up.
But right now, the way the numbers look, we are on a course where something needs to be done, in order for the current beneficiaries to get their current benefits without a reduction. And most likely what that’s going to be is a combination of perhaps a little bit of increase in the current security tax, so more gets paid in. And then what I personally hope would happen is a shift in the retirement benefit ages right now you can start taking Social Security as early as 62, full Social Security benefit age, right now is 66. And you can continue to delay up to age 70. What I hope is that the whole age group shifts up to recognize the additional life expectancy of the health benefits that we all sort of enjoy. That’s what a traditional pension system would do. That’s how it would help rectify any sort of short-term deficiencies. If those changes aren’t made, then we will have problems. But I’m sure when the situation comes dire enough, that’s when Congress will act. And that’s who needs to act in order to make those changes. So that’s where we are from a social security standpoint.
Allison Dubreuil, Wealthway Financial: I definitely wanted to point out what you just mentioned. That no party is really going to want to touch this until they have to, so don’t expect something to be done until the last minute. But there are a lot of changes that can be made that would certainly positively impact the program. Most people, as they near claiming age or if they are on social security and already claiming, they get very uncomfortable because we just constantly see these headlines. Well, it’s less likely that anyone who is currently receiving benefits will be majorly impacted. And it’s not very likely that anyone within probably five to 10 years of claiming will be largely impacted. We’re really looking at most probable effects to the younger generation.
Kevin Zywna, Wealthway Financial: The cost of the security program, to fix it will largely be borne by subsequent generations. the current grandchildren and great grandchildren of the current beneficiaries will be the ones who will have to pay more into the system and or accept less benefits than their grandparents and great grandparents are getting now. That’s where the cost will be borne in society. But current beneficiaries don’t have to worry about it. Certainly I know that many people think they will get nothing out of Social Security. The probability of that is almost zero. All of us workers who contribute to security are going to get something out of it. It’s a matter of what. Alright, we’re gonna pause right here. David in Virginia Beach, we see you.
We lost David but I think we got a gist of his question. He’s got some money and CDs, not making a whole bunch of interest. What else can he do with it?
Allison Dubreuil, Wealthway Financial: Well, it’s, it’s really hard to eke out much of anything anywhere in any bank. So we definitely have clients who try to shop it around. And really, I’ll just say, first and foremost, if this is your emergency reserve, that’s where it stays. Earning interest is not the primary objective of that money. So don’t sweat the small stuff. You know, point zero 1%.
Kevin Zywna, Wealthway Financial: The primary purpose of that money is not to earn money on that money. Its liquidity, and ease of access. That’s your safety net and your cushion. That’s your rainy day fund. So that’s just the price we pay for those other attributes.
Allison Dubreuil, Wealthway Financial: But if you already have your emergency fund, so you have your three to six months worth of living expenses, or maybe another appropriate amount for yourself. And you’ve got extra sitting in the bank earning nothing, then it is probably a good idea to look for other savings opportunities. And that could be in a number of different vehicles. But I think the most basic would be just a regular brokerage account where you could invest in growth-oriented, stocks, mutual funds, and equities.
Kevin Zywna, Wealthway Financial: But recognize, that that account is going to have totally different characteristics. You’re going to have to subject it to short-term market fluctuations. But in exchange for that, you should, if you do it, right, get long-term growth rates that well exceed what you are getting out of your bank account. While we believe that having a healthy bank account cash balance, emergency fund, all different words for the same thing, that’s necessary. It’s a good fundamental underpinning of a financial plan. But not to the extreme. Too much cash sitting around is dead money. Money above your protection level, needs to be invested for growth if you are concerned about building wealth over the long term.
This is just the interest rate environment we are in. There’s no magic solution here. Bonds are an option, you can always purchase a US treasury bill or a 10 year treasury bill that’s earning, you know, about 1.3%. But that, for most people, is not going to move the needle. So, that’s just the interest rate environment we’re in. You’re going to get your best growth out of equities in this environment.
Kevin Zywna, Wealthway Financial: Alright, we have another caller on the line. Scott in Chesapeake. Good evening, Scott, you’re on Dollars & Common Sense.
Scott, Caller: My question is, if my spouse and I are both claiming Social Security, and something happens to me, does she pick up my Social Security and drop hers? Or does she get a portion of mine?
Allison Dubreuil, Wealthway Financial: Good question, Scott. So it depends on which benefit is the larger benefit. So if one spouse passes away, the surviving spouse then keeps the larger of the two benefits.
Scott, Caller: Okay. But she’d have to be drawing Social Security when this happens, right.
Allison Dubreuil, Wealthway Financial: Not necessarily. Did you say you’ve both already claimed Social Security?
Scott, Caller: No, neither one yet.
Allison Dubreuil, Wealthway Financial: Oh, neither of you have. Oh, I misunderstood. Whose benefit is the larger benefit? Do you know?
Scott, Caller: Me.
Allison Dubreuil, Wealthway Financial: Yours. Okay. And how old are you and your wife?
Scott, Caller: I am 64. And she’s 62.
Allison Dubreuil, Wealthway Financial: Okay. So if you were to pass away today, she would have the option to claim a widow’s benefit on your record. Or she could claim her own benefit based on her work record. And a widow actually has a little bit more flexibility than anyone. So a widow can choose to claim one benefit and then switch to another at a later date. So depending on her entire financial situation, her cash flow situation. She could maybe claim hers, and then switch to yours at a later date and allow it to grow a little bit more. So she would have a lot of flexibility there. And yes, she would be eligible right away. 60 is the earliest you can claim a widow’s benefit.
Scott, Caller: Okay, thank you. That’s perfect.
Allison Dubreuil, Wealthway Financial: You’re welcome.
Kevin Zywna, Wealthway Financial: All right, Scott, thanks for the call. We appreciate it.
Allison Dubreuil, Wealthway Financial: Just to wrap up or give a little more clarification around widows benefits. A widow can claim, a widow’s benefit on their deceased spouse’s record as early as age 60. It will be decreased so if you want your full widow’s benefit, you have to wait until your full retirement age. But again, like I mentioned, you have more flexibility than normal. You could claim your own benefit at 62. And then switch to the larger widow’s benefit at 67. You could claim your widow’s benefit at 60 and switch to your own benefit at 70. And if this is confusing to you, this illustrates why Social Security claiming is complex. And you should definitely get educated and work with someone about the strategy.
Kevin Zywna, Wealthway Financial: The moral of the story is, there are a lot of different ways to claim Social Security benefits. And people don’t typically appreciate that Because overwhelmingly, the majority of people just take Social Security benefits as soon as they are eligible at 62, which for most people is probably not the best claiming strategy. But that’s the reality of the situation. So know that there are a variety of options, a variety of programs and plans embedded in Social Security that can be available to you. Social security is a big bureaucracy, right? So if you’ve had experience with that, you know that you could get a good social security, customer service rep, who knows the system in and out or you could get somebody who’s six months on the job, and not really have much of a clue at all. So ultimately, the responsibility is going to be yours. Because once you make that decision, with a few exceptions, it is your irrevocable and it’s permanent for the rest of your life. So you want to go in armed with a plan and a strategy.
Allison Dubreuil, Wealthway Financial: We have experienced this with several clients recently where they have called three different times and gotten three different answers. It is beyond frustrating. But the main takeaway you need to understand is you have to be educated and you have to know the right questions to ask. So it’s a good idea to work with someone a professional that can help guide you.
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Kevin Zywna, Wealthway Financial: All right, we’re gonna try and get Dave in here from Virginia Beach. Dave, Good evening. You’re on Dollars & Common Sense.
Dave, Caller: Thank you.
Kevin Zywna, Wealthway Financial: How can we help you?
Dave, Caller: I’m on Social Security right now but I’m still working. Do my lower years of working when I was only making a couple $100 a year. Do they fall off? And they add to the latest? So therefore my total number would go up?
Allison Dubreuil, Wealthway Financial: Yes. So how old are you Dave?
Dave, Caller: 73
Allison Dubreuil, Wealthway Financial: 73 and still working. So how your Social Security benefit is calculated: they take (it’s actually monthly) they take your 35 highest earning years and they average those and use that to calculate your benefit. So every year you earn if you’re still in your high earning years, that will cause probably a low earning year to drop off your record and it will increase your benefit.
Dave, Caller: Does that happen automatically or do I have to do something?
Allison Dubreuil, Wealthway Financial: It happens automatically.
Dave, Caller: Alright, thank you very much.
Kevin Zywna, Wealthway Financial
Thanks for the call Dave. And there will be a little lag in that because it’s usually based off of previous year’s earnings. So you know you file your tax returns and your W2s, and then it gets to Social Security, but eventually you will see that benefit creep up over time. And that does happen as a normal course of business through Social Security.
Right now we’re going to go out to Virginia Beach to speak with Ross. Good evening, Ross you’re on Dollars & Common Sense.
Thank you for taking my call. I have a TSP account, and my wife has a 401 K. And I’ve become very familiar with investing money into it. Essentially, you set an allocation rate and I like to take the approach of set and forget. As long as I’m comfortable with my allocation to different assets, I leave it alone. But looking forward to the time that I start withdrawing funds, I’m confused about how the allocation would work. I’ve heard it said that I have to withdraw the money on an allocation basis. In other words, a certain percentage of each type of asset. And I consider that that would be a horrible way of taking money out. Because what I want to do is take the money out of an asset that’s been doing well, and potentially avoid taking money out of an asset that hasn’t been doing well. So is that a good question? How does that work?
Kevin Zywna, Wealthway Financial
Yes. So you’re talking about the withdrawal period of time, like in retirement when you’re ready to take the money out and start using it to live on? Is that correct?
That’s correct. Frankly, this gets to the issue of whether it’s better to leave money in a 401k or putting it into an IRA, where it would be more easy to direct. Specifically, which asset to withdraw from.
Kevin Zywna, Wealthway Financial
Right. And how old are you Ross?
Kevin Zywna, Wealthway Financial
Okay. You’re exactly right. Every 401k plan, seems like, there are different nuances and wrinkles. By and large, yes, there are a lot of similarities to a 401k plan. But when you look under the hood, and check out the engine sparkplugs, there’s a lot of differences. Every company’s 401k provider can do it a little bit differently. And as you suggest some companies if you say you have a million dollars in the 401k plan and you want to start taking out $5,000 a month, then their method for withdrawal is going to govern and it might not align with your particular needs and strategies. Some do offer options, but few don’t because it’s more advanced maneuvers that most typical people aren’t even familiar with, and don’t have the sophistication to make the right decisions. I think what I heard you say was spot on. You generally do want to sell those asset classes that are outperforming, and not sell those that are underperforming, so you get it. But if that doesn’t align with the 401k plan’s, distribution, administration mechanics, then you’re your best option. We generally recommend this for most people who are either working with an advisor or who know what they’re doing, is to just take that 401k money, consolidate it into one IRA. (One IRA for you and one IRA for your wife.) And have total control over it. And then you decide how the distribution comes out.
Okay, that makes a lot of sense. Thank you.
Kevin Zywna, Wealthway Financial
Yeah. All right. Thanks for the call. Ross. We appreciate it. Yeah, we talk a lot about accumulation. But the reason we accumulate is because at some point, we want to withdraw and distribute that money and live off of it. And enjoy the fruits of our labor of building that nest egg. And that’s a whole different complex decision set that needs to be managed properly, if you want to maximize the value of your retirement plan and make it last as long as you can.
Okay, we’ve got we’re going to go out to Portsmouth now and speak with Roy. Good evening, Roy, you’re on Dollars & Common Sense.
Roy, Caller: Yes, my question was, are there any updates to the Windfall of your Social Security being taken out once you retire?
Allison Dubreuil, Wealthway Financial: Have you heard anything recently?
Roy, Caller: Well, that’s why I was calling. This was 10 years ago. Just wondering if they have made an update to that since then.
Allison Dubreuil, Wealthway Financial: No, it’s always up for discussion. I think there are certainly groups that are petitioning to have the Windfall Elimination Provision eliminated. But I don’t think anything has gone through officially at this point.
Roy, Caller: Okay. Okay, I appreciate that.
Allison Dubreuil, Wealthway Financial: You’re welcome, Roy. So what Roy is talking about is when you have a pension from a government entity, (like a lot of firefighters, police officers, either government state or city entity) that where they didn’t pay into Social Security for a period of time, and they receive a pension. If you also had work, where you did pay into Social Security and you earned a Social Security benefit, your government or local government pension could actually cause a reduction in your Social Security benefit that you would otherwise be entitled to from other employment. And it was designed so that people couldn’t quote, unquote, double dip, but it is a reduction in Social Security benefits. And sometimes it can mean you receive no Social Security as a result of your pension.
Kevin Zywna, Wealthway Financial: And mainly because that was the tax that was taken out of your paycheck or the withholding that came out of your paycheck was redirected to a different retirement plan. Because you didn’t quite pay in as much as other people, then you got a reduced or eliminated Social Security benefit.
Allison Dubreuil, Wealthway Financial: It can affect spousal benefits and widow’s benefits. So it is something to be aware of. And I don’t think it has been officially addressed, although there are always people trying to take up that cause.
Kevin Zywna, Wealthway Financial: Okay, we’re going to go up to Hampton now and speak with George. Good evening, George, you’re on Dollars & Common Sense.
George, Caller: Yes. My wife taught for 30 years in the school system. I worked in the post office for 27 years. She makes three times as much retirement money. We both get Social Security. They cut my Social Security. I accumulated enough points. But they cut it to half. My question is, if I die (since I make far less than she in Social Security), will she get my Social Security? Or if she dies, will I get her Social Security?
Allison Dubreuil, Wealthway Financial: I’ll first answer the easy part of the question. When one person passes away, the surviving spouse keeps the higher of the two benefits. That’s the simple answer, George. Are you talking about the Windfall Elimination Provision that we were talking about earlier with Roy?
George, Caller: Right.
Allison Dubreuil, Wealthway Financial: So that does make it a little more complicated. Where a government pension causes your benefit to be reduced. So if something were to happen to your wife, George, your pension would probably effect the amount of widow’s benefit that you would be eligible for on your wife’s record. You’d probably have to run some calculators on the www.ssa.gov website to find out what that might look like. It probably will have an impact.
George, Caller: Thank you.
Kevin Zywna, Wealthway Financial: We’re going to go to Chesapeake now to speak with Joe. Good evening, Joe, you’re on Dollars & Common Sense.
Joe, Caller: I heard you say something about your last 35 years of employment is how they take the average for Social Security?
Allison Dubreuil, Wealthway Financial: The highest 35 years.
Joe, Caller: Does that include overtime? Because some years I made 6 digits with overtime. Or do they base it on base salary that you were getting paid on?
Allison Dubreuil, Wealthway Financial: Yes, it is based on wages that were subject to Social Security tax withholdings. All of your wages up to the annual Social Security limit would count on your record. They average the top 35.
Joe, Caller: Okay. When I pass away, my wife can draw on mine at 60. So she can get a widow’s benefit off of me once she turned 60?
Allison Dubreuil, Wealthway Financial: If you were to pass away, she would be able to claim a widow’s benefit as early as 60. It would be reduced, but she could claim it, yes.
Joe, Caller: Thank you, appreciate it.
Kevin Zywna, Wealthway Financial: Thanks Joe.
You can verify these numbers at the Social Security Administration’s website. That’s www.ssa.gov. They were sending us our Social Security statements for a while (a hard copy in the mail) but with more efficient electronic means that has stopped. You can always go to the website and go through a very elaborate sign-up process. But once you do, all your information is there. You can verify it and you can see what your current estimated Social Security balance is.
Allison Dubreuil, Wealthway Financial: It is pretty user-friendly. I recommend that everyone create an account because you want to make sure that no one else access your account. Create an account, and look at your earnings each year to make sure your earnings are being reported properly. Because you only have a short period of time to correct any mistakes or problems. I think it’s two years.
Kevin Zywna, Wealthway Financial: Okay, we’re going to go up to Virginia Beach now and speak with Joey. Good evening, Joey, you’re on Dollars & Common Sense.
Joey, Caller: Good evening. I was curious, I’ve not even thought about retirement (which is a bad thing), but I’m only 61 and I don’t plan on retiring at least until 70. And my wife and I both don’t plan on retiring until 70. For the past 10+ years I’ve topped out Social Security. So, whatever the maximum you can put into Social Security at the end of the year, I’ve maxed that out. My wife makes about $65K a year, and she’s not maxing it out. I’m just curious, between her and I, what are we going to get for Social Security?
Allison Dubreuil, Wealthway Financial: Have you looked at your Social Security statements, Joey?
Joey, Caller: Nope.
Allison Dubreuil, Wealthway Financial: Let me give you an idea. If you have max earnings, the maximum you can claim, if you were claiming right now, this year, would be about $3,100 per month. That’s the maximum Social Security benefit right now. So if you keep earning and maxing out your Social Security for the next 10 years, you’d probably be somewhere around there with cost of living increases. But you don’t have to guess because we all have our own Social Security record and statement that would show you exactly what benefit you would be entitled to at age 62, at full retirement age, and at 70. It lays it our really nicely for you.
Joey, Caller: So is there an age where I should say, ‘That’s it – we are just going to start collecting Social Security.’? Because if I go another 10 years and keep backing it out? Is there a balance there? If I go another 10 years I’m just going to be dumping money into it where I’ve already been dumping a lot of money into it. What’s the sense?
Allison Dubreuil, Wealthway Financial: It’s a really good question and it’s not a simple answer. It not only depends on your Social Security record but your wife’s Social Security record and your entire financial situation and your work plans. I will say that as long as you’re working, you don’t usually want to claim before your full retirement age because your benefit is reduced and any earnings you have could further reduce your benefits. So generally, as long as you’re still working it is not a good idea to claim before your full retirement age.
Kevin Zywna, Wealthway Financial: Which for you is probably close to 67.
Allison Dubreuil, Wealthway Financial: Now the debate between claiming at 67 or waiting until 70, every year that you wait past 67, your benefit will increase by 8% per year. If you are still working your benefit will continue to increase and will be getting cost of living increases. There are oftentimes good reasons to wait until 70 to maximize your benefit. But if you need the cashflow or you don’t think you will have a long life expectancy then a case can be made to claiming before then.
Joey, Caller: Right, then the Medicaid, Medicare, insurance, when should you start getting that?
Allison Dubreuil, Wealthway Financial: You are eligible for Medicare at age 65. But if you are still employed you don’t have to enroll in Medicare. So you will probably want to do a bit of homework to compare your current insurance compared with what you would have, what you would pay with Medicare.
Joey, Caller: Is that expensive, when you start taking it out of Medicare?
Allison Dubreuil, Wealthway Financial: Right now, Medicare is $150 per month but if you are still earning and in your high earning years you could be subject to surcharges. It’s called perma, additional premiums. Your premiums could go up as far as $500 a month if you make a lot of money.
Joey, Caller: $500 a month is actually not too bad compared to what I’m paying now.
Allison Dubreuil, Wealthway Financial: Possibly. You have to really weigh your options
Joey, Caller: Alright, thank you.
Kevin Zywna, Wealthway Financial: Thanks for the call, Joey.
The whole Medicare issue and the cost for that, it is a maligned program. I would say it is functionally working better (at least for the time being) than Social Security. From what we hear from people who are paying the premiums, and even the surcharges even, the benefits they get out of it are pretty robust. That program also needs some suring up and needs some stability going forward. But, at least for now, the current beneficiaries are enjoying it.
Where can people to go to get accurate information about Social Security?
Kevin Zywna, Wealthway Financial: First step is to go online to the website www.ssa.gov the Social Security Administration’s website. Also you can learn a fair amount about Medicare through the Social Security site and it’s own site.
If you are going to go it alone, it is going to be on you to figure out the best strategies. That’s where the rubber meets the road. So for those of you who aren’t willing to do that, find a good insurance agent who knows the ends and outs of Social Security. Social Security is really a fundamental part of a solid financial plan. So that’s where you want to align yourself with a good financial advisor. Whether that’s us or a someone in the local Hampton Roads community.
Director of Financial Planning