On this episode of Retire With Balance, financial planner Rob Auclair and host Kristin Oakley discuss Social Security and the complexities involved in deciding when to start claiming benefits. Tune in to learn how Social Security benefits are calculated, the impact of claiming benefits early, and the potential tax implications. Don’t miss out on this helpful information – watch today!
Topics Discussed:
- Factors to consider when deciding when to take Social Security
- Spousal benefits and widow/widower’s pension
- How benefits are calculated
- Taxation of benefits
- Earnings limits and reduction of benefits
Transcript:
Kristen Oakley:
Hello Rhode Island and welcome to this week’s edition of Retire With Balance, the show that takes the complexity out of your retirement planning. I’m your host, Kristen Oakley, and joining me in the studio is Rob Auclair. He is a financial planner with Balanced Wealth Management. Rob, my friend, great to be back with you. How are you this week?
Rob Auclair:
I’m very good. Thanks for having me back.
Kristen Oakley:
Absolutely. Well, the show is definitely, it wouldn’t be the same without you and without the team of Balanced Wealth behind it. And we say every week that this show is dedicated to helping take the complexity out of your retirement planning and something we’re going to talk about today can be very complex. It has to do with Social Security and when is the right time for you to turn on your Social Security. Now, Rob, you and I both know so much goes into this. I used to travel the country and make presentations nationwide on helping folks understand these complexities of Social Security. And I think what always breaks my heart is when people aren’t educated on the subject and think, “Yay, I’ve turned 62. That means it’s time to turn on Social Security,” and that might not always be the right thing for someone. There’s so many mathematical calculations, so many personal factors that then far outweigh the math. I mean, there’s so much that goes into this all important decision of when should you take Social Security,
Rob Auclair:
Right? Yeah. So I thought you were going to ask me, should you take Social Security? And I was going to tell you
Kristen Oakley:
Yeah, when, right. That’s what everyone wants to know. When should I take it and what is the answer, right?
Rob Auclair:
It depends.
Kristen Oakley:
It depends.
Rob Auclair:
Yes. Yeah, and I think for people that are watching that have yet to file for Social Security, there’s a lot of factors to consider. Number one is do you need the money? So if it’s a point in which you’re saying, I don’t have a ton of savings, I need more income, I’m retiring, or I need just more inflow, then you may have to take it, but you still should look at all your options. I think the other case may be is a lot of people would look at and say, if I take it at a certain age, it comes to be like, when do I win? I want to beat Social Security, right? Yes. When am I going to beat Social Security?
Kristen Oakley:
I’ve been paying into the system for years. I want what is mine.
Rob Auclair:
Right? And some people say, I’m taking it right away because I don’t know if I’ll be here tomorrow. And that is something to think about. You need to think about your family’s longevity, you need to think about your personal health because if that is something where you have a shorter lifespan, you may want to consider, Hey, I need to take it now. And that’s why it’s the word depends really comes into play is because it’s the unknown and we don’t know that. But what we hope that we can do for you today is bring up some good resources for you to understand it a little bit better.
Kristen Oakley:
If we all knew how long we were going to live, it would make this decision so much easier. But nobody knows that. That’s why we have to look at all these different factors. And just for people watching, just to kind of explain the reason why it could be beneficial to wait, and we’re going to get into this, but if you go ahead and claim at 62, you’re locked into a lower amount and you’re locked into that lower amount for the rest of your life. So that’s always sad is when people don’t know that and they just think, oh, I’m eligible, I should turn it on without looking at all these other factors.
Rob Auclair:
So I think what you need to look at is you need to look at your FRA, that’s what they refer to all the time. That means full retirement amount, and that is your basic amount. And so if you had a certain amount of, let’s say $3,000, that said that was your FRA and your age is 66 and 10 months or 67 years old, right?
Kristen Oakley:
Because your FRI, your full retirement age is based on the year that you were born. Correct. So there’s a chart you can look up and then that tells you when, but they get very specific, right? 66 in 10 months.
Rob Auclair:
Absolutely. Yeah. So let’s look at the reduction. I have a slide here, and in this slide, this would show us that if we took it early in, the average would be like, let’s say this person’s full retirement age. Here is 67 years old, and it was actually 66. In this one, they’re at a hundred percent. They’re approximately looking at every year they take it early of getting an 8% cut. So your full amount of Social Security is at 66 years old. If you took it at 62, you are losing 25% of that amount. And absolutely what you said was it’s locked in, you’re there forever, but there forever is, there may be still some inflation, but you have inflation in all of them. In some years there are inflation, some years they’re not. Sometimes
Kristen Oakley:
They do that cost of living increase otherwise known as cola,
Rob Auclair:
Right? And it’s been great in recent years, like the last two or three, but before that pretty flat. So I think that chart kind of explains to you the longer you wait, you can get a lot more money at the age of 70 to do that. So when I have a client, and they were in my office just recently, and it was a really good experience to see that they’re very good about how they budget. They have enough money to support themselves based upon their pension plan and the money that they need and that they’ve saved. And so they said, listen, do we take Social Security or not? And what it came down to was we talked about health, we talked about a lot of different things. They waited two years, she’s 63, now he’s 65. They say, do we wait another two years? And for them, they were all set.
And I said, well, your amount together would be about $3,000 more per month. If I were to say you had that two months from now, how do you feel? And their eyes lit up because they’re very conscientious about how they said, oh my God, I could have that much. I could save all that money, but you know what, I feel better. I keep feeling like I’m pushing it off for what reason. And so for them, and I’m not saying that’s always the case, but for them, I saw that. I knew the calculation of they’re in good shape, whether they take it today or wait another one year or five years, and they just said, we need it and we can do a lot with it, and we want to do it right now. And that was really kind of special for them. I really never saw that aha moment where someone was very definitive and I could it, and they said, okay, we’re going to take it.
Kristen Oakley:
IsWell, it is such an individualized situation. I mean, again, it depends on so many personal factors, and one of the factors that can play into this is are you married or are you single? But for those of you that are married, it’s really important to take that into consideration because of something called the spousal benefit. So talk about that, how it works and what folks need to understand about it.
Rob Auclair:
Yeah. So when you have a spousal benefit, what that means is you should at least get the higher of yours or half of what the higher wage earner would’ve gotten. So if you’re at $900 per month and they’re getting $2000 a month, you’ll get that bump up to a thousand. So you’ll get half of their benefit as that in almost all cases. What we also want to look at is the widow widower’s pension, not pension option. Right. And what can happen in there is you are going to get the higher of the two when that happens.
Kristen Oakley:
Yeah. So when someone passes away, you lose one of the Social Security benfits, right?
Rob Auclair:
Oh yeah. You would not collect both.
Kristen Oakley:
So then you get the higher of the two, which can impact if you started claiming earlier and it’s that lower amount.
Rob Auclair:
I think you could do the show you really.
Kristen Oakley:
Well, obviously it’s something I’m passionate about. I know you are, too.
Rob Auclair:
You’re absolutely right. Yes.
Kristen Oakley:
Especially as a woman, I think a lot of what I’ve done is women’s financial education, and this is something that we really need to pay attention to because for a lot of women, unfortunately in today’s world, they would be broke without Social Security because typically the woman historically has spent more time out of the workforce for child rearing years, also taking care of aging parents. That means already their amounts are lower. And so that widow’s penalty, if you will, with Social Security comes into play for a lot of women and we need to pay attention to it,
Rob Auclair:
Right? Yeah. And I mean, it wouldn’t be fair if they think about it and they tried to put that together. Social Security is not perfect, but when they do bump you up, if your spouse were to pass away, that is helpful. And that’s the reason why they did it is because I think when they wrote it, they realized that families were depending upon the mom to stay home. Things have changed right now, and we’ll see where legislation goes down the road for sure.
Kristen Oakley:
Well, and when Social Security was created, they were not expecting people to live as long as we are today. So there is that, and that is why there’s some issues with the solvency of it, right?
Rob Auclair:
Yes. Which could be a whole nother show. Of course. And maybe we’ll do that at some point, right?
Kristen Oakley:
Right. Well, real quickly in this segment I want to touch on, so you showed that chart and talk about what happens at age 70. I mean, is there any benefit to waiting beyond age 70 to take the benefit?
Rob Auclair:
No. At age 70, you are at your maximum benefit. So if you’re at age 70 and you’ve waited that long for it, your benefit is at the highest point it will ever be. If you don’t take it, you’re still going to get the same amount next year. So I couldn’t even tell you if they automatically click it on, but you still have to file for it. From what I understand, I haven’t really had anyone, everyone’s always usually chomping at the bit to be like, I’m getting it. When am I getting it? When am I getting it? No one’s ever said, oh, I kind of forgot about it. So just know that if you are age 70 years old, Social Security is at the most. It’s not worth waiting any longer at that point. And you’ve done a great job holding off.
Kristen Oakley:
Time to claim, right? Well, I know that those of you watching at home have questions specifically about your Social Security, and this is what you do as part of this complimentary written financial plan is you run a Social Security maximization report for folks.
Rob Auclair:
We do. Yeah. So as part of the process when you come in, we not only will look at and create a balance sheet for you, we will also take a look at your investments, your asset allocation, and then actually putting together your written financial plan to make sure that you won’t run out of money and ways in which if you are, that you can change right now to hopefully fill that gap in. But what I’ll say is when our clients, when they work with us, we actually have hired an outside firm that has Social Security software and also they help us file our claims. So we actually, I’m on the phone, the clients are on the phone, and the person who works at the company’s on the phone and they’ve all worked. There’s I believe eight counselors. Those eight counselors each have worked at Social Security for 20 years or more.
And what we do for our clients is we pay the fee to have them online. We file online together, and there’s so many little things that you can miss in doing this that they catch a lot of extra things such as Social Security will sometimes ask you, Hey, do you want to backdate? So your first check is three times the amount, and it really doesn’t pay off long term. And I’m not saying they’re trying to trick you. They’re employees and they’re told what to say when someone claims. So we want to be there for that. So when you come in for this complimentary meeting, those are things we’re going to talk about in our checklist that we give you. We’re going to tell you if you file on your own, here are the questions you need to be asking.
Kristen Oakley:
Wonderful. Rob, thank you so much to our viewers at home. The reality is if you call the Social Security Administration, they can give you information, but they are not allowed to give you advice based on your personal situation. The only way you can get that individualized advice is by working with someone like Rob and the team at Balanced Wealth Management. So we encourage you, pick up the phone, call that number on the bottom of your screen, 888-398-2001 to schedule your time to come in and get your complimentary written financial plan. And as Rob mentioned, you will also be able to receive that Social Security maximization report. You’re also welcome to take out your smartphone. Simply open up that camera app. You can point, click and scan that QR code down in the bottom right hand corner of your screen that will take you over to a landing page, ask you a few short simple questions, and then a member of the team will reach out and connect with you to schedule your complimentary visit. That way as well, more on this important subject of Social Security when we come back.
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Kristen Oakley:
Welcome back, Rhode Island. You’re watching Retire With Balance. I’m your host, Kristen Oakley here with Rob Auclair Financial planner with Balanced Wealth Management based right here in Rhode Island. And we are having a very important and passionate discussion about Social Security. Really, this is something so many folks have questions about, specifically, when do I know when it’s the right time for me to file? And so much goes into the Social Security calculation. So what we thought we would do next is peel back the curtain. Help folks understand how this amount is actually calculated for them.
Rob Auclair:
So before I tell you how to do calculation, you can have this pretty much done for yourself. If you go to ssa.gov, click on Retirement Estimator, and in there just double check kind of what your earnings have been. There’s a whole list of it. And then what you’ll see is what would I get at 62? What would I get at full retirement? What would I get at age 70? And you’ll see those amounts and they’re already calculated out for you, but what you want to look at is how do they actually come up with the amount that you should be getting? So the first thing is you need to work for 40 quarters. That’s 10 years earning a minimum of approximately $1,600. So that’s the new amount. And once you hit that, you’re eligible for Social Security, then what they’re doing is they’re taking the average of 35 years of income and they’re using that as what we call your base wage in a sense that they’re going to come off of that and say that if you’ve earned this, this is what you’re going to get. Right?
Kristen Oakley:
It’s your 35 highest earning years, right?
Rob Auclair:
Correct. Yeah. And what happens is a lot of people will say to me, well, Rob, what if I’m not going to collect Social Security? I’m going to work part-time. I was earning $150,000 a year, now I’m earning 20. Is that going to kill Social Security? Well, you need to see how much it would affect it, but at the most it’s affecting it one 35th because you’re looking at that case, and again, if you had another 36th year that was higher than that amount, that’s going to come into play. So it’s not as drastic as you would think it is and how it affects it, but it is there and it’s worth doing that calculation to say, okay, if I’m going to retire but not take Social Security and I’m going to work part-time, how is that going to affect that? And so I’d actually like to, I think this is good timing, just to show you how it’s calculated and what the benefits look like.
So when we look at this chart here, this shows a few different low wage earners up to the maximum. And so these people all qualified with 40 quarters of earning approximately $1600 or more. And so the first person you look at, their average earnings were 26,000, so their benefit was $12,000 a year at their full retirement. And then we moved to right in the middle, someone whose average wage was 60,000, their benefits 21,000, and then at age at 94,000 of earnings, their benefits at 28, and then at 142,800, their benefits 34,100, and I’ll correct myself there, that would be if they’re retiring at age 65, which at one time was full retirement age, but is no longer full retirement age.
Kristen Oakley:
They keep raising it and there’s talk of it, maybe even going up more, we don’t know. Right?
Rob Auclair:
And you are paying taxes on your first $142,000, $144,000 that we call it the FICA tax, and that’s the tax that’s going into the Social Security system for someone who earns, let’s say $250,000, good for them, lucky them, right? That extra a hundred thousand dollars does not have FICA on it and is not contributing to that. So the maximum amount of wage would be approximately 144,000. That’s going into that calculation.
Kristen Oakley:
Yes. Again, so much goes into this, but it’s really then figuring out all the different combinations, permutations of when the optimal timing is for you and or your spouse if you are married, and we touched on that in that first segment, what are some other things that folks need to take into consideration when they’re trying to make this important decision of when should I claim?
Rob Auclair:
Yeah. I think one of the things was I had created this chart, and it is very convoluted, but we always want to say when if I were to take it at 62 versus 67, when do I beat Social Security? So you may not think that way as a viewer, but I do have clients that say, okay, when am I going to collect more money if I actually do it at this time versus this time? And so what we find out is if you were to take someone that took it at 62 versus 66, what you’re doing is you’re going to add up the total amount that they’ve collected and what it means for them. Let’s say age 81 is what we call our breakeven point, that
Kristen Oakley:
Crossover point, right? Yeah.
Rob Auclair:
And it’s different for everybody, but if 81 is the crossover point, if you passed away before 81 by taking it at 62, you beat Social Security and you collected more. But if you live past 81, you would’ve collected more by waiting until you were 65 years old in that scenario. And we go through that cross analysis a lot with the analysis that we were talking about, and that is really, really important. So if that’s something where you’re saying, Hey, I’m really inquisitive, what’s my crossover point? We can do that for you. And so when you come in for the complimentary analysis of your financial plan, of your investments, this is a piece to say, Hey, if I took Social Security now at 62, or I waited till 65, what’s my crossover point? So we do offer that, and it’s really, really helpful when people, it’s a piece of what’ll help them make that decision along with their emotional piece and their overall situation.
Kristen Oakley:
When you can see it in writing, it makes all the difference, right? For sure. Awesome. Rob, thank you to our viewers at home. Again, that number to call to get your very own complimentary written financial plan. And of course, as we’re talking today, part of that will be this Social Security maximization report. All you need to do is call that number on the bottom of your screen, 888-398-2001, or take out your smartphone and scan that QR code down in the bottom right hand corner, and that will get you connected as well. More on today’s episode right after this.
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Kristen Oakley:
Welcome back to Retire With Balance. I’m Kristen Oakley here with Rob Auclair, financial planner from Balanced Wealth Management based right here in Rhode Island, and we are having a very lively discussion about Social Security today. We know you have questions about when is the optimal time for you to claim your Social Security and Rob, what are some other things that folks need to be aware of? Should they decide to go ahead and take Social Security prior to their full retirement age? What other things need to be on our radar?
Rob Auclair:
So I think the first thing we need to look at is what other pieces of income do you have and how much of Social Security is possibly taxed, but even more so if it’s early, we need to make sure that we do, we could end up getting our Social Security reduced, meaning it was not worth taking it at 62 because you’re earning too much money if you have a part-time job or a full-time job.
Kristen Oakley:
Yes. I always like to say what the government giveth. The government taketh away, right? Yeah. There’s something called give backs, and for every $2 you might be required to give it dollar back if it’s over the earnings limit. Yep.
Rob Auclair:
So the earnings limit right now is $21,000 before your full retirement age. So let’s just assume we’re at 67 years old. If you take Social Security before that and you earn over $21,000, exactly what you said, you were given $1 back for every two that you earn, which is 50 cents on the dollar. That doesn’t make sense that you took Social Security. I’ve got a client where he was a football coach and a teacher, and so he’s now a substitute teacher and he says he knows that number and he says, every time I get close, then when they call for me to sub, I say, no, I’m not available. Not available. Sorry, that’s smart. But they’re like, no, you really are. He is like, no, but I’m not. So I think when we look at that, that’s important and know what the income is. So it’s your income.
It’s not if you had pensions coming in or annuities coming in, it’s not those. Think about W2 wages. If you own your own business, it’s a different story and you really need to sit down with your CPA to understand that. But yeah, we need to understand what that amount is, don’t earn over that. So what I would like to take a look at is the slide here, which I did put an outdated one, so I’ll just update you. The numbers are pretty close here, but if we kind of look at this half wheel here and we move from the left side to the right side, like we said, we’re taking it early and we didn’t hit our full retirement age, and our benefits are we cannot earn over, it says 17, but it’s now with inflation in 2023, $21,240. So for every dollar you earn over $21,240, you’ve got to pay $2 back of what you’re getting from Social Security.
If we now move to the middle of the wheel, which is gray there, that is, if you’re taking in the year that you take the benefit, the amount is if you earn over $56,520 for every $1 a benefit, you’ll have to give 3 back. And where that comes into play is when people have a partial year in which they’re still working and they are starting to collect Social Security. And then finally, there’s no benefits withheld when you reach that full retirement age. So in the green there, once you reach that full retirement age, you’re in good shape from a benefit reduction standpoint.
Kristen Oakley:
Important to know, because a lot of people are trying to decide when to retire on top of this. And so again, all this plays in, we always say it, how you make a decision in one area can and will affect all the others. You mentioned taxation too. I want to touch on that because Social Security, when it was first created was never meant to be taxed. Well, unfortunately, times have changed. I kind of say it’s taxing times. So talk about that because a lot of people aren’t aware that up to 85% of their Social Security benefit could be taxed.
Rob Auclair:
Right. Where the confusion always comes in is people get confused with my benefit being reduced and taxation. So, benefit being reduced has everything to do with when you actually are filing for Social Security and it’s before your full retirement date. The taxation of Social Security, it doesn’t matter if you’re 62, 82, 90 years old, it is still susceptible to being taxed. And so depending on how much total income you have, and when it comes to taxation, they’re not saying, we don’t use pensions in your formula, annuity income or anything else. We’re looking at everything you earn. So now it can become, and very quickly, 85% of what you get in Social Security can be taxed. There’s different levels. 50% is another one. There are some people, if you’re very, very low on income, you may not pay anything on the Social Security. But more often than not, we find that our clients are either paying 50% or 85%, meaning if you were getting a $30,000 benefit, there’s going to be a small portion, 15% of it that’s actually not taxed, but the rest of it could be taxed.
Kristen Oakley:
And then certain states have a tax on top of that, and Rhode Island is one of them, right?
Rob Auclair:
Yes.
Kristen Oakley:
Yeah, lots to navigate.
Rob Auclair:
Yeah. So I think when we talk about this process of understanding, I really say in that first year that you retire and or start collecting Social Security, that’s probably the most important time to come in to either sit with your CPA or sit with a financial planner because you want to say, okay, this is where I was. My wages were this. They’ve now possibly gone to zero or part-time. Or I’m then claiming Social Security. I then say, some of that may be taxed. I’m bringing in money from pensions. So it’s this whole different place that your employer, your whole life is a physical place. Your employer now in a sense is Social Security, your pensions, your IRA withdrawals, and that’s where you have to do your right tax withholding. That’s what you’re going to owe taxes on. So it can be a very, very interesting/confusing formula. And I know we’re making it sound confusing. It’s the reason I have a job. It’s the reason why CPAs have a job. It’s really, really confusing. But I have to say, once you make that major transition, that transition, once it’s done, usually you can kind of maintain that. But it is really important to get it right in that first year.
Kristen Oakley:
Absolutely. Well, and to your point, if folks are watching out there and they’re going, shoot, I didn’t know some of this. I went ahead and claimed Social Security, but now I’m rethinking my decision, there is something called a doover. So here’s the deal. We all get one doover. It’s a one time only option. It has to be enacted within the first 12 months that you started claiming your Social Security benefits. But if you realize that you got the calculation wrong or you’re learning something new today and you want to take advantage of that, you can do that. Of course, you’re going to have to pay back all the money that Social Security already paid you, but you can kind of start over, which is a nice reset.
Rob Auclair:
I like it. I wish you could reset all the decisions.
Kristen Oakley:
Right, right. Wouldn’t that be nice?
Rob Auclair:
For sure. So yeah, I think if this is something where you’re saying, Hey, I claimed it and it was in the last year, that’s something we can help you out with. If you’re saying, this sounds so confusing, there’s so many different factors coming in. When you come in for the complimentary appointment that we’ll give you, we are going to go through all the stuff we always tell you we’re going to go through, we’re going to go through the investments, make sure you’re allocated correctly. We’re going to go through the financial plan, make sure you have enough money and it lasts you. But we’re also going to talk about the Social Security strategies, how’s it going to be taxed, when to take it, and for you in particular, what’s your crossover point? And those are going to be tools that are going to help you complimentary in that first meeting to help make those decisions. If you move forward with us, we can help even more, but at least coming in here, you go through that checklist we give you. If you want to do it yourself, here’s what you need to do. And people do find it very beneficial when they come in that they can walk away from that meeting, no pressure, but have some really, really good advice.
Kristen Oakley:
For sure. Well, Social Security was never meant to be anyone’s sole source of retirement income. It was meant to be a supplement and a safety net, but studies show that 40% of Americans receive over half of their retirement income from Social Security. It’s a really important piece of your retirement puzzle, and I’m so grateful that you are committed to helping folks navigate it. It is complex.
Rob Auclair:
It is. Yeah. Thank you.
Kristen Oakley:
For sure. Well, Rob, it’s always a joy to be with you. Thank you for being here. To our viewers at home, thanks so much for watching again that number to call to get your very own complimentary written financial plan and Social Security maximization report is there on the bottom of your screen. All you need to do is call 888-398-2001 or scan that QR code down on the bottom right hand corner that will get you connected as well. We love you Rhode Island. We look forward to being back with you next week.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. While our best intentions are to provide accurate and timely information, you should always consult with retirement, tax, and legal professionals prior to taking any action.