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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Intro:
Hey, it’s another edition of Retire Smarter. Thanks for being with us today. I’m Walter Storholt, joined by Tyler Emrick, wealth advisor, CERTIFIED FINANCIAL PLANNER™ at True Wealth Design, serving you throughout northeast Ohio, also offices in southwest Florida and the greater Pittsburgh area. Easy to say hello if you want to start a conversation with the True Wealth team, just go to truewealthdesign.com. Tyler, great to be with you this week. What’s happening in your world?
Tyler Emrick:
Great to be here, Walt. Not much, just hanging in there. We’re coming toward the end of the year. We’re recording this at the beginning of December, so it’s getting in all those year-end tasks and then obviously spending some good time with family and the holidays. I think this is going to be the first year we’re going to have the extended family to the household, so we’ll be entertaining and maybe going out on a limb and cooking, and we’ll see how it all kind of shakes out, but exciting time.
Walter Storholt:
Very good. What’s on the menu? Give us a quick sneak peek.
Tyler Emrick:
Oh, well I haven’t got there that far.
Walter Storholt:
Oh, okay. Okay, I got you.
Tyler Emrick:
Come on here, I still got a few more weeks.
Walter Storholt:
The event is happening, but we’re not sure what we’re eating yet.
Tyler Emrick:
Yes, I’m still just trying to get over having the event and going to have a house full and making sure to entertain.
Walter Storholt:
There’s still time. You got time. I made the mistake, we were doing some of those angel tree gifts where you pick a kid’s gift list or wish list or something like that off the tree and then put it back under the tree and then a local organization, make sure that that gift gets to that kid in need, that sort of thing. We like doing those each year. But I made the mistake of going to Walmart to buy the gifts on a Saturday morning, and I walked in, I was like, “Mistake, mistake. It’s crazy in here.” So it was an adventure, to say the least.
Tyler Emrick:
That’s hilarious. Yeah, a similar experience on my end, at least my short list, my wife takes care of a lot of our buying, but there are a few that I certainly have to still do with the girls, our two little girls, and yeah, I’m always last minute and the guy scrambling around and being like, “All right, hey, what do we got to get?” So it doesn’t match well with me being a financial planner.
Walter Storholt:
Right. You’re supposed to be advanced at these things.
Tyler Emrick:
That’s correct. That’s correct. Yeah, maybe this year.
Walter Storholt:
This year we had the best planning we’ve ever done, and so we had everything wrapped up pretty much except for those little gifts that I had to go to Walmart for. We had everything pretty much wrapped up this year early, which was nice, so it was a good feeling.
Tyler Emrick:
Nice. Yeah. Fair enough.
Walter Storholt:
Good stuff. Well, hey, today’s show, we’re talking social security. And now you’re listening to the show, and you’re like, “Oh, social security, another social security show and topic.” Today is going to be a little bit different. Tyler’s going to take a new approach, an approach that you probably, I’m willing to bet, I’m willing to guarantee, oh no, I’m not supposed to say the G word.
Tyler Emrick:
No, no, definitely not. A compliance alert. Compliance alert.
Walter Storholt:
Okay. I’m willing to bet, no, I have a feeling they wouldn’t like that either. All right. Well, I really hope that you are going to hear something on today’s show that you haven’t heard before. A little bit different approach to talking about social security as we near the end of the year, some great things to be thinking about. Tyler’s going to take us through it all. So, let’s start peeling back the onion a little bit here, Tyler. What do you got for us today?
Tyler Emrick:
Yeah, sounds fair enough. And correct, I love the setup, social security. It’s something that I think Kevin certainly and us talk about frequently. We’re always getting questions and feedback around social security, so we thought now would be a good time to maybe dive back in and take a look at it through a different lens, like you had mentioned. Because at the end of the day, social security’s going to affect a lot of us or most of us. Certainly, there are some of those individuals and state employees that aren’t going to maybe qualify for social security benefits, but it is an important topic and what we feel is extremely important, or at least the feedback that we get consistently and the questions that we get consistently kind of elaborate and share that, “Hey, this is something that’s impacting all of us and something that listeners and our clients are wanting.”
So we’re going to dive in today. And as we think about social security and how important it is, I think it’s important to realize that I think that maybe it’s even become more important over the years. 30, 35 years ago, social security was a piece of the puzzle. We had social security, we had pension plans, and then you maybe had your own savings that would come in there and fit that income puzzle for our retirees. And over the years, that’s changed. Social security, really, for some families, might be the only income source that they’re going to have coming in. With pensions certainly going by the wayside and us seeing them fewer and fewer, I would certainly consider yourself lucky if you do have a pension, and even more so on top of that, well, if your pension has a cost-of-living adjustment similar to social security, boy, you’re really in the minority.
So with social security being such an important part of that income puzzle, and two, it having that significant cost of living adjustment, which we all see in the increase this year, and we’ll maybe touch on it a bit here a little later on, but it’s a really important piece. And making that decision of when to take it and all that entails, it really is something that you’ve got to get right. Yes, you can cancel your social security application, I think, within around 60 days from Social Security approving your benefits. And yes, you do have an option within the first year of withdrawing your benefits, but aside from that, four, five, six years down the road, you are kind of stuck in that decision that you made. So, we want to do everything that we can to get it right, and hopefully today, we’ll touch on that and give you a few tidbits that will help you feel better about that decision.
Walter Storholt:
My wife just accepted a new job, and it has a pension, so I was like, “Oh man, I can’t wait to tell Tyler and Kevin about that.”
Tyler Emrick:
That’s great.
Walter Storholt:
One of these rarities out there.
Tyler Emrick:
It is. It is. Yeah. And it’s great that her company is doing that. And you’re right, definitely in the minority, and something that’ll be really impactful and very good when you guys start thinking about your retirement picture and planning and all the fun stuff that goes into it.
Walter Storholt:
Note for a future show, by the way, they have something that I had not heard about before, and so I was going to ask you guys about it. Maybe, I don’t know if this could be a show or if this is something a lot of your clients run into, but they have some sort of, I don’t know, I haven’t done all the reading on it yet, but something, it’s sort of related to social security, which makes me think about it. Not to get you off track, Tyler.
Tyler Emrick:
No, you’re good.
Walter Storholt:
I may have this wrong. A 401(a), like a social security replacement fund of some sort, like a different account that you don’t have to put aside to social security, but yet it’s still kind of the same amount that’s going into something that you have more control over.
Tyler Emrick:
Okay.
Walter Storholt:
Is that a decent way of describing that, maybe?
Tyler Emrick:
Sure. Well, it’s amazing all the different benefits and the types of plans that employers can offer.
Walter Storholt:
Yeah.
Tyler Emrick:
You got your typical ones, your 401-Ks and your 403-Bs, which I think we run into the most. But yes, there are 401-A’s, 457-B plans, and a whole host of other plans that employers can sweeten their benefit deal with. So that’s awesome to hear that she has it. And oh, I will definitely notch it down as maybe another future topic that we can dive into.
Walter Storholt:
Maybe just a mailbag question. We can’t fill out a full show.
Tyler Emrick:
Yes, I like it.
Walter Storholt:
Yeah, yeah. All right. Go, ahead. I’m sorry, I didn’t want to get you sidetracked.
Tyler Emrick:
No, you’re good. So as we think about social security, we think it’s so important. We look at our process, so when we are meeting with clients, and we have our yearly updates, we’re a very process-oriented firm. And as you think about those meetings and how they typically work, we always have a meeting agenda and prepared notes and a flow to those to kind of keep us on track. And social security is a piece of that meeting agenda for most, if not all, of the families that we meet with. And it kind of outlines the benefit amounts, the strategy that we’re looking to take with social security, and maybe some of the key points. And we do that for a number of reasons. I think some of the two big ones, there’s one, we don’t want to make any mistakes or have any missed opportunities.
There are, for a typical family, a handful of different benefits that you might be eligible for for social security. I was thinking about setting you up for that, Walt, but I figured you’ve done enough social security podcasts in the past where you might be like, “Yeah, you have survivor benefits, spousal benefits, and there’s a number of a whole host of benefits that might be available.”
Walter Storholt:
Love it. Love it.
Tyler Emrick:
But a lot of times, the information out there for individuals to get access to about these benefits is few and far between. I spent a number of years doing financial planning, of course, and I distinctly remember, or at least a nurse that I sat down with, a lot of the families I met with were specific to some of the hospital systems in the area here and kind of how I got my start in the business.
And I had sat down with her, and as with most, she was coming to talk to me about retirement planning, and she was in her late 60s, and she had really just turned her attention to retirement planning and was frankly feeling quite a bit overwhelmed about the decision. And then you could garner pretty quickly that in her mind, she was going to have to work for a number of years, well into her 70s, to make the plan work and be able to retire. And that was why she was coming to me again, was to try to get and say, “Hey, am I on track? What do these numbers kind of look like, and how long do I have to work?” And as with most of us, she had had a number of things that affected her career and what she was able to save.
But one of the big ones was she’d actually went through a divorce a number of years ago. And for any of the listeners that have gone through a divorce, obviously, that can change plans significantly, derail a few things, and certainly change your asset picture and the amount of savings that you might have once had. And it was no different in her situation. And as we’re kind of ticking through some of the boxes, and I’m getting to know her a little bit better, I quickly realized when we started talking about social security, that she had no idea that she would actually have access to her ex-spouse’s benefits or a benefit related to her ex-spouse’s social security. And boy, you could see after we clarified and realized that hey, this was actually the case for her, it was almost like found money. Well, like, hey, “Oh, wow.”
Walter Storholt:
It changes the math a little bit, right?
Tyler Emrick:
It does, and it really can. And it was no small chunk of change that she was going to actually start adding that she could actually add immediately. And then, actually, in her situation, too, this was a benefit she frankly should have been getting for a while. And another little quirk with social security is that, hey, you can backdate that payment six months. So not only did she add quite a bit of income to her situation monthly to help her get towards that retirement goal, but she also got a pretty nice check right at the get-go because we were able to backdate that application and make it effective six months prior. And boy, a couple quirks there, right, if you had no idea you could access benefits based off of an ex-spouse, you had no idea you can backdate those payments. It definitely changed her situation sizably.
Walter Storholt:
Great to hear that people can get good news when they come into the office sometimes, and it’s not always, whenever we think about, I don’t know if some people have an impression of it’s going to be going to the doctor’s office, right, you’re just kind of dreading bad news when you come in to meet with Tyler and Kevin. The picture’s never going to be as rosy as it is in your mind, perhaps. But then, hey, you get good news a lot of the time, don’t you?
Tyler Emrick:
It’s always fun when you can give that, absolutely.
Walter Storholt:
Yeah.
Tyler Emrick:
And I think social security is getting a little bit better in trying to educate and bring out some of those benefits. You could Google search potential entitlement social security, and they have a nice questionnaire that you can go through and really kind of walk through and say, “Hey, was there a benefit that I might be eligible for that I’m not taking advantage of?” So they’re definitely trying to get the word out there, and obviously, if you have a good financial advisor, it’s our job to bring those opportunities to you as well. But having that on that meeting agenda or going back to that whole process and having it top of mind of our conversation allows us not to miss opportunities like this. And it certainly allows us to be on top of any changes in your situation from year to year that might change that filing strategy.
So we think it’s important, and we’re hearing that from a lot of the listeners and our clients as well.
Walter Storholt:
That’s great to hear.
Tyler Emrick:
I guess as we kind of move on and get in maybe some of the meat and potatoes of what we want to touch on today about social security and how we’re going to look at it a little bit differently, I think the big thing or high overarching topic or thought I want listeners to have in their mind is, well today we want to help you maybe how do you approach or tackle some of those decisions that you have to make with social security? And as I think about that type of question and maybe set up what we’re going to talk about here a little bit, one of the big things with any topic from a financial planning standpoint, I feel like, is the more information you can get in your hands to be able to make an educated decision that’s going to be impactful for you and your family is extremely important.
And social security is no different, but I do feel like I get it a lot, especially with social security, “Hey, I heard from my friend, or I had a family member that came to me and said I should do this, or I should do that.” And sometimes, we make our decisions based off those things that we hear, and they’re not always the case. And there’s a couple that I’ve been getting here recently, well, we’ll talk about two, but one I get on a year-in and year-out basis pretty consistent. And the other one’s a little more specific to this year, but the old adage or the old question of, “Hey, is social security going to run out of money?” What do you think? Well, are we doomed?
Walter Storholt:
I don’t think so. Not as doomed as maybe the headlines make you think.
Tyler Emrick:
Correct. Yeah, every year, social security runs through and puts out what they call the trustee report. I think it’s almost a 300-page document. So if you want some light reading, you can kind of go through there. But I think the gist of the document and what is really an important piece is it talks about the funding status, and when social security’s trust fund is set to run out. And really, there hasn’t been much change in that from year to year. Social Security Trust fund is meant to run out around 2034, 2035 timeframe, and it’s been that way for a number of years. And what that means is it doesn’t mean social security is going to go away if nothing changes before then. All it means is that social security will have more going out than what’s coming in. And there will need to be some changes at that time before that happens.
And if there’s not, then really the individuals that are on Social Security would see their benefits cut, and they would receive around 80%. It’s actually, I think, 78% the latest number that I’ve seen. And you would get about 80 to 78% of your social security benefit if nothing changes. So it doesn’t go away, it’s not stopped, it’s just that benefit would potentially be reduced. Now we’re not going to spend a whole lot of time talking about this. Will social security run out of money? I think Kevin did a wonderful podcast on it back in October of last year, I believe it’s episode 82, where you can go in, and he does a great job talking about, “Hey, social security’s been in this situation before where they were potentially going to run out of money, and the trust fund go down. It was in the late 70s, early 80s, and they did some fixes then that got us to the point that we are today.”
And he talks about what those fixes are, and then he goes into what some of the common or what we think are going to be some of the changes between now and 2034, 2035 that will put social security in a little bit better situation and maybe not see quite the impact or certainly not going to see social security completely go away. So we’ll see. Obviously, a lot of that’s up for debate, but check out that podcast. I think he does a good job going into it. So we’re not going to talk much more about it. But I think the high level to consider there is, I think there’s a lot of good fixes, and hopefully, social security will be with us for a long time going forward here.
Walter Storholt:
The sky is not always falling, it sounds like.
Tyler Emrick:
Correct.
Walter Storholt:
So yeah, I like that. You and Kevin always bring some good positivity here to the show. So balance out the noise a little bit.
Tyler Emrick:
Oh, I try to. So that’s the first one. And then the other one, which I think is more recent, is actually, I think, a little bit more on the good side, and it talks about the cost-of-living adjustment this year being extremely high. You know what it happens to be, what we’re getting for 2023?
Walter Storholt:
No, what is it?
Tyler Emrick:
8.7% increase.
Walter Storholt:
8.7%.
Tyler Emrick:
Pretty big. To put that in perspective.
Walter Storholt:
That’s not fun.
Tyler Emrick:
Well, actually, that’s a good thing. What that means is that cost-of-living, people that are on social security, they’ll get an increase of 8.7%.
Walter Storholt:
But just indicating how much everything else has gone up around it.
Tyler Emrick:
That’s true. Very good point. Hey, positivity, right? Come on.
Walter Storholt:
There you go. There you go.
Tyler Emrick:
But I think we have to go back to ’81, 1981 before we’ve seen an increase that high. It was 11% then. So a significant increase. And I’ve gotten a couple calls saying, “Hey, I’m deferring my benefit. I’m not taking it. Am I still going to get that 8.7% increase, or did I kind of miss out on that this year because I’m not drawing benefits?
Walter Storholt:
Oh, I never thought of that perspective. Yeah.
Tyler Emrick:
And the answer is yes, you are still going to get it. The cost of living adjustment is applied to what’s called your primary insurance amount, which your primary insurance amount is essentially the amount that you are eligible to receive at your full retirement age. And that is the number that’s used to calculate your delayed retirement credits at the increases that you get for waiting from your full retirement age until 70. So yes, that cost-of-living adjustment, even if you’re not receiving it, you’re still going to get that and see that benefit down the road, which is important. You see a big number like that, and you say, “Hey, historically, we haven’t seen that since the 80s, did I miss out on it?’ And good news is no.
Walter Storholt:
That’s helpful. That’s good to know.
Tyler Emrick:
Yeah. So again, a lot of information out there on social security. It affects a lot of families, so I think it’s talked about quite a bit. So being informed and giving yourself right information to help make the decisions are extremely important. So as we kind of move on from that, the other thing to consider or what we want to touch on is, well, what’s the benefit of waiting on your social security? I think that’s the big decision point, right? Do we take it early, do you not? Do you wait? And I think there’s arguments on both sides of the coin. Let’s dive into that a little bit and talk a little bit about, or this is maybe the different piece that we haven’t touched on with some of our prior social security podcasts is how do we go about making that decision and trying to wrap our arms around what is the benefit of waiting versus taking it early?
And before I do that, I guess I want to give a very brief high-level overview of, generally speaking, how social security works, because I think it’ll be helpful as we get maybe into some of these more granular items. But generally, there’s three, the way I explain it anyways, there’s three, what I call magic ages to social security, the first of which is age 62, which is the first year you can actually start your benefits. Now, if you’re eligible for a survivor benefit, you can start as early as 60. And there are, again, some other benefits that might start earlier, but for the vast majority of us, 62 is going to be that first year you can actually kick in the social security benefits. And every month you wait all the way up to age 70, you actually get an increase or more of a benefit for waiting.
So that second age, that age 70, is that second magic age, which means that hey, you get no more benefits for waiting past the age of 70 to take your social security because there’s no more increases. So you’re really going to, or the decision is, well, when do you take it between 62 and 70? And the third age, which is what I would consider to be probably the most important, is what’s considered your full retirement age, which is different for everybody. It can be anywhere between 66 and 67. It’s based off the year that you were born. Do a quick Google search and find out which yours is. But that full retirement age when social security considers to be fully retired, and there are a host of benefits you get if you continue to wait until that full retirement age. So that’s, again, high level some of the ages and some of the choices. So let’s kind of break down and decide, well, hey, when should you or how do you consider when to start taking it? All right. Are you ready? I don’t know.
Walter Storholt:
I’m ready. So yeah, do we wait?
Tyler Emrick:
This is the comment here.
Walter Storholt:
Do we stay or do we go? Do we wait, or do we withdraw?
Tyler Emrick:
Here it is. I’m kind of setting it up. It’s pretty granular, but one of the ways that we can kind of look at it is you choose the claiming strategy that maximizes the expected present value of lifetime social security benefits.
Walter Storholt:
You might have to say that again. You might have to repeat that.
Tyler Emrick:
I set it up, right?
Walter Storholt:
I might have to trigger the egghead alert on you there for that.
Tyler Emrick:
That. I was worried. I was worried.
Walter Storholt:
But usually, it’s a whole phrase. Usually, it’s a word that Kevin will use or drop or that kind of thing, but that phrase may just get you into that category.
Tyler Emrick:
It’s a mouthful, isn’t it? Right.
Walter Storholt:
It is.
Tyler Emrick:
Choosing the claiming strategy that maximizes the expected present value of lifetime social security benefits. And that is a fancy phrase for really trying to say, “Okay, you have a couple options.” Well-
Walter Storholt:
Okay, you earned it.
Tyler Emrick:
Come on. You did it. I did. That actually is my first one.
Walter Storholt:
It’s your first egghead alert. You earned it, my friend.
Tyler Emrick:
It is.
Walter Storholt:
So that was well done.
Tyler Emrick:
I was trying to stay away from it. So what that phrase is getting at is it’s saying, “Hey, let’s say you have two options. You can take your social security benefit at age 65, or you can take it at age 70, which is the optimal decision?” Well, if you think about social security in its most basic form, all it is, is a payment that you’re going to receive every year, well actually, monthly every year until you pass. So if you break down year by year and write out each one of those payments, the expected present value of all those payments is us essentially bringing all those payments back into a single number that we can use to compare if you were to take your benefit at 65 versus age 70.
So we could do the same thing if you waited till age 70, break down that social security benefit on a year-by-year basis, bring all those numbers back into a single number that we can use to compare both strategies and say, “Well, mathematically, this one’s going to be the one that optimizes your social security decision and gives you more of a benefit based off your situation.” Okay?
Walter Storholt:
Okay.
Tyler Emrick:
So if we peel back the onion on that a little bit more and say, “Well, what are the important components that go into that calculation?” Well, the first of which is, well, how long are you going to get payments from social security? Which I don’t know about you, but I don’t know when I’m going to croak, right?
Walter Storholt:
Yeah. It’d make this all easier if we knew that, right?
Tyler Emrick:
It definitely would, but we don’t know, so we have to make some general assumptions there. Certainly, the longer that you live, the more benefit that deferring that benefit through social security is going to be. So we just got to make some general assumptions there. The second number that I think’s extremely important in a calculation like this is understanding that benefit you get by waiting or deferring your social security. What does that look like? Well, if I take it at 65 versus age 70, what’s the benefit? And mathematically, that benefit from your full retirement age to age 70 that you get is your social security benefit increases by two-thirds of 1% every month that you wait. Or maybe an easier way to think about is it’s about 8% per year your social security increases from your full retirement age to age 70 as a benefit, and you get more.
And I don’t know about you both, but for me, it’s hard to wrap my arms around that and quantify that a bit. Maybe not like in today’s dollars, right? If you look at your benefit, your social security statement that you get, and you look at the number for retirement age, and then you look at it at age 70 and you kind of look at the annual difference, some individuals could get as much as 9,500, 10 grand more per year by waiting from full retirement age to age 70. And I think that number’s very easy to think about. But when you start going and saying, well, what’s that difference look like 20 years down the road? That, I think that’s much harder. You just throw some simple cost of living adjustments of, say, 3% on that. Well, what do you think that difference or benefit of waiting till 70 grows to on your payment 20 years down the road? If you get this right, wow.
Walter Storholt:
Well yeah, I won’t throw out an exact number, but probably even greater than what you would imagine.
Tyler Emrick:
Much greater.
Walter Storholt:
Yeah.
Tyler Emrick:
I ran some quick numbers. It’s around 17,000 more per year 20 years down the road.
Walter Storholt:
Okay. Wow.
Tyler Emrick:
So that’s not insignificant. I don’t think 10,000 a year is insignificant, but as you think about it and you start looking at numbers way far in the future, that benefit of waiting becomes much, much greater. The way I tend to think about it is you’re almost purchasing insurance on either you or your spouse living a long and healthy retirement, which I don’t want to get into life expectancies and what the numbers show because I have many conversations about that as well. But that’s how I generally think about that deferring benefits longer is you’re kind of hedging your bet a bit and buying some insurance on you and your spouse living longer.
Walter Storholt:
So it’s a great way to look at all of those different moving parts there, Tyler, and I don’t know, it’s a helpful perspective to think of things, looking in the short term, looking in the long term, seeing what waiting gets you, trying to balance all those different things. I know that that can be what’s overwhelming for folks, right, you don’t want to make the wrong choice, but it sounds like also there’s lots of benefits of whatever direction you choose. It’s not like you totally fail if you choose a different path.
Tyler Emrick:
No, not at all.
Walter Storholt:
Does people’s attitudes or opinions about what their life expectancy is going to be then play into how you guys plan around it? If somebody says, “I don’t think I’m going to live a long time, because here’s my family history, and yeah, we’ve had medical advancements, but I really think just given my history, I’m okay taking it earlier because of that,” do you guys then adjust because of your client’s sort of, I don’t know, preconceived notions about their longevity?
Tyler Emrick:
Absolutely. Yeah, we do. And you’re setting me up if I do it right. That’s pretty good. But yeah, I think that’s extremely important. Understanding who you’re talking to and understanding what the family’s trying to accomplish or the individual’s trying to accomplish, I think, goes into this quite a bit. And one of the ways that we factor that in, especially to this calculation of us trying to figure out what the expected present value of the lifetime benefit is through what we call a discount rate. So this is where I thought my egghead alert would come in, so hopefully, I can explain this pretty good without getting through another one.
Walter Storholt:
Okay. Okay. At least discount rate didn’t sound too bad on the front end.
Tyler Emrick:
Correct. So three factors. This is the third one, discount rate. So we talked about longevity, we talked about the benefit of actually waiting and deferring your benefit. Now the discount rate is how we bring it all together. The discount rate is how we look at all those future payments and discount them or bring them back to a number in today’s dollars that we can use to compare against another claiming strategy and really mathematically say, “Hey, this is the benefit to you.” Now that discount rate, there’s been a lot of publications on it, actually social security has a wonderful discount rate article where they kind of go into the different discount rates that can be used, but high level and generally speaking is that discount rate is extremely, affects that calculation a lot. And traditionally, or the way you can think about it is the lower the discount rate is that you use, it will skew be your calculations to say, “Hey, you should defer your benefit and wait.”
The higher that discount rate is that you use, it kind of skews your calculations towards starting your social security early. Now some individuals say, “Hey, everyone should use the same discount rate. It should be something like the current EO on a long-term inflation index government bond or something to that effect, and every family should use the same one because that’s what social security payment is most like.” And I think we take it one step further and getting back to your question of like, “Well hey, does emotion and does other considerations in an individual situation, how do you bring that in to help make the right decision on when to start your social security?” Well, adjusting this discount rate higher or lower in our calculations will help us account for some of those biases or some of those family-specific situations, things like risk level, current asset mix, stocks and bonds, among a host of other things all play into that, and then we can actually adjust the discount rate and our calculations and properly reflect that.
So as I kind of think about this calculation for the individuals and the families that we work with, very rarely am I going down into all the details like we did today and getting very granular about discount rates and items like that in the calculation. When we run these calculations for our families and our clients, it’s very simple as the fact of, “Hey, let’s talk through some of the situations, some of what’s going on in that particular household. Let’s run this present value calculation or calculation that gets a claiming strategy to a single dollar we can use to compare across different claiming strategies and kind of run it through real time with them and say, “Hey, based off your situation, your life expectancy, your risk tolerance, so on and so forth, this is the strategy that provides the most benefits to you based off of the assumptions that we made. Let’s compare that to maybe what you were thinking, or let’s compare this to another option and see how that number changes. You can make the decision for yourself, essentially.”
Well, it is the way that we kind of think about it. So this is a real-time calculation, something we can do and model in our systems very quickly and kind of boil it down to a very simplified number to compare different options to help put a number on where and which benefit would provide to you.
Walter Storholt:
Very nice.
Tyler Emrick:
Yeah.
Walter Storholt:
Last thing I’m wondering, Tyler, is where does this come in your process? Are you starting with social security when you help plan with someone, does this begin the conversation since it’s sort of a known entity of what’s going to be out there for somebody, or does it come later on? How do you incorporate this in with everything else everybody’s got going on?
Tyler Emrick:
I think it depends. It’s a case-by-case basis. If we got someone who’s retiring that really needs to make a decision on social security quickly, I think it gets pushed to the forefront. If we’re speaking with a family that’s maybe younger, maybe 15 years out until social security, maybe that social security is covered at more of a high level, we make some general assumptions, and then as we progress and get closer, then we can continue to dive into it on a little more detailed basis. And I also think the family dynamics play a factor as well. You think about some individuals where maybe it’s just you, okay, well that claiming strategy of do you wait or not can be pretty clear cut, but you start adding in a couple, say a husband and wife, well now we have considerations on, well maybe one individual waits and one individual takes it early.
And a lot of times, that might be extremely beneficial. I think an often overlooked benefit to social security is the actual survivor benefits and how those work. And for example, let’s say you have a husband and wife, and the wife was the higher income earner, so her social security benefit is higher than her husband’s. If the husband kicks in his social security early in this scenario and the wife continues to wait until 70, and heaven forbid something happened to her, and she passed away, what’s going to happen is the husband’s actually going to be able to benefit from her delaying and actually switch over to a higher survivor benefit. So even though she didn’t get a benefit from delaying, he still would. That dynamic is very different if you consider a scenario where the higher income earning spouse, the wife in this scenario, kicks hers in early and the husband defers his until 70 and then passes, heaven forbid.
Well, her as a surviving spouse, she might not even get to switch over to a higher benefit if his was never higher, and thus no one got to benefit from that delayed strategy. So there is definitely some dynamics there as you start looking at it from a couple to where you can use the system to your advantage, and things like that survivor benefit, I think, come in. So I think complexity plays a factor into it quite a bit, Walt, and when we cover it. And two, I had a couple come to mind just last year, they actually retired, and we had many conversations around social security. They were really considering taking it early. We had ran through some of the numbers, talked through their family dynamics and their situation, and they kind of changed their mind and were like, “Hey, I think we’re actually delay benefits. We’re actually going to use a split strategy,” very similar to what I touched on.
And we came back for our update in the summer this year, and when I walked into the meeting, they joked, “Hey, you got to sell me on this social security strategy again, right? Talk me through it.” Because think about it, you put yourself in their shoes, right, they just retired, the market’s down, they’re using their retirement assets to support their lifestyle, and they got these big social security benefits they’re looking at saying, “Hey, I could kick them in. I could stop withdrawing from my retirement accounts. That could help me,” right. So they were joking around, but we definitely spent the time kind of talking through it, and they’re still continuing to defer, because, again, when you go through, and you run the numbers, and you start thinking long-term, it really benefited them to kick the can down the road and say, “Hey, we understand that there’s some pain early here of using their assets and especially in the market that we’re in, but we don’t want to lose sight of the why behind deferring the benefits and delaying.” In their case, it really is good for them.
Walter Storholt:
Great to hear your kind of thoughts and perspective on all of this, Tyler. Just so interesting to see how you guys approach every aspect of financial planning and getting ready for retirement. And here we take what seems like a simple subject of electing social security, and you get to layer in all sorts of different levers and things that you guys are looking at to try and figure out what’s the best, the absolute, I think you guys, I don’t know, it’s like your juicers. How can you squeeze the most out of every asset that your clients have? That’s the level of detail that you go into. Is that an internal philosophy by chance, like leave no dollar left behind or something like that?
Tyler Emrick:
I think Kevin would say that’s a great way to explain it. For me, I know personally, I just want to get the information to individuals in a way that they can digest. Yes, we went extremely granular, and the podcast today is talking about discount rates and some of the other intricacies about how you can actually calculate and get a number to help you decide when to take social security. But more so, I think a lot of times when I’m meeting with families, if they want that granularity, sure, it’s there, but more importantly, I think the families that meet with us say they know that that work is being done and that we can present it in a way that’s easily digestible and can give them the confidence to make whatever decision’s best for them. I always feel like knowledge is power, right, so the more knowledge you have, the better information and decisions you can make.
Walter Storholt:
You kind of help meet people where they’re wanting to be met in terms of the level of detail or the amount of information you give to him, but the work is always being done in the background, so that’s great.
Tyler Emrick:
Always, always.
Walter Storholt:
Pretty cool way to think about it and look at it. Well, hey, if you have a question for Tyler, want to talk to the True Wealth Design team a little bit more about your particular situation, and go into some of the details, it’s easy to get in touch. All you have to do is call 855-TWDPlan, that’s 855-TWDPlan, or go online to TrueWealthDesign.com and click on the Are We Right for You Button to schedule your 15-minute call with an experienced advisor on the team and see if you’d be a great fit to work with one another. Again, that’s at TrueWealthDesign.com, and we’ll link to that in the description of today’s show. Tyler, thank you so much for the help. Really appreciate it, and good luck on a little bit of that last-minute shopping and prepping that food menu for the holidays, and we’ll look forward to talking to you and Kevin in the new year.
Tyler Emrick:
Yep, will do. Have a good one, Walt.
Walter Storholt:
Thanks so much. That’s Tyler Emrick. I’m Walter Storholt. Thanks for joining us. We’ll talk to you next time on Retire Smart.
Disclaimer:
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