Social Security’s Uncertain Future & Impacts On Your Retirement

Social Security’s Uncertain Future & Impacts On Your Retirement

Listen Now:

The Smart Take:

We’ve all heard about Social Security’s funding troubles. Is this why some decide to start benefits early? If Social Security were reduced, can it make sense to defer claiming? Hear Tyler Emrick, CFA®, CFP®, discuss a recent Wall Street Journal article on these topics as well as other recent proposals from Congress and academics that may impact the system. You paid in. Let’s learn how you can get your fair share out.

Here are some of the things you’ll learn in this episode:

  • Why so many people claim their benefits as early as possible due to uncertainty. (2:22)
  • Does delaying your Social Security benefit help or hurt the system? (8:30)
  • How your 401(k) and IRA accounts factor into your strategy for Social Security. (12:20)
  • Some final thoughts from Tyler on Social Security. (18:52)

 

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

 

Intro:

Hey, welcome to another edition of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick today, wealth advisor, CERTIFIED FINANCIAL PLANNER™ at True Wealth Design, serving you throughout northeast Ohio, southwest Florida, and the greater Pittsburgh area, or from anywhere at truewealthdesign.com. Tyler, great to be with you this week. Ready for another great show?

Tyler Emrick:

That’s right. Yeah, happy to be here, Walt. Appreciate it.

Walter Storholt:

Glad to hear it. Yeah, looking forward to chatting with you today. We’ve got some things that have been in the news a little bit lately, maybe even some articles that folks have come across as they read and learn about what’s going on in the world as it pertains, in particular to Social Security and its uncertain future. A particular Wall Street Journal article that came out that caught your eye, and I’m sure the eye of some of your clients and people that you know. And so inspired you to want to have some comments a little bit, talk about the system and seems like there’s always concerns about the system of Social Security and the right decisions to make. So it’s a topic that really will never go away, right, Tyler?

Tyler Emrick:

That’s right, Walt. Yeah, Social Security is a topic that is not going away. For our longtime listeners, they’ll know that we’ve talked about Social Security more than a handful of times over the years, and I think each time we try to approach the subject from a different perspective or maybe try to look at it through a different lens, and we’re always trying to stay on top of the most recent publications and articles that come out in regards to the matter because it is such an important topic that touches so many of the families that we work with. So not going away, and definitely something that we’ll continue to discuss from time to time. There were a couple of articles that came out over the last few months or so that really sparked my interest. I thought they did a good job of that, looking at it from a different perspective. So, I figured we would talk about it on the podcast and spend some time dissecting them and how they might affect the listeners.

Walter Storholt:

Perfect. Well, can’t wait to dive in. And again, if you’ve got any questions on something we talk about here on the show today, invite you to go to truewealthdesign.com, and you can click the are we right for you button to schedule a time to visit with the team and ask any of those questions that might come to mind. Let’s dive in, Tyler. What you got?

Tyler Emrick:

Yeah, so over the years, I think it’s fairly common practice or common knowledge that the average claiming age for Social Security has been increasing over time. So said in another way, individuals are waiting longer and longer to start their benefits. But in any given year or likely this year, around a quarter or 25% of individuals who turn 62 will actually kick in their Social Security benefits. And it’s unclear as to the why behind it. There’s not a lot of good data on there because everybody’s situation is different and have their own reasonings as to why they want to commence benefits at 62 and why it works in their situation and by no means is delaying taking Social Security benefits a free lunch, especially given the uncertainty of life expectancy and how the math will work out if it benefits you. But it is fairly general practice, and I would say general consensus around financial advisors and economists and the like that it’s economically beneficial for individuals in most cases to delay taking their Social Security benefits.

But the article, or the first article that we’ll mention, the one from Wall Street Journal titled Fear Over Social Security’s Future Leads Some to Claim Retirement Benefits Early, sort of dives into what might be causing or some of the backend or the why, if you will, of individuals kicking in those benefits early. And it really alludes to, or starts to allude to, the fact that individuals are worried about the Social Security Trust Fund running out of money and trying to gain and get as much of that Social Security benefit as they can before that year. And Walt, I’ll put you on the spot here. Do you know when Social Security’s set to run out? We talked about it on the last episode, we touched on Social Security.

Walter Storholt:

What was it? 2035?

Tyler Emrick:

Yeah. You’re right there. You’re in the ballpark. I mean, yeah, 2034 is what the article references.

Walter Storholt:

Only off by a year. That wasn’t too bad.

Tyler Emrick:

That’s right.

Walter Storholt:

I was rounding up Tyler.

Tyler Emrick:

And it does change from year to year too, Walt. So in any given year, depending on how good of a year it was from Social Security standpoint, maybe that year might be pushed out to 2035, or I’ve seen it as early as 2032 as well. But the article dives into this fact that, hey, the trust fund’s going to run out. And then at that time, if nothing changes between now and then, well, benefits are going to be affected, and they’re going to be cut. The reduction’s going to be around 23% on current Social Security benefits. So not an insignificant haircut, to say the least. And you hear articles, or you hear someone talking about it and saying, “Hey, we have this big issue coming up with Social Security somewhere around 2034, 2035, I want to try to get as much money as I can now from Social Security in light of them maybe having some issues down the road.”

And there’s a study that’s referenced in the article by Boston College that really alludes to that fact or that thinking and saying that, “Hey, yes, this news and this issue that we have ahead of us is really impacting individuals’ decisions and leaning them to actually kick in and start those benefits a little bit early.” Now what I think, and what kind of struck to me, is why is there so much of this? Why is there such a disconnect there? Why are all the professionals in our industry still saying, “Hey, we think you should, in most cases, delay taking your benefits,” but you have these individuals to the tune of almost 25% of individuals when they turn 62, that they’re going to actually kick in their benefit early? And why are things not matching up, Walt? I mean, it just seems like something is getting lost in translation there.

Walter Storholt:

Yeah. It’s like things just are a bit mismatched, and I’m sure that can be confusing for consumers.

Tyler Emrick:

Absolutely. I mean, and you think about some of the comments that they have referenced in there, individuals saying, “Hey, I paid a lot of money into the system over the years. I’d like to see something in return.” Or one individual made a comment on there that, “Hey, I think I’m more protected if I’m actually receiving benefits and any future reductions aren’t going to be impacted or are less likely to be impacted from those changes.” And I wouldn’t say I agree with either one of those statements by any means, but they are real fears, and they’re real concerns that individuals have. And if you think about, like, well, what’s the solution? What’s going to happen? Or what are some of the fixes that we have in our back pocket that we could help alleviate some of these concerns? And there are a whole host of them.

I mean everything from raising the full retirement age, which they’ve done in the past, to increasing payroll taxes or increasing the taxable wage base. These are all things that have been discussed and have very viable outcomes to help solve the issues that Social Security has. And they really haven’t changed much over the years. I mean, you could go back, I took a look, Kevin did a podcast on it a couple years ago, I think it was episode 82, where he really did a deep dive into some of these solutions that were presented, and they haven’t changed over the years.

So when we run into a situation to where, hey, we know we have an issue coming up. Yes, you might not have a whole lot of faith in Congress getting something passed and making the changes that are necessary to avoid any disruptions or cuts in Social Security. And then there’s this handful of widely accepted solutions to the problem. We just haven’t gotten the fix yet. And it seems like that the advisors and the industry professionals seem to be a little bit more confident that some of these solutions will come to pass and solve that issue of us running out of money or, excuse me, the Social Security trust fund running out of money in 2034, 2035 time range.

Walter Storholt:

When people choose to delay Social Security, is that naturally helping the system by delaying it, or is it actually hurting the system because people are taking larger and larger payouts over the long term by that waiting?

Tyler Emrick:

The math is heavily skewed towards delaying. So when you think about Social Security and its creation and some of the math behind the calculations as to how much are you going to get and what does that benefit look like, it is really skewed in favor of us and delaying getting more money and getting better outcomes in the long term. So it would be more impactful and probably a more strain on the system if we had more individuals delaying taking benefits there.

Walter Storholt:

Interesting. So that’s probably why there’s not been a push from the government to raise the minimum age of Social Security. But yet, I feel like I do hear stories all the time about them talking about doing that or raising the retirement age and some of those other conversations.

Tyler Emrick:

Yeah, it’s been floated out there as a viable option. You think about the last change that Social Security made. That’s what they did. The full retirement age was 65, and then it got pushed out to, now it’s between 66 and 67. So when they push out those full retirement ages and those benefits, there is some benefit there because they are kicking out benefits. But I do think that story is changing a bit, and there is trying to get more and more, I won’t call it marketing, but more education out there of the benefits of delaying. Because you think about just the difference in payments from 62 to 70. I mean, if you do wait till 70, you’re looking at getting roughly 75, 76% more on a month-in and month-out basis, which that’s not insignificant.

And even under the scenario where nothing happens, and nothing gets changed between now and 2034, and then let’s say that benefits do get cut by 23%, most cases, the math is still going to favor delaying benefits and not having that mindset of, “Hey, I want to get as much as I can now because it’s not going to be there down the road.”

So as you look through, or I guess the other article or that second article that I wanted to reference, it goes into that and explores those solutions a little bit more and says, “Well, hey, what can we do from not only a marketing standpoint, an education standpoint, but what can we do to help with better outcomes as individuals are trying to wrap their arms around the decision, when to take Social Security?” And one of the suggestions in the article that was mentioned, well, I wouldn’t say it’s a suggestion, but there’s a group of senators right now that recently proposed changing some of the terminology that Social Security uses to describe the claiming ages.

So right now, if you kick in your benefit or you try to start benefits at age 62, that is what’s called your early eligibility age. Or if you delay until age 70, you’re getting delayed retirement credits. So in their proposal, they essentially are trying to reframe that terminology and say, “Hey, at 62, that is actually your minimum benefit age. Age 70 is your maximum benefit age.” And I think they’re trying to align that terminology and make it even that much more clear and set in stone as to, well, what are you really signing up for if you kick in your benefits early? I don’t know from an outcome standpoint how much that’s going to move the needle, but they’re really trying to look at ways to make sure that, hey, people are going into this decision with their eyes wide open.

Walter Storholt:

Great points across the board so far, Tyler. So yeah, what else do we need to consider about Social Security and especially thinking about that uncertain future? What else catches your eye from the latest conversations you’ve had yourself and seen?

Tyler Emrick:

Yeah, so the other, or the second part of that article that goes into some of these unique ways to frame Social Security and some of those decisions was talking about your 401(k) plans or your defined contribution plans and really trying to look at how we’re using those type of accounts in a positive way. And again, to promote these positive outcomes and when to take your Social Security payments. And the way that the author proposes we do that or we look at that is we actually within our 401(k) create what he referenced as a bridge sleeve, which essentially would be a separate sleeve within your 401(k) account, or you could even think of it as a separate account if you will, that money would go into and would be set aside specifically to bridge that income gap that you have when you actually delay your Social Security benefits.

Because you know, think about what this individual is suggesting and trying to solve is they’re trying to match up the financially and mathematically best decision with the emotional side of it as well. Because if you think about what drives a lot of individuals, I think to kick in that Social Security early is the fact that if I’m getting a social security payment, I don’t have to use my savings. I don’t have to pull money from my 401(k). Whereas as each year you continue to delay Social Security benefits, well, you still have the spending, and you’re still in need to live, and you’re likely going to have to start pulling money out of those retirement accounts and using your own. And that’s a pretty big emotional disconnect there. And you have to get over that hump and really understand the benefit of delaying. And this proposal of having that separate account or that separate sleeve within your 401(k) is it’s kind of pre-conditioning you to set yourself up to delay Social Security because you are setting aside money specifically for that income gap referenced when you delay your Social Security benefits.

Walter Storholt:

What was the name of that term again? Just wanted to reiterate that for the listeners.

Tyler Emrick:

The bridge sleeve or the income cup.

Walter Storholt:

The bridge sleeve.

Tyler Emrick:

Yup. They just called it a bridge sleeve or a separate account, and they didn’t really have any type of specifics around how it would be accomplished, but more the idea that, hey, if we’re separating and bucketing out a piece of your retirement assets specifically for this goal, you’re more apt to follow through on that goal and feel more comfortable about that decision and get over that hump of using a piece of your own savings and your piece of your own assets to bridge that gap. Because again, if you’re waiting on Social Security, you’re not getting a paycheck from it, and if you end up retiring in your early 60s, well, I mean, that could be a number of years there where you’re going to have to bridge that gap, which is no small chunk of change that you’re going to have to use of your own assets to get you there.

Now, he did go in and propose some solutions as to, well, how this sleeve would be managed and what this sleeve would actually do. He even proposed maybe annuitizing a piece of it as well, but it was very, very clear that whatever the solution is and however it would come to fruition, that it was important that, hey, you’re doing this to delay retirement benefits from Social Security because that is the maximizing decision. Not necessarily using it to, hey, go purchase an annuity and annuitize or get something that is going to give you income for the rest of your life. It’s really there just to bridge that gap from retirement to you actually starting your Social Security benefits.

Walter Storholt:

I was queuing up the egghead alert there in the moment with the bridge sleeve.

Tyler Emrick:

I stopped, I stopped. I did.

Walter Storholt:

It needed one more word, like the amortization bridge sleeve. I was like, nah, that would’ve triggered it. But bridge sleeve, we just let slide.

Tyler Emrick:

That’s good. I’ll take it. Well, and I think that all in all, I mean all these solutions, and there’s been a number of them that have been written on in the past, and I think the big thing is it’s saying, hey, there’s this knowledge or this understanding that there’s the disconnect here, and whether it’s an education issue, whether it’s getting individuals emotionally comfortable with a decision or whatever it is, the more and more we focus on it and the more and more it gets positioned or solutions there that make it easier for you to make better financial outcomes, that’s great. And I love when these articles and these authors kind of are going down and exploring some of these out there or off-the-wall solutions to these problems. Because when we think about Social Security, I mean we do have an issue.

2034 is coming, the Social Security Trust Fund is eventually going to run out at some point down the road, and we do need to work around or get some type of buy-in as to, well, how are we going to solve this issue? All the things that we have to solve the issue are out there, and there’s many different ways that we can do it, but figuring and navigating out which one’s going to actually get voted on and approved through Congress and actually come to fruition, that can be a little bit more difficult because there’s a lot of politics at play and all the like. But at the end of the day, it’s important that the education and that the information is out there, and then that way families have it to be able to use to get to whatever decision is going to make their family and put them in a better situation going forward.

Walter Storholt:

If any of this is confusing to you or just makes your head swirl a little bit, not just from today’s conversation, but maybe you’re reading articles about Social Security online, or you go to Google, and you’re just finding all sorts of different opinions, or you’re seeing fear articles that are telling you things are going to expire and implode in the next little bit. And that’s where it can be really helpful to work with an advisor to kind of put all of this into context like Tyler has done for us on today’s episode.

So just want to reiterate, if you’ve got questions, folks, or want to have a more in-depth conversation about your particular plan, your particular situation, again, don’t worry. Go to truewealthdesign.com and click on the are we right for you button, and you can schedule a 15-minute call with the team, and that kind of gets the conversation started. See if you’re a good fit to work together and move forward. Any other thoughts or things we should bring up as our, I don’t know if we call this our 2023 edition or check in on Social Security, Tyler, but what else should we call attention to?

Tyler Emrick:

That’s the big things I wanted to discuss today. Again, we’ll have more to come on it. I mean, Social Security’s going to be a topic, as we mentioned earlier, that’s not going away. Many, many individuals have questions about it, and sometimes the decisions around it aren’t necessarily black and white. There’s a lot of gray area, and navigating what’s best for your situation can be challenging at times. So whether you’re doing this research on your own or you’re working with a financial professional or someone like us to help you navigate through it, I think the important thing is that you are using the information that’s out there and using it in a way that you can make better decisions and create better outcomes for you and your family.

Walter Storholt:

Well, in addition to going to truewealthdesign.com and booking a time to chat, you can also do that by calling 855-TWD-PLAN. That’s 855-TWD-PLAN, and the contact info is all in the description of today’s show. So just check the show notes. You can find that very easily. Well, Tyler, thanks for all your help in breaking down the Social Security conversation for us today. And I know we’ll have a great episode on the docket next time around.

Tyler Emrick:

Yeah, that’d be great. Appreciate it.

Walter Storholt:

Appreciate it. That’s Tyler Emrick. I’m Walter Storholt. Thanks for joining us. We’ll see you next time on Retire Smarter.

Disclaimer:

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