The Smart Take:
There’s an old school of thought that says you should take social security as early as you can so that you can get the most out of it. But this is another one of those retirement rules gone awry that we enjoy picking apart on the podcast. Kevin will tell us why this retirement “rule” needs to be scraped and give us the proper lens through which to view the social security problem.
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Speaker 1: Welcome to Retire Smarter with Kevin Kroskey, find answers to your toughest questions and get educated about the financial world. It’s time to retire smarter.
Walter Storholt: Thanks for joining us on another edition of the podcast, this is Retire Smarter. I’m Walter Storholt, alongside Kevin Kroskey. He is the President and Wealth Advisor at True Wealth Design, serving you throughout Northeast Ohio with offices in Akron and Canfield. You can find us online at any point in time by going to TrueWealthDesign.com, listen to past podcasts, read the blog, all sorts of good information there. It’s TrueWealthDesign.com.
Walter Storholt: Kevin, I hope all is well in your world. How are things going, sir?
Kevin Kroskey: Hi, Walter. Things are going great. We are recording today at the near end of September and September in Northeast Ohio is quite a beautiful time of year, so it’s not too shabby today.
Walter Storholt: Absolutely. Yeah. Hopefully it will continue to be. This is my favorite time of year, so that whole late September, all the way through October and November, just I think that’s the best time of year in my opinion.
Kevin Kroskey: I agree. It’s weather and football. What’s not to like?
Walter Storholt: I think there’s something also to the routine, right? You being back into, if you’ve got kids, you kind of have school going back on, everybody’s kind of in work mode, so even though there’s all these other fun things happening, there’s something comfortable about the routine getting reestablished. Maybe that’s just me.
Kevin Kroskey: Walter, are you implying people are happier when people send their kids back to school?
Walter Storholt: That’s not where I was going with that, but that may be a factor I believe. Right?
Kevin Kroskey: I’ve got a quick … Financial humor is difficult, but I heard a professor, his name is Dr. Michael Finke and he does a lot of retirement satisfaction study. Oftentimes it will be things that are correlated with happiness. In one of his studies, he found that retirees that live within 10 miles of their children are less happy than those that live further than 10 miles away. Now, anybody that knows statistics knows that correlation may show a relationship, but you don’t know the underlying cause. He just likes to point that out, but he doesn’t make any assumptions as to why that may be the case.
Walter Storholt: That is too funny, but isn’t it a lot of the times the parent choosing to retire closer to the children, like to be closer to grandkids and that kind of thing?
Kevin Kroskey: Yeah. You do see a lot of that and maybe that’s a conversation for another day, but kids are pretty mobile in general. They seem to move around a lot more today particularly in their professions and they’re even saying today that this generation is going to have maybe 10 different professions, not 10 different jobs, but literally change their profession 10 times, so you probably have to be fairly mobile. I don’t know if you’ll want to go out and buy a house next to your son or daughter right when you retire because you might have some happy feet and be moving around quite a bit.
Walter Storholt: We do seem to kind of have that, speaking as a millennial, I suppose. We do seem to have sort of this mindset of the ability to reinvent yourself at any point in time and on a less dramatic scale, yeah, that can manifest itself and I think I’ll become this now. I think we’re maybe more willing to say, okay, two years of school and now I’ve got the skillset to go do X, Y, Z and I may be more willing to make that investment where the previous generations couldn’t imagine taking two years, once you got into your working life, to go back to school and change all those kinds of things.
Kevin Kroskey: Walter, you lost me when you said millennial and you definitely lost the audience when you said you’re a millennial as well. I don’t know where we go from here [crosstalk 00:03:35].
Walter Storholt: I’m not the stereotypical millennial. Come on, we should all know better than that. This is our fifth episode. You should know me well enough by now that I’m not your typical millennial. Come on.
Kevin Kroskey: I do. I do, I do. Just giving you a hard time.
Walter Storholt: I know. Us millennials always get a hard time. See? No, I hate sometimes having to claim to be a part of that millennial group with such a bad rap that we get, but that’s not our conversation from the large standpoint today. No, no, no. We’re going to get into talking about Social Security and this is kind of continuing our series about some of the retirement rules that have been purported as rules before. Some of these that have gone awry over time. There’s this one rule, Kevin, that says that you should claim Social Security as soon as possible. You’ve put into this account your entire life, as soon as you’re eligible, why wouldn’t you want to start getting your hands on that money? Why is that a retirement rule gone awry?
Kevin Kroskey: Yeah. I don’t even know if it’s a retirement rule, but it’s just this default position that people seem to take. If they’re retired, they’re eligible to take the retirement benefit as early as age 62 from Social Security and they just think, like, okay, I’m retired. You just go ahead and take your Social Security. I think it’s just more, it’s kind of that knee jerk reaction, so I’ve been doing this for a while now and back in the late 2000s, I was teaching a class. It was a retirement planning class, part of the Certified Financial Planner curriculum at a local college here in Northeast Ohio. I had to teach on Social Security.
Kevin Kroskey: One of the things that I was astounded about as I taught the 15 or so people that were generally in these classes, again, these were all financial advisors seeking to become Certified Financial Planners, was that even the curriculum that we were teaching, which was good curriculum, but it was just about the basic rules of how the system worked. While those are all fine and good and important to know, where it fell short was actually using the rules and applying some strategies to get the most out of the system for the client. Squeezing the most out of what they paid in, incorporating into their financial planning and into their retirement planning, into their investment and tax planning because it’s all interchanged. That was just something that really stuck out to me.
Kevin Kroskey: Going back then, not only was it a default for people that were retiring just to go ahead and take Social Security, but frankly, it wasn’t even on the roadmap or the mind of most advisors to even consider about planning for it. These were CFPs that I was training and only about 20% or so of the advisors were certified. For anybody that doesn’t know what that means, basically it’s like the equivalent of passing the bar if you’re an attorney or passing your medical boards if you are a doctor. It’s kind of new territory, so you’re seeing a change, but that default path is definitely 110% what you’ve seen for quite some time.
Walter Storholt: Well, I know this debate about Social Security has raged on for a long time. Some people say that you don’t want to take it too early because you want to maximize your Social Security, so take it later on. Others are on the other route. Well, what if I pass away earlier. I’d rather had been getting it for a longer amount of years rather than a higher amount for a shorter period of time. I guess the bottom line is it’s kind of hard to know exactly what this rule should be set at because you don’t know how long you’re going to live and it makes solving the rest of that equation pretty difficult.
Kevin Kroskey: Yeah, it does. You just hit on a few of the key points that you said, so when I think about this, I think of kind of three or four different default actions or mindsets that people have. One is they don’t think at all and they just say, “Okay, hey, I’m 62. I’m going to take it.” The other is, they think that, “Hey, I’ve heard about this deferral thing and I realize the benefit could be higher in the future, but hey, I’m healthy now, I’m in my 60s now. Who knows what kind of health I’m going to be in the 70s. I want to spend more money now and I don’t want to have to wait to spend money later and I don’t care if the benefit’s going to be higher.” I’ll come back to that and explain why that’s a bad mindset to have. The other one is, it won’t be there for me and the last one, so I guess this is four of four, is I won’t live long enough to make the deferral to make sense. I’ll go ahead and kind of chalk those down one at a time.
Kevin Kroskey: I won’t live long enough, we actually talked in podcast episode three about life expectancy and we talked about how if you have that husband and wife who are both, say, age 62 and the only other condition is that they’re a non-smoker. On average, the second death is going to occur in the early 90s, so that’s another way to say that it’s going to be about 30 years on average that somebody’s going to be living and needing money. The way that Social Security works as well is if you have a husband and wife, and say you have two Social Security benefits, the higher of the two benefits is going to be paid as long as either one of them lives. That’s known as a survivor benefit.
Kevin Kroskey: Just to give a concrete example, say one spouse has a $2000 benefit per month, the other spouse has a thousand dollars, and the spouse with the $2000 benefit passes away. Well, the surviving spouse, I’ll say her in this example, her thousand-dollar benefit goes away. However, she steps into the shoes of her husband and receives the $2000 per month. There’s this inherent survivor benefit that’s built in and on average, people are going to live long enough for the deferral to make sense. We won’t get into any mathematical calculations on the podcast and completely lose the audience, but certainly the life expectancy for most people really is a non-issue. If you want some more information, go back and listen to podcast three about that.
Kevin Kroskey: We already kind of talked about the don’t think at all. We talked about I won’t live long enough. The next one is, hey, I don’t want to wait to spend money. This is something that just people have this behavioral preference of spending not their own money, but they prefer to spend Social Security, they prefer to spend their pension. These other income streams that they don’t have the flexibility over, you know, I mentioned earlier that Dr. Michael Finke, one of the things that he found in his study about retirement satisfaction is people are happier when they have pensions, when they have Social Security to spend. The way that he measured, and I’m going from memory here, is basically they were about 50% more satisfied spending those income streams rather than dipping into their own investment accounts to spend the money.
Kevin Kroskey: The thing that I tell people is, look, if we’re advising you because we run the numbers and we know that deferring Social Security for you is going to make sense, we’re not saying you have to wait until you’re age 70 or 68 or whenever it is that we defer it to, to go ahead and spend money. No. Absolutely not. What we’re saying is you can actually spend more money today at age 62 or whatever your age is that you’re retiring and were planning to go ahead and recreate this retirement income stream for you, you can spend more today and you can spend more each and every year by doing it, however, you have to get over the emotional hurdle of using your own money for a period of time to bridge the gap until Social Security is going to start. That’s tough for people. That emotional hurdle, it’s tough enough going into retirement after you’ve been saving in these accounts for 30, maybe 40 years and then you get to retirement and you know you’re supposed to start pulling the money out. I mean, it has retirement right in the account name, but going ahead and just flipping that behavioral switch is difficult for a lot of people.
Kevin Kroskey: Now, we’re saying, not only do you have to flip that switch of spending your own money, but you have to spend even more of it than what you otherwise would because you need to defer Social Security. That’s tough for people, but I can say doing this for well over a decade now, we’ve had a lot of people that we’ve been able to help and make that smart decision to go ahead and defer and help themselves. We’ve got three of the four down, so some people just don’t think at all, they say I’m just going to go ahead and default take it at 62 because that’s as soon as you can. The second was I won’t live long enough, so we already talked about that one. Number three, I don’t want to wait to spend. Then, the last one is, hey, Social Security, I don’t know if you heard, but they’ve got some funding issues. Right? There’s something called the solvency and the Social Security trustees come out with a report every year and hey, even if I look at my statement, there’s a little bit of a warning sign right under my expected benefit at age 62 or 67 or whatever it may say that the Social Security system is going to run out of money in the year 2034. Have you ever seen that on your statement Walter?
Walter Storholt: I have trouble just looking at the statement, just kind of being sad that it might not be there when I get to retirement.
Kevin Kroskey: Walter, my favorite millennial, I think I can help you feel a little bit better here, so let’s see what we can do. Back in, I think it was 2011, the system crossed over where it started paying out more money than what it was taking in. Social Security’s funded by, if you look at your pay stub and you see this, you know, it says FICA, and you wonder who’s this FICA person that’s taking 7.65% of my money? Those benefits are being paid in, but more than what’s being withheld through the payroll taxes is being paid out in part because our country has an aging demographic. You have all these baby boomers, they’re retiring in waves, they have been for some time. People are living longer, like we’ve already touched on, so you’ve got more and more people receiving these benefits for longer and basically this kind of pay-go system being withheld through payroll taxes and being paid out is just not cutting it.
Kevin Kroskey: One of the things that I find really interesting, and again, this is, we’re talking about finances, so give me a little grain of salt here, but back in 1983 was the last time that we had a major Social Security reform and that’s when Reagan was in office and the person that was leading this was everybody’s favorite, Alan Greenspan. Everybody remembers Uncle Al and all the power that he had and how he would show up and, hey, what’s the Federal Reserve going to do? Well, before he became that Federal Reserve governor, Social Security was on target to go insolvent and same sort of thing that I just described, where it was paying out more than what it was taking in. They made this reform in 83 and Alan Greenspan was chairing the committee, but a lot of people from the Government Accountability Office said, hey, if we make these changes, the system’s going to be solvent for about another 50 years.
Kevin Kroskey: Think about this, I said 1983, so 50 years from that is 2033. If you actually looked, one, if you were able to find your Social Security statement, but then actually look at it, it would say that the system is going to become insolvent again in 2034. Uncle Al was almost dead on back in 1983 and actually it was a little bit before that when they were doing the work, but the projections that they made were dead on, so this whole thing with Social Security being insolvent is nothing new, it’s something that’s been out there, it’s something that’s been expected and something that’s been dealt with before, frankly.
Kevin Kroskey: How did they deal with it? Well, back in 1983, one of the things that they did was they increased the full retirement age, so you being a millennial and frankly, me being generation X as well, our full retirement age is age 67 and that applies to anybody that was born in 1960 or later. If you had somebody that was born in 1960 that was kind of the most adversely affected by this legislative change of increasing the full retirement age, they were only 23 years old in 1983, so 1960 plus 23, gets you to 1983. They had the entirety of their career, basically, to go ahead and account for this change in their Social Security benefit and the reason why I think people should take comfort in that is one, it’s precedent, so I’m certainly not going to predict what Congress is going to do, but there has been precedent where they’re going to phase in changes like that over time. That could certainly happen again. Any other changes that people do put forward, which you don’t hear about it talked about all that often because it’s not exactly the most politically popular thing to talk about, at least in public circles. Usually, it’s age 50 or 55 and people that are older than that are not going to be affected by any of the changes. People that are younger than that are going to be affected.
Kevin Kroskey: Again, that’s something that is out there, but the Social Security in general is, frankly, it’s a relatively easy mathematical problem on wheat they need to do to fix it. It’s just having the political will to do it. Again, when you look at those four things about why I think people don’t make smart decisions on their Social Security, you can really distill it down to those four things. They don’t think at all, they just kind of take the knee jerk reaction when they retire or at 62, whichever comes later, they don’t think that they’re going to live long enough, so they can’t really envision what is a reasonable life expectancy, so they’re not making the smart decision there. They don’t want to wait to spend, which is another way of saying they haven’t really … it’s a symptom of the problem, it’s not the problem. The real problem is just getting over the emotional hurdle of using their money that’s in their savings and investment accounts knowing that if you actually run the numbers, you’re going to actually be able to spend more throughout the entirety of the retirement rather than just when Social Security starts. Then, lastly, it’s that concern about it’s not actually going to be there for them.
Walter Storholt: It’s a lot of different concerns to have kind of on the top of your mind in trying not to fall into one of these pitfalls, you know, not having that fear that it’s not going to be there for you or that you’re not going to live long enough to enjoy the benefits and those kinds of things. I know that that can be very frustrating for people having so many different things to kind of juggle there, but you do a nice job of kind of laying out and kind of disabusing some of these notions of the problems that surround Social Security to eliminate some of that fear. I think that’s important as well.
Walter Storholt: Kind of as a follow up to this, Kevin, what about it’s not just a matter of flicking the switch. Okay, Social Security is now on. I know in the past there were all these different ways that you could elect or take your Social Security. Is that still the case? How has that maybe changed over the last couple of years if somebody hasn’t been following closely to the Social Security addendums and rules and those kinds of things? Is that another layer to this whole equation?
Kevin Kroskey: Yeah. I would say two things. For the purpose of our conversation today, we’ll probably just leave it largely at those four things that I touched on. Then, there’s a lot more to unwrap about Social Security that we’ll touch on in future episodes, but to your point, there are different claiming strategies and there is the budget deal that was passed in late 2015 that included a Social Security change and ensured, without getting too technical and getting all these different claiming strategies, you had to be 62 by the end of 2015 in order to do something that’s called basically restrict your application and only take a spousal benefit.
Kevin Kroskey: In short, say if, a common strategy that we actually have a lot of clients that are currently doing this because we incorporated it into their planning, we did the analysis and they were old enough to go ahead and use it, but somebody gets to the full retirement age, baby boomers are often, you know, that’s age 66 and they will go ahead and get to age 66. They would file for benefits, but they would restrict their application solely to the benefit of their spousal benefit and not their own retirement benefit. In short, that would basically entitle them to half of their spouse’s benefit, who’s already claiming their own benefits. I know I just kind of mentioned a lot of things there, but going back to that example that I touched on earlier, say one spouse had a $2000 per month benefit, the lower income spouse had a $1000 benefit and let’s say that the $2000 per month spouse gets to age 66, files that restricted application.
Kevin Kroskey: What do they get? They get half of the $1000, so they get $500 a month, $6000 a year, and they get that from 66 all the way up to 70. Well, what’s the benefit of going ahead and doing that? Well, they got that $6000 per year, however, they also got an 8% increase per year on their own benefit, so over four years from age 66 to age 70, they’re $2000 per month becomes … I’m doing some math in my head here, but a little bit more than $2600 per month for the entirety of their lifetime. That’s that restricted application. It’s still out there, but you had to be 62 by the end of 2015.
Kevin Kroskey: The other thing that changed and is important to know and probably a good way we can wrap up our call today, is that you used to be able to repay benefits. This is a true story. In 2009, I had a client that I did the analysis, they had a lot of longevity in their family and I did a calculation going through and showing them like, hey, I think you guys made a mistake on taking your Social Security early. He kind of did it the, you know, I really didn’t think about it way. Smart guy, had some means, had some longevity, and I basically said, “You should really repay the $100,000 that you received in benefits over the last few years, go down to the Social Security Administration, pay that back, and then we’re basically going to get a do-over, make sure that we do it right. This was in 2009 and sometime later, I saw the statistics and there was literally only like 49 people in the entire country that repaid benefits similar to what I advised my client to do in 2009. I guess I was … Like my mom always said, I was a little bit special in recommending that they do that. It was, as you could imagine if you’re going down to Social Security Administration and you want to write a check and repay your benefits, you’re going to get a blank stare at best.
Walter Storholt: Probably.
Kevin Kroskey: That’s exactly what he got. I wrote down in black and white exactly what they should do, sent them down to the Social Security Administration with that, and he did repay benefits. That part was implemented well. The thing that he didn’t do though and the thing that was not implemented correctly, he was also supposed to file a restricted application and take that spousal benefit that I just explained. For this client, it was just a project work. Basically, there was no ongoing advice after the first kind of few months of planning that I had done for them. Then, he called me about two years later and he said, “Did you know I could have gotten a lot more money from Social Security?” I went back and I looked at exactly what I wrote. Then, I asked him to send me his statement of benefits and what he was receiving. That’s when I figured out that, hey, what I wrote was exactly right, but unfortunately, it wasn’t implemented correctly.
Kevin Kroskey: Two things, I think, are a good lesson for this. One, you can’t repay benefits similar to what I advised that client in 2009, so you need to get it right the first time. You need to run the numbers, you need to incorporate this into your overall planning. It doesn’t affect your investment planning. It impacts your tax planning, it impacts your ability on when you’re going to be able to be financially independent and retire, so you need to think through and you need to have a plan for this. Secondly, what we do now is basically we just file for benefits for our clients. They come into our office. We actually had a client here earlier today and we were helping her file for benefits. Now, there’s a few kinds of filings that you cannot do online, but as a result of that implementation mistake, we just prefer to do the implementation ourselves and actually do it for the client rather than send them down to Social Security or have them go to the Social Security website. We do this probably 10 times a year for different clients. Anybody that’s listening to this is only going to file for Social Security once, so it’s just one of those things. You want to make sure it’s going to get done right and you don’t have a chance to do it over like you used to.
Walter Storholt: Well, if you have any questions whatsoever about your Social Security, how to take it. There’s one way you can take it, claim your Social Security as soon as possible. That’s just one way. Often, that’s not the right way for you to do it, so be aware of that. If you thought that was a retirement rule, it’s one that has definitely gone awry, and you heard the litany of reasons why that’s the case. Obviously, Kevin and his team, very knowledgeable, on this subject, they’re standing by to help you kind of navigate through some of these questions if you have some about your own Social Security, how it fits into your overall financial plan. The best way to get in touch, best way to set up a time to chat is go to TrueWealthDesign.com, that’s TrueWealthDesign.com. Click on the, Are We Right for You, button to schedule your 15-minute call with an experienced financial advisor on the True Wealth team serving you throughout Northeast Ohio. That’s TrueWealthDesign.com. You can always call as well, 855-TWD-PLAN, 855-TWD-PLAN is your number to dial.
Walter Storholt: Kevin, I just asked you that follow up question because I’m going to use a millennial term here, I wanted to hear you drop some knowledge some more on Social Security and you took it and you ran with it, man. That was great.
Kevin Kroskey: Walter, I have no idea what you just meant to say [inaudible 00:24:26].
Walter Storholt: Come on. You gave us all the down-low. No, that was still probably millennial, too, wasn’t it?
Kevin Kroskey: I know what you’re saying, Walter, and you are definitely atypical for the stereotypical millennial.
Walter Storholt: You gave us the whole story, was that the … Who am I thinking of there?
Kevin Kroskey: I gave you the truth and nothing but the truth.
Walter Storholt: There you go. We’re taking it way back now. That’s right. Very good. All right. Well, there’s your ways to get in touch with Kevin Kroskey. Don’t forget TrueWealthDesign.com, the website to go and check out. Kevin, thanks so much for joining us on the podcast today and making a topic like Social Security interesting and I enjoy actually hearing all the different layers and intricacies that there are because some people think it’s just so simple, but there are a lot of different things to consider and you broke it down well for us. We appreciate it.
Kevin Kroskey: Thank you. Real quick, I have a few clients that are in their 70s and defer until 70. A few of them are, just ask them, they’ve been very happy with the deferral. They’ve also said that they don’t tell anybody what they did because the few times that they’ve tried to tell people, they just get such a backlash and have a tough time explaining the benefits to them, so it’s kind of … More is being written about it, but it’s still pretty much undercover for most people and even if it’s talked about, it’s not being done, so it’s certainly something that can add a lot of value. I mean, six figures is not uncommon for a married couple if they’re going to do the Social Security planning right, six figures more than what they would have otherwise received. Definitely big numbers.
Walter Storholt: Absolutely. Again, TrueWealthDesign.com, your place to go to set up a time to chat with Kevin and the team. Just click on the, Are We Right for You, button. We appreciate it Kevin. Thank you very much and thank you for listening to the show today. If you thought the information today was helpful and might help someone that you know, maybe a friend or a family member, send them the podcast. Copy the URL or hit the share button if you’re listening on the app and send it to somebody that you know if you think it might help them as well. Thanks for joining as and we’ll talk to you next time on Retire Smarter.
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