Category: Financial Planning / Podcast

YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, RICP®, to wrap up the two-part series on common social security mistakes to avoid.

Episode Summary

This week, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, RICP®, to wrap up the two-part series on ten common social security mistakes to avoid. Tim and Tim start the discussion with a quick review of the first five common social security mistakes to avoid: not checking your earnings record, only considering your own benefits and not knowing what benefits are available, not understanding how social security benefits are calculated, taking social security too early, and not coordinating benefits with your spouse. They move on to dig into the second half of the list, including mistakes like not considering the cost of living adjustment (COLA) and how it changes your benefits, not planning for taxes on social security benefits, assuming social security benefits will fully cover your living expenses in retirement, how getting divorced too soon or remarrying can change social security benefits, and the mistake of viewing your social security benefits through the wrong lens. They share about potential dangers of polar opposite views on social security and how viewing social security as an insurance framework tackles a variety of financial risks that can impact the financial plan. 

Links Mentioned in Today’s Episode

• YFP Planning: Financial Planning for Pharmacists
• Schedule a free Discovery Call with YFP Planning
• YFP 294: 10 Common Social Security Mistakes to Avoid (Part 1)
• YFP 242: Social Security 101: History, How it Works, and Why it Matters for Your Financial Plan
• Social Security Administration
• YFP Tax
• YFP 275: How to Build a Retirement Paycheck (Retirement Planning) 
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. 

This week, Tim Baker and I wrap up our two-part series on 10 Common Social Security Mistakes to Avoid. Now, whether you’re a new practitioner, where Social Security is far off in the distance, perhaps in the middle of your career listening or approaching that timeline towards retirement, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 280 households in 40-plus states. YFP Planning offers fee-only high-touch financial planning that is customized to pharmacy professionals at all stages of their career. 

If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. Okay, let’s jump into my interview with Tim Baker, where we complete our 10 Common Social Security Mistakes to Avoid. 

[INTERVIEW]

[00:01:11] TU: Tim, welcome back.

[00:01:13] TB: Good to be here, Tim. How’s it going?

[00:01:14] TU: It is going well. I’m looking forward to part two of our series on 10 Common Social Security Mistakes to Avoid. If you missed last week’s episode 294, make sure to check it out, link in the show notes below, where recovered the first five Common Social Security Mistakes. 

Tim, we talked through not checking your earnings record and making sure you’ve got a good view on what’s going on in the ssa.gov profile and some of the tools in there. We talked about not knowing some of the specifics of the benefits that are available, spousal benefits and disability benefits. We also talked about how benefits are calculated and then some of the strategies around potentially the timing of claiming Social Security. So a lot of information in that episode. Make sure to check it out. 

Tim, let’s jump right into number 6 on our list of 10 common mistakes, which is the cost of living adjustment. We talked briefly about this last time, but it really needs the attention that it deserves. So tell us more about the Social Security COLA and how that works.

[00:02:11] TB: Yeah. So every year, the government looks at the consumer price index for urban wage earners and clerical workers, and they do this I think – I think this is in fourth quarter. Based on the CPI-W, they announce what like the change in payments would be for security or other government benefits. This year was – Most years, it’s very incremental, right? Because inflation hasn’t been what it was year over year from 2021, ’22, what we’ve seen. But last year, they announced and then put it into practice that the benefit would increase by 8.7%, which is huge, Tim, if you think about it. 

Because if we take a step back and we talk about one of the major pieces of the retirement paycheck, obviously, Social Security, which is what we’re talking about, the other major piece is the investment portfolio. So one of the reasons why we put our money into the markets and we, hopefully, take aggressive but intelligent risk is because, unfortunately, we can’t stuff the mattress full of cash and then hope that in 30 years, when we go to retire, that that’s going to be enough to sustain us. So the reason that we invest and we earn dividends and we earn capital appreciation on investments is to outpace really two things. It’s the tax monster and the inflation monster. That’s why we do this. 

One of the beautiful things about Social Security is that it is inflation-protected. So your payments going from December to January got almost a 9% bump to month over month, which is huge. What we have said is that they don’t even sell annuities on the market right now, as I’m aware, that has a cost of living adjustment rider, which means that when I’m talking about annuity, all an annuity is is your own Social Security benefit that you’re creating yourself. So it’s where you say, “Hey, I have $100,000. I’m going to give this to the insurance company, and then they’re going to pay me for life or for a term certain X amount of dollars per month for that lump sum of cash.” 

I can even go on to the market and say, “Hey, you see what Social Security is doing, where they’re simply giving me that 9%.” Or hopefully, it’s not that big. We don’t have inflation starting to temper down, but it could be 5% next year. It could be 7% the following year. You can’t even get that on the marketplace. So Wade Pfau, who is a professor at the American College, he’s written a lot of books on retirement. He’s basically saying that Social Security is really the cheapest annuity money can buy, even the firm process. So you can’t even get that on the market. 

Now, what you can yet, Tim, is you can get a rider that says, “Hey, it’ll go up 3% every year or 2% every year.” That’s typically the component that drives the price of the annuity because two or three percent could keep pace with inflation. But this year, you’re like, “Hey, you’re down 6% if you have a 3% rider based on the difference.” So really what we’re doing with Social Security and it being protected by inflation is we’re protecting your buying power. We know that the price of gas, the price of eggs, the price of other groceries, housing, utilities, everything has gone up. For a retiree on a fixed income, that can be super stressful. But at least if a good portion of your retirement paycheck is protected by this inflation protection, it’s a little bit of a feather in the cap. 

Social Security payments, just to clarify, they’re adjusted every year based on inflation, based on that CPI index. This is another important thing. By law, an individual’s benefit can’t decline, even in deflationary times. So that’s one thing that your benefit could stay the same. Usually, it goes up every year. When we’ve had a year like this, where there’s been a lot of inflation, you see that matched in the benefit increasing by 8.7% this year. So I think that this is one of the things that is often overlooked. When we’re buying policies or doing things, like cost of living always comes up, and it’s one of the more expensive things because it’s just an unknown. We just don’t know where it’s going, so the fact that the government has our back in this regard. 

Again, a lot of people, we pay for Social Security. Like that comes out of your check every time. So this is just allowing us or the government allowing us to kind of get those payments for life. So they’re doing what they need to do on the back end to make sure that that is sustained. But to me, this is important piece that it is inflation-protected. Again, being on a fixed income, there’s risk there that if you’re not, you’re just being priced out. Your standard of living is affected without it.

[00:07:04] TU: Yeah, Tim. New news to me. That’s really neat. I was unaware of, essentially, the floor, right? That they’re in a deflationary time period, that the benefit can’t go the other way, which makes sense, right? That while some people are using Social Security benefit, obviously, for goods and services that are going up with inflation or in a deflationary period, those costs would go down. There are other things that are fixed that aren’t going to go the other way. So that would make it difficult for planning. 

Tim, I was feeling good about my high-yield savings account with Ally at what? 34 or 35 –

[00:07:34] TB: 3.4. 

[00:07:34] TU: So I saw 87, and I was like, “Oh, man. Still losing, right?” That’s inflation, so. 

[00:07:40] TB: Yeah. You know what? Every little bit helps. Again, most banks, they kind of just collect that money on the float. So I like seeing those payments roll in, even though I know that it’s a jungle out there with inflation.

[00:07:53] TU: I’m glad that you mentioned the tax monster and the inflation monster. Obviously, we just talked about the inflation monster and addressing that with COLA. But our number seven common Social Security mistake really gets to the tax piece. I think, as we’ve talked about many times on the show, tax, like inflation, is often an overlooked part of the financial plan. 

Tim, when it comes to this number seven mistake, not planning for taxes on Social Security benefits, another example of the integration of tax planning with the financial plan. So how are Social Security benefits taxed, and how could this impact, potentially, someone’s decision to whether or not they’re going to earn additional income as well?

[00:08:32] TB: Yeah. So to your point, shout out to our tax team at YFP Tax, Sean Richards and Paul and Ariel, I think this is another indication or another example of having a professional look at this and help decide on this as important. 

So one of the things that people don’t know is that up to 85% of your Social Security benefit could be taxed at the federal level, if you earn substantial outside income, such as wage or dividends. Really, the benefit, Tim, the percentage of your benefit that’s subject to income taxes really depends on what’s called your combined income. So your combined income is essentially 50% of your household’s Social Security benefit, plus any other taxable income, which could be wages that you receive from a W-2 or a 1099, plus any tax-exempt interest, which is typically things for like bonds, that type of thing. 

So 50% of Social Security benefit, plus taxable income, plus tax-exempt interest income. That’s essentially your combined income, and that’s how it is determined, like what your tax will actually be. So one of the interesting things is that back in the ‘80s, I believe it was the ‘70s, ‘80s. A smaller percentage of people’s Social Security was being taxed, and a lot of it is because some of these thresholds that they’ve set were not indexed for inflation. But as time has gone on, and people have earned more money, we’ve seen it creep up to where now a recent study projected that going forward, about 56 of beneficiaries will pay taxes on at least some of their Social Security benefits. 

It’s good to kind of sit down and see, okay, if I’m earning additional money or I have a portfolio that spits out of income, how does that affect what I’m going to pay taxes on? Then probably even more, a broader conversation is really, okay, if I do additional work, am I going to lose some of my benefit, which is also a misnomer and probably something that should have made this list as well. Like if you make a lot of money, you don’t necessarily lose the benefit. You just don’t – They just kind of pause it, and they give it back to you later. 

Earning money in retirement, so to speak, is actually a great strategy. But understanding kind of the tax and how it affects the benefit itself is important to know. Again, it can be great because it, obviously, helps maintain the portfolio and all that stuff. But it’s really important to understand that the tax is. Again, if you work with an accountant, a CPA, an enrolled agent, they should be able to walk you through, okay, this is what the tax bill is going to look like on your Social Security benefit. I think that’s an important piece of the puzzle as well.

[00:11:21] TU: Yeah. Tim, it’s reminding me back too on 275. We talked through how to build a retirement paycheck, right? You talked about that a little bit on the last episode as well, but so important. I mean, at the end of the day, like for planning purposes, we want to know what is the takeout, right? What’s the net? So we can plan for our expenses and goals and other things that we’re working towards. 

Another good example is you mentioned of not only thinking about the sources of income, one being Social Security, that are going to make up our retirement income. But what are the tax implications, and the tax optimization strategies to, obviously, pay our fair share, right? But no more, right? We want to be able to allocate those dollars.

[00:11:59] TB: Yeah. If you know that your tax bill is going to be higher for that year, maybe the paycheck, the source is really coming from things like a Roth account, which you’ve already paid the taxes on. Or an after tax account, which you might have to pay capital gains tax on. But that’s different than ordinary income tax, and you leave the traditional accounts alone a bit. That’s why at the end of the day, a lot of people ask me like what proportion should be in pretax versus Roth versus like a taxable account. 

It’s tough to say, again, depending on like where you live and what you’re doing because state taxes are different. But I think it’s a good bet to have a little bit in column A, a little bit in column B, and a little bit in column C, and be able to kind of like pull from those different accounts, depending on what’s going on in that time in your life. So, yeah, just, again, having that optionality is another key theme in all of this.

[00:12:55] TU: Tim, as we move on to number eight on our list, which is assuming Social Security benefits can fully cover your living expenses, I think we’ve highlighted well the benefits of Social Security. We talked about the COLA. We talked about potentially the size of that benefit. You gave some examples in the last episode, as you were looking at your ssa.gov, online portal. 

I think maybe some folks might be listening and be like, “Man, do I need to be saving as much as I am outside of Social Security? Can I potentially depend more upon that than I was planning?” So what is the potential mistake here in assuming that Social Security benefits can fully cover your living expenses?

[00:13:32] TB: Yeah. I think it’s – When we’re sitting here and like, “Wow, it’s COLA,” and if I can work till 70, well, I’m going to work till 70, anyway. So it’s funny because like a lot of clients that come to us, and maybe they have a couple $100,000 in debt, they’ll be like, “Man, I’m never going to retire. I’ll never be able to retire.” Then we kind of start to deconstruct that repayment, and then we start to get them in a portfolio that does its thing. Over a couple years, you can start to see the script flip, so to speak on, okay, like I think there’s a path forward. 

In a lot of those scenarios, we’re not even really accounting for Social Security in a lot of ways. When we say we’re going to plan first, as if it’s not there. But the reality is it will be there. Again, it might be dependent on how far away you are from retirement. It might be a lesser benefit. But I think it is definitely a mistake to say, and some people do believe this that it’s like, “Hey, I’m going to do what I can do in my 401(k) and my IRA, and I’m not going to kill myself because I know that the Social Security benefit will be there for me.” 

I would say that, that is – Again, if we’re talking about optionality, if we’re talking about we don’t really know how long we’re going to live, we don’t really even know how long we’re going to be able to work, all of those things, I think, tend to say, “Hey, let’s do what we can to kind of make sure we have a good healthy portfolio that we can draw from.” We don’t know where inflation is going to be. We don’t know really know where the US markets are going to be in the next 30 or 40 years. Again, I still feel super bullish about that. But the fact remains that it is unknown. 

But I would say that, and these are really beginning of 2022 numbers, the average for all retired workers, the benefit is about $1,657 per month. That’s 20 grand a year, Tim.

[00:15:23] TU: Yeah. That’s lower than I would have thought.

[00:15:25] TB: Yeah. I think we’re actually going to – But I think that for so many people who are collecting this benefit, the mindset was like 62 and go. It’s like once I get to that, I’m going to get the money because I’m only going till 68 or 69 or 70. So I want to get the money while the getting is good. We’re starting to see that trend really shift, where I think people are starting to understand, okay, I can defer. Or they’re just naturally working longer because of some of the affirmation things like debt, student loan debt, etc. 

The average for older couples in situations where both spouses receive benefits is $2,753 a month or about $33,000 a year. There’s a lot of different ways to kind of skin the cat, so to speak. But a lot of planners will say, okay, if you make $100,000 as a household, they’ll use anywhere from 60 to 80 percent of those dollars and to say, “Hey, you need 60,000 to 80,000 dollars to live because they discount it, and a lot of the discount is based on really the fact that like while you’re in retirement, you might be saving 10, 20, 30 percent or more. 

Then also ideal, that’s not necessarily true in early retirement because you’re typically a kid in the candy store where you’re like, “Wow, I need to go do all the things I defer while I was working, so travel and that type of thing.” So there is a little bit of a smile, so to speak, of spending where it starts higher, and then it starts to come down as you age. Then as you age, medical expenses get larger, so it kind of increases. 

[00:17:00] TU: Yeah, makes sense. 

[00:17:01] TB: But when you compare that, again, 100,000, most of the clients that we’re working with are making a way above that as a household. So 100,000, 33% of that is covered. It’s not a huge portion of that paycheck, and it’s even going to be smaller the further you climb up kind of the pay ladder. 

So this is to say, and we’re kind of talking at both sides of our mounts, how great of a benefit it is. But it’s also to say that it’s not going to be the end-all be-all for you in terms of retirement, unless your lifestyle just says, hey, I can live off of $33,000, which maybe some people can do that and go from there. So to me, that’s a big thing. If we’re looking at somebody, their stats, Social Security will be a major source of income for many retirees, especially like lower income levels. It represents about 30% of the income for older adults. 

Specifically, when you kind of go down from a gender perspective, about 30% of men and 42% of women receive at least half of their income from Social Security. Then probably one of the more concerning things is that roughly 12% of men and 15% of women rely on Social Security for 90% of their income. Again, hopefully, the people that are on our listeners, because of some of the socioeconomic differences and resources available and, hopefully, the education that they’re receiving from a financial literacy, that will not be them in the future. But it is safe to say that it could be 20 to 30 percent of what you’re relying on, which is getting a good chunk of money. If that can grow because we are differing, and it is inflation-protected, that’s the power of the Social Security benefit.

[00:18:47] TU: Yeah. Tim, this reminds me. One of the takeaways I’ve had just from listening, and you teach and talk on this topic, is to really kind of avoid the polar extremes of use on Social Security, right? I think there’s some folks that, especially maybe earlier in the career, like Social Security is not going to be anything, and we can establish why that probably won’t be the case in the first episode. 

Then here we’re talking about the other side of the spectrum, which is assuming it’s going to fully cover all my expenses, and I think for obvious reasons of what you just highlighted, probably not going to do that for the vast majority of folks. But it can be a really good in-between, just like we talked about building a foundation early in your career with the financial plan here. Like you’ve got this foundation or at least some of the makeup of the floor that’s going to give us some insurances. It’s not nothing but it’s also not going to be everything that we need, as it relates to retirement planning.

[00:19:35] TB: Yeah. Like we mentioned before, like if you’re pretty conservative in your approach, if you can get Social Security and maybe annuity that you purchased by peeling off a couple $100,000 of your investment portfolio, and you can say, “Okay, this check from Social Security, plus this check from the insurance company for my annuity is going to provide for all of the necessities that I need,” like there’s a feeling of freedom there.

Now, someone who has more appetite for risk, they’re like, “Well, I would almost rather just kind of spend down my portfolio and be able to enjoy the things that I want to enjoy without paying that huge bill up front.” But there’s also stress in saying, “Okay. Hey, the market is down 30% and I’m drawing on it,” versus if you were just getting that paycheck built in. So there is a different approach. It’s based on your appetite for risk, and what we’re just kind of describing here is the flooring strategy versus the systemic withdrawal strategy, who I think can be – You can have hybrids of that as well. But, yeah, important to kind of see what is the best way to tackle it for you and go from there.

[00:20:44] TU: Tim, number nine on our list of 10 Common Social Security Mistakes refers to those that may get divorced and then potentially remarry as well. Talk us through what are the implications of the Social Security benefit for these situations?

[00:20:58] TB: Yeah. So sometimes, people don’t know that if they’re divorced and the failed marriage kind of meet certain criteria, you’re actually eligible for a benefit based on your spousal Social Security record or your ex-spouse’s Social Security record. So essentially, the rules for this is that you have to be divorced. The marriage has had to last at least 10 years. You are age 62 or older. You’re still unmarried. Then your ex-spouse is eligible to receive a Social Security retirement benefit or disability benefits and your benefit. So if you’re a worker, your benefit from your own work is less than what you would receive under your ex’s earnings record. 

The other interesting thing, which kind of makes sense because as a divorce say, you’re not like – You shouldn’t be all up in like your ex-spouses like business and when they’re going to retire and claim. But they don’t need to be claiming the benefit. Whereas if I’m married and my spouse can’t claim on my benefit, unless I’ve claimed the benefit. So those are really the rules. So like, again, it might be where if you’ve been married for nine years and you’re looking at divorce, it might be best to kind of get to that 10-year mark, so stay married longer, to activate that benefit. 

Or even just as you move on and have other relationships, whether you want to actually marry or not because once you marry, then that comes off, and then you’re kind of tied to your new spouse’s benefit, that type of thing. So it is one of those things that, obviously, Tim divorce can be a very emotional thing, and we would never advocate for someone to be in a situation that is unsafe or doesn’t make sense for them. But if it’s kind of a more of an amicable thing, it is something that you should definitely use and understand in terms of strategy. 

The interesting thing, Tim, and I listened to a lecture on this, if you’re married and divorced multiple times, I mean, you could have a stable of ex-spouses that can be claiming on your benefit, and that’s kind of where maybe some of the inefficiencies. If I have three or four ex-spouses, and they’re claiming off of like one worker’s benefit that’s been paid into, and then there could be children involved with that, the bill could pile up, so to speak, for Social Security. I wonder, I wonder. This is just be speculating out loud. I wonder if this is one of the things they potentially tighten up in terms of what this looks like in the future. 

So we know that, obviously, divorce is a reality for a lot of Americans and, obviously, this is the benefit that should be there. But I wonder if this is one of the things that they look at in the future. 

[00:23:41] TU: For the record, Shay, nothing to worry about. Tim mentioned three ex-spouses. Just an example, in case she’s listening. 

[00:23:48] TB: Yeah, exactly right. 

[00:23:49] TU: This is the test, right? Is Shay listening to the podcast or not? We’re going to find out.

[00:23:53] TB: She says she does. She says she does. But I probably need to like quiz her or drop some –

[00:23:59] TU: Well, this is deep and a part two of a series, so like –

[00:24:02] TB: I know. For her, she’s probably sleeping or fell asleep listening to me talk about this stuff.

[00:24:09] TU: All right. Number 10 on our list is looking through the wrong lens. Tim, this is a new concept for me, as it relates to Social Security and looking at it as an investment framework or an insurance framework. Describe the difference. Tell us more here

[00:24:24] TB: Yeah. So I think so many people, when they approach the decision on when to claim, they look at it from the vantage point of like, “Okay, if I’ve put money into the system over the last 30 or 40 years as I’ve worked, I want to get as much money back and more.” So a lot of advisors would use what’s called a breakeven analysis. Basically, they would say, “Okay. If you claim at 62, here’s your reduced benefit. But if you were to wait to claim at 70, there’s eight years where you’re not claiming it, and it’s at any increased benefit. So where did those kind of cross?” 

For a lot of people, it’s usually between age 80 and 84. So if you’re like, “Well, my uncle Donald or my aunt Ginny,” or whatever died at 78, then I’m like, “I’m definitely taking it early.” Many retirees, they live a lot longer than they think they will. So the average person at 65, they’re going to live. Once they get to 65, there’s a really good chance you’re going to live to 85 and beyond.

[00:25:25] TU: Yeah. Life expectancy increases once you get to a certain age. Yep. 

[00:25:28] TB: Yep. So I feel like too many people think of it as an investment that only pays off if they live a long time, and they worry too much about what happens if they don’t live as long as they expect. The thought is that this framework gets the focus – This framework focuses on the wrong issue, dying young instead of living a long kind of retirement with a good kind of standard of living. 

The opposite one, where I think the decision really should reside, is in the insurance framework. So why do we buy insurance? We buy insurance because we want to mitigate risk. Again, this is not advice because everyone’s situation is different. But typically, the longer you to defer, the more you kind of scratch the itch of mitigating some of these risks related to retirement, so one being longevity risk. So longevity risk is that you live too long, where you’re going to basically outlast your money. 

Deferring Social Security and looking through for that framework, you get a larger stream of lifetime income, long-term care risks. So one of the things that I talked about with a smile is that you could get to a point where you need to use nursing homes or that type of thing. Because you deferred Social Security, you have more resources, i.e. in your portfolio, later in life to kind of cover that inflation risk. 

Again, we’ve talked about this. A larger percent of your income is protected against inflation. That’s a beautiful thing. Things like frailty risks, which is as you get older and cognitively you might not be as sharp as you were, this really simplifies the decision making because, again, a bigger portion of your income is covered, and it’s inflation-protected. Even things like elder financial risks streams of income is – They’re less at risk to kind of be stolen and take advantage of versus like a couple million dollars in an account. 

Excess withdrawal risk, so this is where you’re locking in larger income stream in Social Security, so eliminating risk of generating income from the portfolio assets. Again, market risks, it eliminates volatility and returns. Then early loss of spouse risk, where you’re deferring, again, a larger benefit. Even if I’m in poor health and I defer my benefit, when I were to pass away, even if it’s sooner, it might be larger than what Shay would do. 

At the end of the day, you kind of look at it from the standpoint of, okay, if I have a short – So if I look at this from the strategy of claiming early versus claiming later, and I look at my retirement time horizon, whether it’s a short time horizon or a long time horizon, the only way that it works out to claim early is that if I claim early, it’s worked out, I get a lesser benefit. But I die early, so it worked out. If I claim early and my time horizon is actually longer, I permanently reduced my lifestyle because the benefit just isn’t as good. If I claim late and I have a short retirement, it’s minimal harm done because at the end of the day, again, a spouse could still use that. At the end of the day, it’s not necessarily there. It’s there to kind of provide a baseline for your needs. 

Then if you claim late and you have a longer time horizon, you’ve permanently increased the lifestyle. Again, that’s where I think that most people will fall is that they’re going to live longer than they think. At the end of the day, they’ve permanently increased their lifestyle because of the deferral credits that they’re going to get 8% a year. Think about it as that 8% a year raise that you get for every year that you defer. 

To me, that’s the crux of the issue. It really should be less about kind of a breakeven analysis and more about what is the impact that a decision like this can have permanently on my lifestyle, and what is it that we’re really trying to tackle. I would argue that the Social Security should be more, again, looking through from an insurance mitigating risk, and then the portfolio is where you’re really trying to maximize, okay, vacation and grandkids and things like that. So everyone’s going to be different. But to me 

I think people are starting to come around on this, as they really look at this and they see, hey, we’re just living longer, inflation-protected, all those things that we talked about in the segments. But it is a really important decision, if we haven’t got that point across, that you want to make sure that you’re looking at this from an analytical approach and then overlaying that, again, with what your goals are in retirement.

[00:30:02] TU: Yeah. I think what you’re highlighting here, which is really interesting, something I hadn’t considered before is this is a framework, a mindset in terms of are you thinking about this more from the investment strategy, more from the insurance, and kind of bringing us full circle. Like what I’m interpreting is if you’re able to plan earlier and throughout your career by building other investment streams that you can pull from, it allows you to have maybe some more freedom and peace of mind and viewing that Social Security as an insurance piece and less as a need on the investment side. I think that’s a really, really great example and something that seems obvious that we need to be thinking about in great detail. 

Tim, this has been great, 10 Common Social Security Mistakes to Avoid. We’re going to continue to build out more information on this topic, I think, I hope, as we’ve highlighted so much to consider around Social Security as a part of the financial plan. We’ve just scratched the surface really here in these two episodes. We also did an introductory episode on Social Security back on 242. We’ll link to that in the show notes. But much more to come, and we’re going to tap into Tim’s expertise and the expertise of the planning team at YFP Planning to really bring us some more content in this area. 

So, Tim, as always, appreciate your time and looking forward to more coming on this topic.

[00:31:15] TB: Yeah. It was fun, Tim. Thanks. 

[END OF INTERVIEW]

[00:31:17] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END]

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Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, to kick off a two-part series on ten common social security mistakes to avoid.

Episode Summary

This week, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, to kick off a two-part series on ten common social security mistakes to avoid. Highlights of the show include Tim Baker sharing about the Retirement Income Certified Professional designation and training and why it is a crucial aspect of the overall financial plan. Tim and Tim dig into tackling the complex and critical decision of when to start claiming social security benefits, why it is an integral part of the financial plan, and how the program is funded. They then get into the weeds on the first five of ten social security mistakes people make and how to avoid them. Major mistakes include not checking your social security earnings statement for accuracy, only considering your benefits or not knowing what benefits are available to you, and not understanding how social security benefits are calculated. Tim and Tim discuss the mistakes of taking social security too early, not working long enough, and not coordinating social security benefits with a spouse and how all impact the financial plan. Listeners will hear practical ways to get on the path to success and learn about resources available to prevent those common social security mistakes. 

Links Mentioned in Today’s Episode

• YFP Planning: Financial Planning for Pharmacists
• Schedule a free Discovery Call with YFP Planning
• YFP 242: Social Security 101: History, How it Works, and Why it Matters for Your Financial Plan
• Social Security Administration
• Your Financial Pharmacist Disclaimer and Disclosures

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. 

This week, I had the pleasure of welcoming YFP Co-founder and Director of Financial Planning, Tim Baker, to kick off a two-part series on 10 Common Social Security Mistakes to Avoid. In addition to talking through just how big a part of the financial plan Social Security can be, we talk about the first 5 of 10 common mistakes, including some big ones like taking Social Security too early, not understanding how the benefits are calculated, and not coordinating benefits with a spouse.

Now, before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 250 households in 40-plus states. YFP Planning offers fee-only high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. 

Okay, let’s jump into part one of 10 Common Social Security Mistakes to Avoid. 

[INTERVIEW]

[00:01:21] TU: Tim Baker, welcome back to the show.

[00:01:23] TB: Thanks, Tim. Happy to be here. I lost my voice over the weekend. So hopefully, this will be okay. But, yeah, I’m doing well. How about you?

[00:01:32] TU: Go Eagles, right? 

[00:01:33] TB: Go birds. Yeah. I was at the NFC Championship in Philadelphia. Shout out to my cousin, Pete, for scoring some tickets, and it was crazy. One of the best sporting events I’ve ever been to. It was great. Yeah. 

[00:01:46] TU: Love it. Love it. So, Tim, you recently completed the RICP training, which connects well with the topic that we’re going to talk about today, considering Social Security is such a big part of the retirement planning process for many folks. Before we jump into the topic today, tell us more about the RICP training and why it’s such an important really aspect to the overall financial plan.

[00:02:10] TB: Yeah. So RICP stands for Retirement Income Certified Professional. I think what it does is it kind of expands further on the deculumation or the withdrawal part of the retirement phase. So I think so much of what the CFP really focuses on is just accumulating assets to get to that destination. I think what the RICP – First, it says it’s not really a destination. It’s more of like a journey. It’s a process. I think a lot of retirees, they think they’re like, “All right, I’m 65. I’ve made it,” and it’s so far from that. 

But then the idea really is to say, okay, we have all of these assets that we built up over the last 30 or 40 years. How do we then translate that into a recurring paycheck that lasts us for the rest of our life, which is a timeline that’s undetermined? So it’s looking at sources of income like Social Security, like retirement plans, like individual retirement plans, like home equity, how does long-term care, insurance, health insurance, Medicare fit into this, any type of executive benefits? If you’re a single business owner, what are the risks in retirement? What are your overall goals? What are we trying to accomplish? 

Kind of really put that together as people are transitioning from the workforce, sometimes very abruptly, whether it’s their choice or not. Sometimes, it’s a phased retirement. But to do that in a way that, again, is sustainable for the course of the plan. So that’s really what it is. Obviously, Social Security is a huge part of this and probably one of the biggest things that a retired professional or a retired person has to answer is how does one access. How does one determine Social Security benefits? When should I do this? How? 

Yeah. I think it’s often an overlooked part of the of the plan. There’s so much focus on climb the mountain. But if you ever watched any type of documentaries about Everest, probably the hardest part is getting down and the most dangerous. So that’s kind of the best analogy I can give.

[00:04:23] TU: Yeah. That’s why I’m excited not only to dig deeper into Social Security, which we’ll do on this episode of the next, but to dig deeper into more of that climb down the mountain, right? We’ve spent a lot of time in the first five and a half years of this podcast, talking about issues related to the climbing up the mountain. I think that whether someone’s approaching retirement, whether they’re in the middle of their career, or whether they’re on the front end of their career, beginning to think about this, and even if it’s, “Hey, I’m on the front of my career, but I’m planting some seeds.” 

Obviously, for those that are listening that are a little bit closer, there’s some tangible takeaway items that they can implement, hopefully, sooner rather than later. But so much attention given to the front end, the accumulation side. We want to spend some more time here in ’23 and into next year as well, talking about the decumulation. 

So today, we’re kicking off a two-part series on 10 Common Social Security Mistakes to Avoid. We’re going to tackle five this week. We’ll tackle five next week. Just about a year ago, we talked Social Security 101, including the history, how it works, why it matters to the financial plan. We’ll link to that episode, which was episode 242, in the show notes. Tim, we’re not going to rehash everything we covered in 242. But let’s get some of the fundamentals related to Social Security on the table so that we have a framework to consider, as we talk about these 10 common mistakes. 

So first and foremost, I think that decision about when to claim Social Security benefits, arguably one of the most important decisions that clients will make, that individuals will make, is in your retirement. Why is that the case?

[00:05:54] TB: I think it’s the case because for a lot of Americans, it’s going to be the biggest source of income that they have, even more so than money that’s coming from a 401(k) or equity built in the house. So many people – There is this impression that Social Security is going to be the paycheck that dominates. Unfortunately, for a lot of people, that’s the case. Hopefully, for a lot of our listeners, that is not the case because of either good planning outside of Social Security or even good claiming strategies. 

The thing that makes Social security so powerful, one, is backed by the full faith and credit of the US taxpayers backed by the government, which is probably some of the surest assets that are out there, no matter what you think about. Where the economy is going or if Social Security’s going to be there, it is, I think, one of those things, unfortunately or fortunately, that it’s just too big to fail. So people hear horror stories about it’s going to go bankrupt. It’ll be there when – If you’re 25, 35, 45, if you’re listening, it’ll be there. It might not be what it looks like for retirees right now. But nonetheless, it will be there. 

I think one of the big thing I think that is often overlooked, and we’ll talk about that, is it is inflation-protected. So when we saw inflation run rampant in 2022, Social Security and a lot of these other government payments that go out went up, I think, by about 8.7%. One of the things we’ll talk about this is like you can’t buy an annuity that has a COLA, that has a cost-of-living adjustment out there. So one of the big strategies is that you want that Social Security payment to you and your spouse to be the largest it can be.

I think so many people, so many retirees, similar to like a student loan strategy, kind of just goes with the flow or talks to a colleague, and that becomes the basis for how they approach their security. But it really needs to be a lot more in depth than that. It’s going to be a big part of your retirement paycheck. We want to make sure that we have all the data, and we understand the system to be able to make the best claiming decision that we can. 

When we talk about our first point here, I’ll give an example of just looking at my own statement what that looks like. Obviously, I’m a few years off. But when we talk about the student loans, the delta between scenario A versus scenario Z can be hundreds of thousands of dollars. So that’s important to understand.

[00:08:28] TU: Tim, just a general scope, I think you make a good point that whether it’s a good thing or a bad thing, depending how you look at it, maybe too big to fail. I think there’s many folks that are maybe earlier in their career, they hear pay Social Security, and they think, “Hey, that’s not going to be a thing.” But I think if we take a step back and really look at just how big Social Security is in terms of like who receives the benefits, how many people receive the benefits. 

[00:08:52] TB: Yes. Some of the numbers? 

[00:08:52] TU: Yeah. And how big this is for many folks in terms of their income in retirement.

[00:08:58] TB: Yeah. So the number is the majority of American retirees receive more than half of their retirement income from Social Security. So that is the most important retirement asset on the balance sheet, so to speak, even though it doesn’t show up as something on their balance sheet. There’s just a lot of dollars involved. A client who currently claims benefits at the age of 70 and who is eligible for maximum Social Security benefit will receive a benefit that’s like 50k a year. 

So over 20 years, that really kind of relates about a million dollars in inflation adjusted spending power. So if you think about that in that context, where it’s like, “Oh, it’s 1,500 bucks a month or it’s 3,000 bucks,” maybe it doesn’t hit. But there’s a lot of dollars involved. Really, for a lot of people, not everyone but working longer and deferring, which we talk about with an investment, typically how you feel is what you should do. You should do the exact opposite in investment. 

It’s almost like the same with Social Security. It’s like if you’re like, “Man, I need to get out of my job. I’m ready to retire,” working longer and differing are strategies that can have the most impact to help you kind of mitigate the longevity risk, is the risk of running out of money because, one, it’s another year where you’re not spending in retirement. But it’s also another year where you’re deferring, and you’re potentially earning credits, deferral credits, that makes that dollar amount larger. 

We’ll talk about the whole, well, if I put money into, I want to make sure I get every dollar out. People look at this from a breakeven perspective, which I think is a little bit flawed, and we’ll talk about that in one of our things. But if we actually break down the numbers, there’s about 47 million retired workers who are receiving benefits that are around $73 billion per month. So it’s huge. 

The second biggest pie are disabled workers. That’s another thing that we’re going to outline. About eight million disabled workers receive about $10.3 billion. Then there’s survivors’ benefits. So this is, typically, you have a worker that dies, and they have children or a spouse that might be receiving benefits, about six million or survivors that are receiving benefits at about 7.3 billion. So it’s very much a piece of the puzzle. 

We’ll talk about kind of the averages when we – I think in part two, where we’re talking about like how much this is actually percentage-wise covered from a paycheck perspective. So it’s a big thing. Again, like I think just like we talked about other parts of the plan, you got to take the emotional inventory. You got to take what the actual statements or the balance sheet looks like, and then make the best claim decision for you. That’s, hopefully, some of the things that we’ll uncover.

[00:11:43] TU: So with that, let’s jump into 10 Common Social Security Mistakes to Avoid. Again, we’ll tackle five this week. We’ll tackle five next week. So tip number one Common Social Security Mistake to Avoid is not checking your earnings record for accuracy. Tim, whether someone is nearing retirement, listening in the middle of their career or listening on the front end of their career, tell us more about where they can go to find this information and making sure that they don’t make this mistake.

[00:12:09] TB: Yeah. I think in an effort to go more paperless, I think back in the day, once you reach a certain age, you get like a statement every month. Now, I think they’re moving to every quarter. They’re trying to kind of modernize. For maybe retirees, that can be a little bit of a hard sell. The best place to go is to ssa.gov. You can – It’s the my Social Security website. I signed on right before we hopped on here. It’s really easy to get on, and the website is actually pretty easy to navigate. We’ve talked about some other things related to student loans. The websites that the government built actually is pretty good, same thing with like the IRS tools. S

When I log on, Tim, just to kind of give you a description of what this looks like, I can download my Social Security statement. I can go and replace my Social Security card. I can view my benefit verification letter. The big thing that catches my eyes when I first log in, it’s called the eligibility and earnings section. It basically says that you have 40 work credits you need to receive benefits, and there’s four blocks. There’s a big checkmark, which basically means that I have earned enough credits to earn Social Security. 

So Social Security credits, you can earn for a year. You earn a credit by – I think in 2023, dollars is a little bit more than $1,600 in that year. So 1,600 times four, if I earn that amount of money, then I get four credits. Essentially, I need 40 credits to collect Social Security. So it’s essentially 10 years of earnings. But the cool thing is that under that section, it says review your full earnings record now. So when I click on that, it takes me to the eligibility earnings, and it goes back, essentially, from when I first started making money back whenever that was. 

When we talk about accuracy, one of the big things that you want to do is you want to make sure that when I filed my taxes in 2022, it shows the tax Social Security earnings dollars, and this is basically how they calculate that. There is a cap, but that’s basically how they calculate what your benefit is. So I can go back and see, okay, this is the amount of money I made in ’21, ’20 for me, all the way back to 1998, Tim, where I earned $353. 

[00:14:25] TU: Love it. 

[00:14:26] TB: So this is really important because they’re looking at the way that the – And we’ll get into this a little bit more, but they look at, essentially, the 35 highest years of earnings. If there aren’t 35 years, then they essentially use zero dollar year, which moves your average down. So you want to make sure that when you’re reviewing this, that your earnings record is correct. It’s not infallible, like you find errors here. So you want to make sure that when you go back and you’re looking at the top 35 years, that it’s accurate. You’re getting the best benefit you can. 

It basically lists for me from 2022, all the way back to 1998. I’m just eyeballing. I’m like, okay, that makes sense because I left the workforce here, or I work part time or that type of thing, just to make sure it looks good. The other thing worth mentioning when we talk about deferral, for a lot of people, the last years before they’re retired is typically their highest income years. So that’s another feather in the cap of like defer work longer. We’re closer to that full retirement age and beyond that. For a lot of us, it’s going to be 65. But then the longer you defer to age 70 is when the benefit gets the highest. The earnings record is going to be the biggest thing in terms of accuracy and making sure in that. 

But the other cool thing about this, Tim, is there’s actually like a section on here that shows me if I were to retire at age 67, it says your monthly benefit at full retirement age is going to be $2,599. So it shows me like this pretty cool graph that says, okay, at age 67, this is your full retirement age. Your benefit’s 2600 bucks, if I retire early, say five years early at 62, which is the earliest I can collect it, that drops to $1,774.

[00:16:21] TU: It’s almost 900 bucks, right, yours Tim?

[00:16:22] TB: Yeah. Yeah, exactly right. But then if I defer, so if I worked three years longer from age 67 to age 70, that goes up to the delayed retirement where I earn referral credits, 3,231. So that’s the thing is like when I’m when I’m talking about tens of thousands, if not hundreds of thousand, the earliest I want to get out, it’s 1,700, 1,800 bucks. The latest, age 70, eight years later, 3,231. 

So that’s where – Again, and this is inflation-protected. So that’s a huge thing, where those dollars go up every year with what the index says. But then you can also look at disability benefits, I mean, if you have them. It talks about Medicare part A and B, and how you qualify for that. But it’s just a good – When we talk about when we work with clients, get organized, the big thing is looking at the balance sheet, looking at what’s coming in income-wise. Like this is going to be a huge part of that for the retiree or someone who’s transitioning into that. So checking it, making sure it’s accurate. 

The earnings is going to be a huge thing that a lot of people don’t do. You want to make sure that you audit it as you go and make sure it’s accurate. So if it’s not, you can make the necessary adjustments.

[00:17:39] TU: Yeah. So takeaway number one, if you haven’t already done so or recently done so, ssa.gov. Log in to my Social Security. You can access your statements, look at the dashboard. Tim’s looking at and talking about, obviously, looking at whether or not you have the 40 work credits. Then looking at some of those simulations for when you may retire. 

Tim, I also like – You can play with some of this, right? So you can change your future salary. You can include a spouse or not include a spouse. You can see how that changes the benefits amount as well. So similar to some of the credit I’ve been given to the Department of Ed lately on what they built, that is studentaid.gov, I think they’ve done a really good job with this, so credit where credit’s due. 

[00:18:17] TB: I agree. Yep. 

[00:18:19] TU: So that’s the number one mistake, not checking your earnings record, not being aware of your Social Security account. Number two, Tim, is only considering your own benefits and not knowing what other benefits are available. So I suspect that folks are most familiar with retirement benefits in Social Security but perhaps to a lesser degree or maybe not even all some of the survivor and disability benefits. Talk to us about really the breadth of benefits that fall under the Social Security benefit.

[00:18:48] TB: Yeah. So the retirement benefits are the big one, and one of the things that is often overlooked is kind of that, yeah, those spousal benefits that are available for non-working spouses as early as age 62. Typically, a lot of the benefits are like kind of hinged on the worker. So if the worker isn’t collecting, then the spouse can’t collect, unless there’s a divorce, and we’ll talk about divorce here later. If it’s a separate household, even though you’re divorced and maybe you had to be married at least 10 years, then you can collect, even if the working divorced spouse is not collecting. 

To go back, a lot of the benefits hinges on the working spouse collecting the benefit, unless retired. But the worker must claim the worker benefit to trigger the spousal benefit at full retirement age, which is kind of that middle number, so 67 for me. If you’re a little bit older, it could be 65, 66 years old. But at full retirement age, the spousal benefit is 50% of the workers’ PIA, and we’ll talk about that a little bit. But basically, that’s the number that they use. 

The spousal benefit is not affected by the age that the worker claims benefits. So it’s basically once the worker claims it, it’s 50% of that benefit, but it can be reduced if – The spousal benefit can be reduced if it’s claimed before that full retirement age, which again, for me, is 67. Then deferring that benefit does not increase. So there is no referral credits for a spousal benefit. So getting that beyond full retirement age doesn’t make any sense. The spousal and survivor benefits do not increase, like I said, past full retirement age. 

The other interesting thing is that if a spouse is caring for a child that’s under 16, you can receive the full benefits, regardless of the caregiver’s spouse’s age. So there’s a lot of just little like nuance here that if you aren’t part of Social Security, you can, again, look these up and see if you would be eligible for a benefit. But this can also be paid for a dependent, an unmarried child under 18. So if I’m 65, and I’ve retired, and I’m collecting my benefit, and I have a 15-year-old daughter, they’re eligible for a benefit, as an example. 

Then if there’s a disability, as long as the disability started before age 22, there’s another benefits there related to that. There can be, Tim, a fat family like maximum applied. So like if my family – If I have two dependents and a spouse and then myself and then we’re all drawing like four checks, essentially, there is a cap per family that has to be considered, and that changes over time. 

It’s just interesting to know, again, a lot of people overlook this. Unless they’re looking at their mail, which there might be some notices here, or working with a planner sometimes, like this goes unpaid. So you want to make sure that, again, this is a system that you pay into as a worker. That you want to make sure that you and your dependents have the ability to collect the maximum amount.

[00:21:50] TU: Tim, one thing that stands out here real quick is it feels like this is a good example. I mean, there’s many that you just listed off there, where really getting in the weeds and planning could be helpful. But I’m thinking about – Selfishly, I think about my situation, Jess, and others that maybe have a nonworking spouse. Like when you talk about things about a spousal benefit and the percentages and that being hinged on the worker and that it doesn’t have the deferment credits, like there’s really some calculations to be done there of like does it make sense that there’s a strategy around spouse gaining employment, and what might that look like, and what’s the net benefit relative to the time. 

Or if the plan is that there’s a nonworking spouse, and it’s going to remain that way for whatever reason, then kind of understanding some of those nuances, right? It’d be hinged on the individual that’s working. What are the risks and benefits of that? Then also, that there’s not things like that deferral credit, right? So there’s a lot to unpack there.

[00:22:49] TB: Yeah. Even taking a step further, if your full retirement age is 67, and you decide to take it at 67, the things that you would have going on there is, say, your benefit is $5,000 at 67. Jess, if she decided not to work, it would be 50% of that, so $2,500. Or do you wait to get that 8% every year, which is essentially going from 67 at age 70, it increases by 8% every year. So you say you claim at age 70, which she can’t claim until you’re claiming, and then she gets 50% of that, right? 

If you were to pass away or she were to pass away, you basically get the larger of that benefit. So if you’re at 5,000 and she’s at 2,500, that’s 7500 hours for the household. But then if you were to pass away before her, she would get your benefit. So you would get 5,000, but the other 2500 we’re going to turn off. So the exercise then is what is the best strategy for you to claim to get the maximum out versus deferring. So there’s lots that goes into this. 

Again, even me making blanket statements of like, “Hey, deferring usually makes the most sense,” for your case, maybe that’s not the case because you want to turn that benefit on as quickly as possible because deferring for her is not going to really matter. 

[00:24:12] TU: Yeah. But that highlights the value of the planning here, right? Yeah. I mean, you talked about at the beginning building a retirement paycheck. Well, that paycheck is going to come from multiple sources. Here we’re only talking about one source and within that one source all the decisions and the nuances.

[00:24:28] TB: Exactly, right. Yep. The second population of people, Tim, so everybody we’ve talked about so far in terms of like benefits, that’s like the worker and like their dependents. So the next bucket is for when that worker dies, so you have like a survivor benefit. When a person who has worked and paid Social Security taxes dies, certain members of family may be eligible for survivor benefits. So a widow, widower would get full survivor benefits are available at full retirement age, but reduced benefits can begin as early as age 60. 

This is a whole another ball of wax that we get tested on for the RICP. That can be very confusing to understand. If the widow or widower is disabled, the benefits can then begin as early as age 50, not 60. Then full retirement, full benefits are also available if the widow is caring for a deceased person’s child who is under age 16. You can also get survivor benefits if divorced spouses are under certain conditions. Or unmarried children younger than 18 can also get a benefit. Children under the age of 80 or 18 or older, if you’re disabled before 22, so this kind of falls very similar to the worker benefits. Then dependent parents aged 62 or older. So if I am –

[00:25:43] TU: Interesting. 

[00:25:45] TB: Yeah. So say I’m taking care of my mom, and I’m receiving a work benefit, and then I die, my mom might not be receiving a check for Social Security. She might get her own. But if she’s not, then she has the ability to actually get a benefit based on my Social Security. Again, a lot of nuance when a worker passes away as well.

[00:26:07] TU: Tim, what about disability? I know this is an area when I’ve talked to folks before that are evaluating Social Security, asking questions, thinking about Social Security, it’s always focused on the retirement income side of it. But a big part of Social Security on the disability side as well, correct?

[00:26:23] TB: That is correct. I think what we had said in the beginning that it is the second most behind – Yeah, second most behind workers benefits is the disabled workers. About 8.1 disabled workers receiving about $10.3 billion per month. This one’s tough, though, because the Social Security definition for disability is pretty strict. So to receive disability benefits requires providing proof that the worker is incapable of engaging in any type of gainful employment, any type of a gainful employment. 

You have to be in a pretty tough medical status to be able to get this, and they typically have an end date. So they’re paid until the earliest of death, the end of disability, or attainment of full retirement age. So then you would go – So if I were disabled at age 55, and I was still alive at age 67, then I would switch over to my worker benefits. It can be pretty strict to be able to get the disability benefit, but it is the second largest after workers benefits. It’s a pretty strict interpretation of work and gainful employment. 

It is important to know, again, do I have a worker benefit? Do I have a survivor benefit available to me or my kids? Do I have a disability benefit? So kudos to the website. I would be on there. Obviously, there’s a lot of education, but then being able to log in and see, hey, I do have this benefit because I paid enough into it. There’s some assurance there, to know that.

[00:27:57] TU: Tim, when I see on the disability side that the worker is incapable of engaging in any type of gainful employment, my first thought is, well, this seems to be why, for so many pharmacists, we’re often looking at standalone long-term disability insurance policies that have some type of an own occupation component to it. Am I reading that correctly?

[00:28:16] TB: Correct. Yep. Yep. 

[00:28:17] TU: Okay. Yeah. 

[00:28:19] TB: Really, the reason for that is like what often happens, if it’s not an occupation, say I’m a pharmacist and say I’m in an awful car accident, and I cognitively can no longer do the work of a pharmacist, that doesn’t necessarily mean I can’t do the work of bagging groceries or doing something like that. So what the insurance company could say is like we’re going to deny the claim because you can still have gainful employment. It’s just not for the employment that you were trained for. So that’s just – Yeah, it’s important to know that. 

[00:28:51] TU: Good stuff. Number three on our list of 10 Common Social Security Mistakes is not understanding how benefits are calculated. Tim, admittedly, this is something I know very little about. You’ve already thrown around a term. I’m sure you’ll define PIA. Tell us more about the formulas that are used to determine one’s benefit?

[00:29:09] TB: Yeah. So the two big terms here is the PIA, the primary insurance amount, and the AIM, the average indexed monthly earnings, which I alluded to a little bit. So the worker’s benefit is tied to the primary insurance amount, PIA, which is a benefit formula applied to the worker’s average indexed monthly earnings or AIMs. That’s a mouthful. So the way you get to aim is you add together all of the index wages for the highest 35 years, and you divide that by 420 months or 35 years, and that’s the AIM. 

So if you look at this on a timeline, the timeline zero is kind of the PIA. Then anything before that, so if you retire early, say at 62, that’s kind of a reduction, and I’ll take you through the math on that, then anything to age 70, which is the opposite on the spectrum, is a credit. So the worker’s benefit is reduced by – Of course, we don’t want to make this simple, Tim, but it’s five-ninths of 1% of the PIA for each month before retirement age up to 36 months. So essentially, you’re getting a haircut five-ninths of 1% of PIA for every month before your full retirement age. 

If it’s greater than 36 months, it’s further reduced by five-twelfths of 1% per month. So in my exam, I’m basically calculating this. I’m like, okay, the full retirement age is 65. They – Yeah, no doubt. So here’s an example. If we’re claiming 44 years early, that’s 48 months. So the first 36 months, it’s five-ninths of 1%. Then the last 12 months to get to the 48 is five-twelfths of 1%. So if I do the math there, that’s a 25% reduction. So five-ninths times 36, plus five-twelfths times 12, the 12 months is 25%. 

[00:31:06] TU: Four years early. 

[00:31:08] TB: Correct. So that tells me that my paycheck is reduced by 25%. So if my primary insurance amount was 1,500, then my benefit would be reduced by 25% or 1,125. The scary thing or not the scary thing, but the problem is, Tim, is like once you do that, there are some like you can unwind it. If you claim early, you have 12 months to kind of give the money back. Or you can give them money back and say, “I’m just kidding. I want to actually defer.” 

But once you take that haircut, you take that haircut. Again, you still might get the cost of living so that 1,125, if you’ve got that in 2022, you still get the 8.7% increase. But I would rather have the 8.7% increase on that 1,500. So if you defer the worker’s benefit, it increases by two-thirds of 1% for each month, until age 70 or 8% per year. So if that 1,500, basically, I go all the way out to age 70, for every year, essentially, it’s about 8% per year, which is why when I was looking at my benefit, I’m like, all right, 2,600 bucks at age 67, if I wait to age 70, 3,231. That’s kind of the idea.

[00:32:27] TU: What was your spread, Tim, your low to your high, 62 to 70? What was your –

[00:32:31] TB: 62, I’m getting $1,774. To age 70, I’m thinking 3,231s. What is that? 70, 80% difference between the two or something like that?

[00:32:43] TU: Quick $1,500 about. Yep.

[00:32:45] TB: Yeah. It’s significant. We’re talking about this a little bit, Tim, but what people are saying is like, “Well, if I retire at age 62, I’m probably going to live to age 65.” Like people have kind of very little sense of their own mortality, and they typically live longer than what they think. Now, that’s not always the case. There are some people that it does make sense to claim, and we’ll talk about a little bit more of the mindset. But a lot of advisors and people, it’s like, well, it’s kind of a breakeven. It’s like, well, if you are collecting at 62, that’s eight years of collecting it at that versus waiting at 70. There’s a breakeven analysis that you can do. But I think that’s flawed in a sense, in terms of it looking at it from an investment decision versus like an insurance decision. We’ll talk about that in the next episode.

[00:33:34] TU: Tim, a question I have, when you talked about the benefit going up 8% per year by deferring, is that 8% plus the COLA then, just like it was on the downside? You know what I’m saying?

[00:33:48] TB: Correct. 

[00:33:49] TU: Okay. 

[00:33:49] TB: Yeah. 

[00:33:50] TU: Yeah. I mean, that’s wild, right? I was just kind of taking those numbers like, so instead of 1,500 going to 1,125, getting reduced by 25%. Essentially taking that up 8% per year and, obviously, it’s 8% on the 8%. But then adding to that the COLA piece, like that’s where the numbers start to really deviate.

[00:34:08] TB: Yeah. Again, this was a crazy year, so –

[00:34:13] TU: Yeah, that’s right. That’s right.

[00:34:14] TB: I’d have to look at in terms of like what the – But I feel like it’s gone up, even in years of very little inflation. The CPIW, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers, is essentially what they use to adjust it, even if it’s a 1%, 2%. Yeah. That’s completely separate from the deferral credit of 8% that you receive away from inflation. Again, that can be huge. 

[00:34:41] TU: Yeah. Yeah, absolutely. Again, I think this is a good reminder, like we’re talking in generalities. I think you mentioned, Tim, the importance of, hey, we can run the math. You can run a breakeven. But it doesn’t stop there, right. As we highlighted earlier in our conversation, there are so many layers to this and considering spousal benefits and quality of life and overall health condition, what you’re doing. 

I mean, there are so many things that consider that, yeah, I mean, there are cases where someone may claim early, as we look at generally. Certainly, the math here would advocate that deferring makes sense, but that may not always be the decision. I think that’s where the planning really comes into play. 

All right, number 4 on our list of 10 Common Social Security Mistakes is taking Social Security too early, not working long enough. Tim, we talked about this a little bit already, and perhaps it’s due to the age of my parents and in-laws, where this topic is one that comes up a lot. But this feels like a topic that is often discussed, often debated. So talk us through some of the major implications here.

[00:35:42] TB: Yeah. Just like any other parts of the plan, Tim, like what we’re really trying to strive for here is optionality. I can speak to my own parent, at least my dad. When he retired, it was kind of out of his hands because his company was bought by another company, and he was kind of duplicitous. So his options there were, okay, find a new job at 65 or whatever it was or start retiring. 

Again, like if I’m him, in that moment, I’m probably trying to use other sources of income. So I can then defer Social Security, get the biggest benefit. Sometimes, your plan is out of your hands because of external things like that. You want to prepare yourself as best you can to kind of cushion the blow, again, if you are, if you do kind of get phased out of the workforce. A lot of it, it’s related to scale backs and things like that. But sometimes, a lot of it is health. 

Sometimes, you’re like, “Oh, I’m definitely going to work to age 65, or I’m definitely going to work to age 70.” I think it’s something like 40% of the time, that’s not the case. So 40%, that’s a coin flip, a coin flip, Tim. Sometimes – Now, just because you’re not working doesn’t necessarily mean you have to claim Social Security. But for a lot of us, especially for a huge portion of that, you have to, right? But the argument that I would make is that if you can build a plan to have enough retirement assets or being able to tap home equity or taxable brokerage assets to kind of bridge that gap, it allows for further sustainability later because just more of your dollars are coming from Social Security, versus taking a 30% haircut or whatever it is. Yeah. Not working long enough is huge. 

The other factor is that, again, typically, towards the end of your careers, when most of us are working or earning the most money, which, basically, we’re looking at the highest 35 years, so it could be I’m making $200,000. If I decide to work another year, $200,000, maybe that’s taken zero or that $358 a year that I had in 1998 off the table. Then my benefit is going up even higher. 

But then the other side of it is like it is another year, where you’re not essentially senior. You’re not in senior unemployment, i.e. retirement, where you’re not basically generating your retirement paycheck yourself, which, again, is the whole purpose of retirement. So there’s a lot of people that are now really trying to either phase into retirement, or they have lifestyle, jobs, or businesses, or things that they do that maybe bring some dollars in that they’re not full stop. 

Because, again, from an emotional standpoint, we talk about this from an identity perspective, a lot of us like my identity is very much wrapped up in the job that I have, which can be unhealthy. But we’re seeing high levels of depression and drug use, alcoholism in retirees that we haven’t seen before. I think it’s because a lot more people are talking about it. But that’s another benefit of like easing in from a work perspective. 

But as we talked about it, again, it’s a 30% reduction if you claim at age 62, versus full retirement age. If you work past it to get the full credits, 8% per year. The difference, it can be like 70 to 80 percent between age 62 to age 70 in terms of the benefit, if you defer. One of the things that is if you’re listening to this, and you’re like, “Ah, I just retired summer of last year, and I took the benefit right away,” there isn’t the ability. It’s called a withdrawal of application, which can be made by a worker within 12 months of claiming the benefits. 

It’s basically like a take back seats, like do over. You’re like, “Oh, I just kind of did what everyone else is doing, and my situation maybe requires some more TLC and attention to see. Like maybe I can get by or not claim this. I can work part time. I can consult or do whatever to kind of grow that benefit to –” Where you’re getting that 8% raise to age 70. I think that’s important. Really important to look at.

[00:39:57] TU: Tim, one of the things that just hit me as we were talking, to reiterate something we lead with, is the need for time, attention, love, planning, whatever you want to call it for Social Security. We spend so much time – When I think about numbers like $5,000 a month, right, just throwing a round numbers here, as we’re looking at some of our examples, $5,000 a month, and the attention and time we give to building and putting together a nest egg that would generate $5,000 a month, while we, I think, largely often kind of wander, walk into perhaps on some level and inform the decisions around Social Security, the implication around Social Security, a very similar level here we’re talking about, and it’s substantial, significant level, several thousand dollars per month. 

I think it just highlights, as we’re digging into some of these numbers and how to optimize it, how much time and attention Social Security does really need and deserve as a part of the financial plan and one that admittedly – We look back over the first five years and said, hey, we haven’t really talked about Social Security. It’s a huge part of the financial plan, and that’s in part why we’re talking more about it right now.

[00:41:02] TB: Yeah. Again, just like anything, the financial plan is not necessarily built in a day. I think a path towards financial freedom, how you just decide that, is months. It’s years. It’s decades of being very intentional, of working towards stated goals. Social Security is a part of that. Again, we often think of it as just I’m earning money, 35 years of earnings in the background. But a tweak here or a tweak there, someone listening, and they’re like, “Hey, I can definitely earn $1,600 times four a year to turn that benefit on for me.” 

Even if it’s a small benefit, I mean, that might be a car payment. It might be a chunk of rent. It might be groceries. So I think every little bit counts. At the end of the day, what really – Again, it goes back to the being intentional but then optionality when you get to that moment. Again, like one of the things that we do – Again, if we use the term, if we use 5,000, 60 grand a year for that, we might need another 60 grand to live. 

So let’s say it’s 120,000. Essentially, what we’re doing then is we’re looking at those alternate sources, which could be pretax dollars from a traditional 401(k), after tax dollars from, say, a Roth IRA, a taxable account. We’re kind of trying to bring all those in, and it could be money from home equity. It could be money from an annuity that we take a chunk of the portfolio, and we say, “Hey. For us to get to a minimum, maybe it’s not – Maybe we need 80,000.” So maybe we buy a $20,000 annuity for that year or for like a term or whatever to get to that level. Then you know that based on Social Security and based on what that annuity is going to pay you that I’ll food, I’ll have a roof over my head, all those basic necessities. So everything else that’s coming from the portfolio, which is kind of cream. 

Essentially, what I’m describing is like the flooring strategy. But, yeah, it’s huge. It’s huge. Again, I think what we’re advocating for is just intentionality. So it leads to optionality in the future.

[00:43:23] TU: Yeah. It’s separate conversation for a separate day. But just things that are coming into my mind as we walk through some of this if you have a solid flooring strategy in place, if that’s the route and pathway you’d go, like does that change your risk tolerance or risk capacity around investing or other opportunities? Again, all this feeds into to one another. 

All right, let’s wrap up this two-part series on 10 Common Social Security Mistakes. We’ll finish up with number five here, and we’ll pick up next week with 6 through 10. Number five is making sure that we’re not looking at this in a vacuum and specifically not coordinating benefits with a spouse. Tell us more about this one, Tim.

[00:44:01] TB: Yeah. Kind of I’m thinking about this. We do have a lot of people that come through the door that’s like, “I’m looking for a financial plan just for myself,” but they’re married. I’m like it is hard to do because up and down, whether it’s a shared benefit like a home or even something like Social Security, like you got to be on the same page. 

As we said, the spousal benefit does not increase if the worker defers benefits. But a survivor benefit may. You can get credit based on that because it’s based on the PIA of the worker. One of the things that like we often hear is like, “Well, I’m in poor health, or like my dad and my uncle, they all died in their early or late 60s, early 70s.” But it might make sense. So even if the spouse, who is in poor health, it might make sense to defer the benefit because the longer you defer – 

Again, if we give an example of spouse A has a benefit of 1,700, and spouse B has a benefit of 3,000, that’s a $4,700 per benefit. But if I can defer spouse B to get the 3,500 or to get the 3,800, I still can either pick mine, which is 1,700, or my spouse’s at 3,000, when they do pass away. 

Again, it can’t be looked at a vacuum. You really have to look at everything. But a lot of people at default, they’re like, “Hey, I just got to get the money as quickly as possible.” Because I put all this money into, I want to get out. That kind of goes back to like the whole investment. So it really is important for you and your spouse to go back to the first one, where it’s like look at your earnings. Look at everything. Make sure it’s accurate. Then really coordinate the benefit that maximizes the dollar for the household, when both spouses are alive but then also when one spouse predeceases the other. 

So not in a vacuum, just like so many other pieces of the financial plan, you need to really make sure that there’s a coordination strategy there to, again, maximize the benefit and not leave money on the table.

[00:46:00] TU: Tim, one of the themes I’m hearing from you, especially for folks that are listening that have still a decent runway to save, is what can we be doing to take off that pressure of early claiming, if that’s not the move that we would desire to make, for the reasons we’ve talked about looking at the dollars and cents here?

Can we build those other sources that we can pull from, when it comes to that retirement paycheck? You mentioned the traditional retirement accounts, Roth IRAs, brokerage accounts, etc. Can we build those up in a way that relieves that pressure? Then if the decision really should be different for some and, again, that may not be a blanket for all, but we take that out of the equation, pressure out of the equation. 

[00:46:42] TB: Yeah. I think this all goes back to like goals, like what is your goals around retirement? It’s funny. Like it goes back to all the other pieces that we talked about what the financial plan. It’s like what’s the balance sheet say? What are the sources of income, and where are we trying to go? What are the goals? It’s the same, whether you’re starting out, or it’s the same, whether you’re starting to wind down your career, so to speak. 

Having a good eye on like where you’re at and where you want to go is just as important at age 60, 65, 70, as it is at 25, 30. To me, it’s really, really important to have these conversations out loud. I always – I laugh at myself, where I’m like, “Man, I love what I do. I love the work that we’re doing at YFP. I can see myself working at least till age 70 to get ready for retirement age.” But I also know that like we can be fickle creatures, right? Something could happen outside of our control that just makes the work that we’re doing a lot harder. There can be a lot of things. 

So I think even checking in with yourself, checking in with your spouse in terms of like what you want is important. But then if you do have to kind of pivot because of maybe some of the things that we did 20, 10 years ago, we have the option to say, okay, we can still not be hasty with our retirement claim or Social Security claiming strategy because we have the ability to pull through other sources to still max them out, max out like what we get from the system. 

Again, like I would almost say that this decision is going to be one of the bedrock decisions, if not the bedrock decisions, because we’re looking for sure things. Although, again, like there might be differences in the benefit in the future, it’s still going to be there, and it’s still going to be inflation-protected and all those things that is really positive about the Social Security benefits. So, yeah, I think, hopefully, this is a good first five and looking forward to getting to the next five. But I can’t stress the importance of this decision on the retirement income plan.

[00:48:43] TU: Great stuff as always, Tim Baker. We’re going to pick up next week, as we continue with 10 Common Social Security Mistakes to Avoid. Again, I’d reference you back to episode 242, where we relate some of the foundation around Social Security. We look forward to talking more about this topic throughout the year. 

For folks that are listening, especially, Tim, I’m talking about folks that are maybe in that later part of their career, nearing retirement, a lot of these questions are really coming to life around Social Security. It’s moving from the education to the decision making, if you will. We’d love to have a chance to talk with you to determine whether or not the financial planning services that we offer at YFP Planning are a good fit for you. So you can do that by booking a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com. 

Tim, thanks so much, and we’ll be back next week. 

[END OF INTERVIEW]

[00:49:29] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. 

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. 

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week. 

[END]

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