• Brendan Sheehan

Social Security & Retirement Planning: A Hit or Myth Proposition

Despite the economic impact that Social Security has on this country today, the myths

and misunderstandings that are out there about what it is, as well as what it is not,

are overwhelming. Understanding what the program is, recognizing what it isn't, and

dispelling some of those myths about Social Security can set you on the road to more

comfortable retirement.


In our latest video, Social Security & Retirement Planning: A Hit or Myth Proposition, we talk about how dispelling the myths and misunderstandings of the Social Security program can help you better achieve the retirement you want.


Watch the video below, or scroll down to read the transcript.


Topics Discussed:

  • What was the original intention of creating the Social Security program?

  • Should you rely on Social Security benefits as your only income after retirement?

  • How to maximize your Social Security benefits and better plan for retirement.

  • When should you collect your Social Security benefits?

  • Choosing the best Social Security strategy based on your personal situation.

You can watch this video and others on the Waymark Wealth Management YouTube channel.


Video Transcript


Brendan Sheehan: All right. Hello everyone. Looks like we have a big group of people. We've got about 13 folks that have joined us and hopefully a few more as we start. Thanks all for joining us. As our emails and Facebook page have indicated Waymark will be hosting these monthly workshops, so this is the first one.

Brendan Sheehan: I'm so really thrilled to have Kurt with us today. He, as we mentioned in the emails and the invitations, he was the Social Security administration's former regional communications director for New England. I think that the New England part doesn't really necessarily apply, New England, this is a federal program, so therefore he's going to be able to speak to pretty much the entire program and everything is pretty much specific to or isn't specific to the state of Massachusetts. I know we do have a few folks joining us from outside of Massachusetts, so that's that.

Brendan Sheehan: So again, just as indicated in the email, we'll be doing these on a monthly basis. This is a new thing for us. Next month's seminar is going to be on a state planning, so basics on a state planning like wills, powers of attorney, et cetera. We also will be talking about some year end tax saving strategies in November, budgeting around the holidays, obviously in December, some divorce planning, health insurance and Medicare and improving your credit score. That's all in 2020.

Brendan Sheehan: As I mentioned, Kurt has joined us. He is, as we were talking about prior to the workshops semi-retired [crosstalk 00:01:59]-

Kurt Czarnowski: Semi-retired, yes. Living the dream one day at a time.

Brendan Sheehan: This is what he does as his quote unquote semi-retirement job. He does workshops like this for groups, but also does meet with people individually. If at the end of all this you think that it might make sense especially if you're about around that time where you actually have to make a decision, Kurt may be our guy to speak with one-on-one to vet out your different options.

Brendan Sheehan: So we'll try to keep ground rules here. Try to keep this about 30 to 45 minutes and open it up for questions for another 15 minutes, and depending on how long those questions last, we'll try to do a hard stop at one hour to respect everyone's time. To ask any questions, there is a Q&A button at the bottom of your screen that you should be able to see and you can type in your question. We'll see it. It'll pop up on our screen by not everyone else's screen, and we'll try to answer that if it's within the context of what Kurt's talking about. If not we'll just table it for later on the conversation.

Brendan Sheehan: We'll also have a few interactive polls and that I'm going to start right now, which is just to get an idea of what we actually are looking at in terms of who we have on the call. I'm going to ask you, this is anonymous. I don't get too hung up on this, you can choose how old you are so that we can get an idea of where we are with the audience here, just so that Kurt can tailor this presentation towards that. So we're getting a few responses. We've got about 60% of the people voting so far. It looks like everyone's pretty much around obviously 62 and 62 is the bulk or younger than. So it looks like we have a number of folks that are starting to think about this and it's becoming actually a real decision that they have to make.

Brendan Sheehan: That's great. Thank you for voting, we'll end the polling here. Pretty much the results, that's what we're looking at. I'll do it from here is make this presentation a little bit bigger for the screen, and I'll turn it over to Kurt. So, let's go for it.

Kurt Czarnowski: Thank you. Good afternoon everyone who's here, [inaudible 00:04:32] Kurt Czarnowski. I'm currently the principal in Czarnowski Consulting. Proud to say we're an international consulting firm, whose world headquarters that conveniently located in the basement of my house in Norfolk, Massachusetts. In Czarnowski Consulting we'd like to say we provide expert answers to your Social Security questions, and why can I say that the bullet Brendan mentioned. I worked for the Social Security Administration for 34 years. Last 20 years I was the communications director in New England, which meant I spent my time out talking to folks about the program.

Kurt Czarnowski: And in my retirement such as this, continue to do that same type of work largely because I enjoy it, but also because I believe there's a real need for the information. Leaving off the Social Security program is now a little over 84 years old. Each and every month, Social Security pays about $84 billion in benefits to about 63 million people. On top of that, there's another 177 billion folks are now out there working and paying into the program. When I saw during my time with the agency and not even about my own [inaudible 00:05:33] things with the program like the size of the program.

Kurt Czarnowski: Despite the economic impact that Social Security has this country today, the myths and misunderstandings that are out there about what it is as well as what it is not, overwhelming. Nobody knows nothing about Social Security. Hopefully in our time together today, spend a little time helping you better understand what program is, recognize what it isn't, dispel some of those myths and misunderstandings, and set you down the road to the comfortable retirement, we all want joy. Next slide please.

Kurt Czarnowski: Most important slide in the presentation is going to be this one. You'll hear me reference it over and over again. People need to understand that when Social Security was created, a little over 84 years ago, it was put in place simply provide people with a base or a foundation of income. They can count on being there for them, but it's a base or foundation that people must take steps to supplement. But unfortunately these days for about 21% of retiree couple households, the Social Security money that comes into them each month is virtually the only income they have, a terrible situation.

Kurt Czarnowski: How do you avoid that happening to you? Simple, by planning for retirement obviously, and you'd be commended. Taking a little time out of your busy day, spending some time with me today, planning for this aspect of retirement, Social Security. Next slide please.

Kurt Czarnowski: Now for the longest time, the Social Security administration had tried to play an active role in helping you plan for your retirement, because back in the day, meaning back starting in 1999, Social Security with mail on an annual basis, a document to everyone, a Social Security Statement. It would go out to anyone who was 25 years of age or older, would ever pay it into the Social Security program and it was not yet collecting benefits. That's Social Security Statement designed to provide you with a benefit estimate of retirement payments at three ages, 62, your full retirement age or 70, but also provided a very nice year by year breakout.

Kurt Czarnowski: What Social Security had recorded is your working earnings under the program. We'll see in a little bit, what you eventually collect each month is directly related to what you're working on then, so it was important to look at that information, make sure that the earnings credited to you were accurate, because if they weren't it was important to catch it and correct it, because if you didn't would have a direct impact on what you eventually received. We may have noticed, I haven't got one of those over year lately. What's the deal? Social Security has cut back on the distribution of paper, Social Security Statements.

Kurt Czarnowski: First and foremost now, they no longer mail a paper document to everyone aged 25 years of age or older. Instead, what they have set up is a system whereby if you go to, URL is on your screen, www.socialsecurity.gov/myaccount, and take about 10 or 15 minutes or so to set up your individual Social Security account, an important byproduct of having that account in place is you'd be able to download a Social Security Statement for yourself whenever you need or want one. You're going to come in and do some retirement planning. Having set that account up, will enable you to have a current statement in hand, which is going to make that a more worthwhile exercise.

Kurt Czarnowski: So, big message for me is that's how you primarily get your hands on the Social Security Statement, is by setting up your individual account and if you haven't done yet, I encourage you to do so. But Social Security has announced they've decided to resume mailing paper documents. I'll be it on a very limited basis though. Here's what they say is if you were 60 years of age or older and haven't set up an account, they will mail you a paper statement same old schedule about three months before your birthday. But that's it for mailings. Anyone under the age of 60, the only way you get a statement is by setting up your account.

Kurt Czarnowski: But in my view, even if you're over the age of 60 I think it makes sense to set that Social Security account in place, because then again you want to come in and do some retirement planning, having a current statement in hand is going to make that a more worthwhile exercise. Key message for me, take advantage of this planning tool. Next slides please.

Kurt Czarnowski: But one of the things about the statement, gives you benefit estimates only at three different agents, 62, your full retirement age of 70, and then preparing the estimate because Social Security has no idea what your future work plans are. They've instant calculation on an assumption that you're going to keep working, making the same amount of money you've been making for the past couple of years. Who knows what I do planning for retirement, they'd be interested in collecting at ages other than just those three, may also be interested in figuring out what would happen to your Social Security benefit if, I don't know, you quit work on Friday and never worked another day in your life.

Kurt Czarnowski: So another retirement planning tool you should avail yourself of is Social Security's online retirement estimator. Use of the estimator is, it allows you to develop what if scenarios, your heart's content if find out how much you get if you started to collect that, I don't know, 64 years and four months or 68 eight months or whatever age you're interested in. Ans so you can also find out what would happen to your Social Security payment if you did a deep, what works this Friday, never worked another day in your life.

Kurt Czarnowski: So a key message for me, you've got to plan for retirement. You've got to recognize the Social Security program, intended to provide you with that base of income, that foundation that you can count on being there. But you've got to find ways to supplement that because it was never intended to be your only source of income in retirement. So take advantage of those planning tools. Next slide please.

Kurt Czarnowski: Let's talk about retirement benefits. This is where most people would call or approaching that. As I traveled around the country and talked to folks about retirement benefits, most frequently asked questions has to be, well, when should I take my money? Well, understand this, you've got choices and you've got options. What I'm trying to do today is help you understand what those choices and options are. In other words, I want to help you understand what you can do under the program. But ultimately deciding what you should do, and mind you, that's your choice, your decision. You're the ones who've worked and paid into the program. I can't tell you what you should do.

Kurt Czarnowski: But what I can do is tell you what you can do and my view is if you don't fully understand what you can do, you're in no position to make that informed choice about what you should do. So let's make sure you understand your choices and options. The place to start is by making sure you know what Social Security calls your full retirement age. When the program started back in 1935, full retirement age that by Congress says the most, you turned age 65. And when it was age 65 for every one without exception, and continue that way frankly until 1983 though when Congress changed the law, increased full retirement age for everyone born 1938 or later.

Kurt Czarnowski: This increase gradually been phased in over time. We're now at the point for a big chunk of the baby boomers. Anyone born between 1943 and 1954, full retirement age is the month you turn age 66. But it's important to note, it continues to increase beyond that and under current law tops out anyone born 1960 or later, Social Security full retirement age is the month you turn age 67. You understand this, collecting at full retirement age, that's not your only choice. It's not your only option. But you need to make sure you know what your personal full retirement age is based on your birth. As you'll see as we go through the discussion today, a lot of features of the program do flow from at least having reached your full retirement age, so make sure you know what yours is. Next slide please.

Kurt Czarnowski: In terms of collecting benefits, so you have to start the month you hit your full retirement age, that means one thing and one thing only, means you'll get 100% of the amount your work earnings and title you'd receive. We'll talk in a second how that all gets calculated. But starting at full retirement age, you get 100% of your benefits. But among the many options you have or start before reaching full retirement age, if that makes sense for you. I know the rules today, you can start to collect payments as early as age 62. But here's the thing, Social Security as the name applies as a social insurance program, and Congress has built certain social goals into it, and what is the hope that everyone ends up with roughly the same amount of lifetime benefits regardless of when they start to collect and so under the rules.

Kurt Czarnowski: You have to start taking your money before you hit that full retirement age month. Well now by starting earlier, in theory then you'll now be collecting for a longer period of time. Well, you'll find that your monthly payment amount gets reduced. How much of a reduction? Well, it's roughly half a percent per month, for each month prior to your full retirement age, you have to collect benefits. Half percent per month, roughly at 6% per year [inaudible 00:14:04] but again, you don't have to start right on your birthday, you don't have to start the first retirement year. But if you opt to collect before hitting that full retirement age month, your benefit amount's going to be reduced by roughly half a percent for each month that you collect.

Kurt Czarnowski: And by the way, it's a permanent reduction. None of those myths that I've encountered, too many folks mistakenly think, yeah, I know I'll start early, I'll get less, but as soon as I hit my full retirement age, my payment will zoom back up. Uh-uh (negative), permanent reduction again, the idea of being, you're starting sooner. In theory, collecting them for longer period of time so you're given less on an individual monthly basis. As I mentioned, you start right at full retirement age, that's when you get 100% of your benefit. But among the options you have are to wait pass full retirement age before starting, if that makes sense for you. And with that social insurance idea in place, you opt to delay.

Kurt Czarnowski: Well now by starting later in theory then, you'll be collecting for a shorter period of time. So you'll find that by waiting your monthly payment amount ought to be increased and it is. These are referred to as delayed retirement credits and for each month past your full retirement age, you opt not to collect your benefit, you'll find your payment amount now been permanently increased by two thirds of a percent. Two thirds percent per month, translates into an 8% per year increase by waiting. But again, you don't have to not collect for a full year to accrue these delayed retirement credits for each month past full retirement age that you'd defer, benefit permanently increased.

Kurt Czarnowski: But here's the key thing. Delayed retirement credits only accrue from whole retirement age until the month you turn age 70. Full retirement age to age 70. Now understand this, you never have to take your Social Security payments. It's not like there's a required minimum distribution or anything, but if you opt to differ from your full retirement age until age 70, you'll see your payment increased by two thirds of percent for however many months you didn't collect, but you opt to wait past age 70 before starting. That's an option you have, but you're not going to see any additional increase because you waited past age 70. Next slide please.

Brendan Sheehan: [inaudible 00:16:21].

Kurt Czarnowski: You certainly can.

Brendan Sheehan: One of the things I was showing to Kurt was a picture of what Kurt just walked through. It also gives Kurt a chance to gran glass of water. But bottom line is there are two segments here. This is if your birth year was 1954 or earlier, your full retirement age is age 66. If you took it out at age 62 you're looking at about a 75% full retirement age benefit. If you took it all the way out to age 70 you're looking at about 132%. If you look at the 1960 or later, your now full retirement age is age 67 where you would get your full benefit. But if you took it early, you'd only get about 70% because again now we're looking at 67 minus five years at a 6% drop each year.

Brendan Sheehan: And then versus the age 70, what Kurt was pretty much saying a moment ago, is you only have from 67 to 72 grow at 8% or per year, so you get about 124%. So this is another way of looking at it. Then each one of these in the middle here is this, is a birth year, '55, '56, '57, '59, this is a slide that I could share with you so if you are interested in seeing this slide or another slide that I'm going to show probably a little later in the presentation, feel free, I'm happy to just share that with you.

Kurt Czarnowski: That and then the next few slides, I was going to cover exactly the same thing. That was to give you a couple of examples of a people. First one we'll talk about someone with a full retirement age of 66, and then pointed out you start full retirement age of 66, you start at age 62, you gets 75% of your benefit amount, at your full retirement age of 66 to get 100%. You wait all the way until age 70, you see that 8% increase each one of those four years means you're receiving 32% more. The important thing is it's simple interest, not compounds, but it's 132%. Next slide please.

Kurt Czarnowski: Is just the similar information for somebody with a full retirement age of 67, reinforcing start at age 62, still allowed to do that under the law, but you're going to see a greater reduction in your benefit. Full retirement age is 67, you get 100%. At age 70, three years worth of delayed retirement credits, major payments, 24% higher. Bottom line though, and all of these, as I said, it's your choice, your decision. You're the ones who've worked and paid into the program. Now what are the things I think you should be thinking about? Well, there's the obvious ones that I'm sure you already are.

Kurt Czarnowski: Your health for one, longevity for a second factor. You need the money, you're going to keep working. All those factors come into play, but the whole idea when Congress set this up, was it based on average life expectancy? It was all supposed to come out about even. But the important thing to me these days is life expectancy is increasing. Social Security numbers say if you're a 65 year old man today on average, you're going to live to age 84, 65 year old woman on average, you're going to live to age 86, but even more telling to these Social Security numbers say today's 65 year olds, one in three expected to live to age 90, one in seven, age 95.

Kurt Czarnowski: We baby boomers need to focus on the fact that retirement for us could be a period of 2025 or maybe even 30 or more years of life. My personal view tends to be for most [inaudible 00:19:57] as they head into retirement these days, if they have any type of pension at all, that's far more likely to be the defined contribution type 401k, 403B, 457, where you're walking out the door not with a guaranteed stream of lifetime income like you used to get with that traditional defined benefit pension, no you're walking out the door with a pile of money.

Kurt Czarnowski: So it seems more likely to be that later in retirement, that pile of money will have diminished somewhat, later in retirement healthcare costs may be higher, so you may have a greater need for a higher monthly income later in retirement than when you make that initial transition, and one way you can meet that need is by delaying the start of your Social Security benefits. But again, it's not for me to say, it's someone's individual choice, individual decision, I just want to make sure you're making an informed decision, which is you start sooner, you get a lower amount for the rest of your life, you wait longer before you start, you get a higher payment amount for the rest of your life.

Kurt Czarnowski: But again, when Congress set the reduction rate, increased rates so many years ago based on average life expectancy at the time, it was all supposed to come out about even. But now because life expectancy is increasing, I tend to think the good things come to those who wait. But again, not for me to say, your choice, your decision. Next slide please.

Brendan Sheehan: All right. I'm going to share a couple... I'm just going to jump in again.

Kurt Czarnowski: Yeah, absolutely.

Brendan Sheehan: I'm going to share another slide because we have gotten a couple of questions about the average age or average life span of a healthy male. What's the optimal age to start collecting, and I'm sure Kurt will talk about collecting Social Security while you're employed, but we'll talk about that in a minute. But I want to show you a slide. Again, this might be a little bit too much detailed but I do think that it's, for those of you who we've been following along with this slide, I think it's pretty much again echoes the points that that Kurt was talking about.

Brendan Sheehan: Specifically what this is saying is that if the client's full retirement age is 66 and six months, but I wouldn't get too hung up on that amount. Bottom line is if you start taking your retirement benefit at age 62, we know that it's a lower amount. In this specific case, the full retirement amount would be 1653 per month. For this person it would be reduced to 1080 per month, but you actually have four years of a head start rolling that cumulative pile of money that Social Security has actually given to you.

Brendan Sheehan: So what this chart is actually showing is that right around age 76, is when it would have been better for you to have claimed your retirement benefit at full retirement age, in order to maximize this. And down here it's pretty much saying this is the probability that if you were a man, female or a couple, that you would live to that point. So it goes back to the law of averages. In the case of men, 27%, it would have been better for them to claim it at age 62 because they will have passed on between age 62 and 76. For a woman, in general again looking at these statistics, 81%. So it's actually more beneficial for a woman to actually wait until full retirement age or longer to claim hers.

Brendan Sheehan: What you see here is the break even for taking it at age 70 is right around 80. That's really where that break even actually happens. So from a longevity standpoint, if you have a lot of longevity in your family, and there are a lot of people that live to age 80 and longer, then you may want to think about delaying a little bit longer than normal. But again, it's something that I've talked to a number of clients about, is if you actually need so... that's one side of the argument. One side of the argument is delay as long as you possibly can because again, looking at percentages, there's a 60% chance if you're a guy that you'll be living age 70 and further, 71% if you're a female and 88% of you're husband-wife. That's one side of the argument.

Brendan Sheehan: Other side of the argument is if you're out of work at age 62 and you need to actually start a claiming or actually start drawing from your investment portfolio, and let's say it's 2008 and the market's down 30%, do you want to take from your investment portfolio and start selling things at that discounted negative 30%, or do you want to get quote unquote free money from the government to supplement your lifestyle? So it is not an easy question to answer. It's individualized for every single person. But at the end of the day, if you're just looking black and white at this, there's a very high likelihood that you will be here later on in life so it would make sense for you to delay as long as you possibly can.

Kurt Czarnowski: All right, so let's move on from the when you can collect to how benefits are figured. The second area I get questions about all the time. As I mentioned before, there's a relationship between your work in your earnings and what you receive each month from Social Security goals so in a second, it's not a perfect correlation. But in calculating payments, Social Security simply uses the formula that Congress has written right into the law. Formula has a number of different steps.

Kurt Czarnowski: First step is that Social Security will go back and adjust all of your prior year earnings for inflation, bring them all up to what they are in today's dollars. But then once they've done that, they calculate your benefit by plucking out and averaging your highest, wait for it, 35 years of work under the system. Another huge area of misunderstanding. I don't know how many folks I've talked to over the years, we certainly think, well it's based on my high three or my last five, like some other pension systems. Uh-uh (negative), Social Security benefits are calculated by averaging your 35 highest use of work under the system.

Kurt Czarnowski: So what happens if you don't happen to have 35 years you've actually paid into Social Security. You've taken time out of the workforce to raise kids, care for aging parents or perhaps work for one on the job where you hadn't been paying into Social Security? No provision for that. It's still going to be an average of your 35 highest years of earnings, and Social Security applies a formula to that to determine your monthly benefit amount. Next slide please.

Kurt Czarnowski: Here's what I want to emphasize again today, is Social Security in that social insurance program, and putting the formula in place. Congress has recognized that people have lower paying jobs, less likely to have a pension of any type. Less likely to be able to save for retirement during their working years because they, excuse me, need their money for food, clothing, and shelter. So the system does try and help people with lower paying jobs by providing a benefit amount which is intended to replace a higher percentage of their pre-retirement income. Some of them have had 55%.

Kurt Czarnowski: For a higher earner, by all means, they get more each month on absolute terms. But if you look what that payment represents, designed to replace a smaller percentage of someone's pre-retirement income. For the average earner these days, the key point is Social Security payment only designed to replace around 41% of what you're making. And in no case, low earner, high earner or average earner is the payment intended replaced 100% of what you're making. It leads us right back to that first slide I showed you. You got to understand the programs designed to provide you that base of income, that foundation, but you've got to find ways to supplement it because it was never intended to be your only source of income and retirement.

Kurt Czarnowski: Two numbers to think about this afternoon, 2019 the average Social Security retirement benefits being paid $1,461 a month. What can $161 a month a little over $17,000 a year. Then the question comes up, is there a maximum payment? Well, qualify it by saying in 2019, somebody who was at full retirement age of 66 this year and who for each of the past 35 years has had earnings at or above whatever the taxable maximum has been, because that's an important point. Each year there's a maximum, excuse me, maximum level of earnings upon which Social Security tax is imposed. This year you could make a half a million dollars, you only pay Social Security tax this year the first $132,900 that you make. Anything above that, you'll pay a Medicare tax, but you don't pay that 6.2% Social Security payroll tax.

Kurt Czarnowski: Well, when it comes time to average your earnings to calculate your benefit, Social Security only averages the earnings up to taxable maximum for a particular year. So to recap, 2019 somebody at full retirement age of 66 this year who has reached the past 35 years has had earnings at or above whatever the taxable maximum has been, this year he or she receives $2,861 a month, close, $35,000 a year in Social Security. Nothing just needs that, but it's a base, the foundation and you've got to find ways to supplement it. Next slide please.

Kurt Czarnowski: Let's move on to talk about working in retirement. We have a question on that, but it's another area that I get questions about all the time. And here's another area where it's important to know what your Social Security full retirement age is. Because of the rules of the program, if you are under your full retirement age, looking to collect benefits, but intending to work at the same time, need to understand that you're limited in how much you can earn before it begins to impact your ability to collect.

Kurt Czarnowski: And in 2019 if you're under your full retirement age, you're allowed to make up to $17,640 without any loss of benefits whatsoever. You make 17,640 or less, you'll be paid full Social Security payments every month of the year. You make above that doesn't mean you can't necessarily collect it all, but Social Security events starts to hold back $1 in benefit payments, for each $2 that you're over the threshold. So what counts towards that 17,640? Two things only, wages and your net income from self-employment. In other words, earned income only. That whole wide world of unearned income, you might be receiving, a VA benefits, general motors pension, 401k distributions, bank interest dividends, none of that counts towards that 17,640 threshold.

Kurt Czarnowski: But the good news is from the month you reach your full retirement age on, there's no longer any earnings limitation imposed on you whatsoever. From full retirement age on, you can work and earn as much as you'd like and collect Social Security payments at the same time. Now people frequently ask, "Hey, I'm retired but I'm going back to work. I don't have to pay Social Security tax on my earnings, do I?" Well, yes you do. If you're in a job covered by Social Security, which is good news for the folks at Social Security because they can use the money. For this potentially good news for you as well, we mentioned your benefit's always calculated by averaging your 35 highest years of inflation adjusted income under the program.

Kurt Czarnowski: And so, even if you consider yourself retired, you go back to work when the job is covered under Social Security, the good news for you is if the earnings that you've had are higher than the lowest of the 35 years that Social Security had been using to calculate your benefit, you file your tax return, Social Security does a match and they will automatically recompute your benefits. They'll drop out the lowest of the 35 years, plug in this new hire year and will result in a payment increase for you going forward. And disability to increase your payments for additional work and everything continues forever.

Kurt Czarnowski: Delayed retirement credits? Yeah, they stop at age 70. No additional bump past age 70 by not collecting. But no matter how old you are, if you're working, paying into the system and your earnings are higher than the lowest of the 35 years that had been used to calculate your benefit, well it's going to be automatically recomputed each and every year giving you credit for that higher year of earnings. The other bit of good news frankly about work is it never hurts. So you've been a high priced executive, but in retirement, take part time job at the local golf course, driving the beer cart around. Does it make a couple thousand bucks?

Kurt Czarnowski: Well, at the end of the year that a couple thousand dollars probably going to be lower than the lowest of your 35 years. So what happens to your benefit amount? Nothing, it stays the same. It's always based on your 35 highest years and inflation adjusted income. So I said a while ago. I think good things come to those who wait. I think good things can come to those who work as well, because as long as you're working, paying into the system, there's always the possibility that your payment's going to go up, it's never going to go down. Next slide please.

Kurt Czarnowski: Let's go into a discussion about spousal benefits, survivor benefits, divorce spousal benefits. We'll touch quickly on the one remaining Social Security claiming strategy that's still out there, that people might be able to take advantage of. The spousal benefit program under Social Security has been around for 60 or 70 years, put in place by Congress to support the model of the American families in the 1950s and the 1960s, so whenever I discussed the Household Benefits, I illustrate it by referring to what in my baby boomer estimation was the prototypical American family, the '50s the '60s.

Kurt Czarnowski: It was the Cleaver family from the TV show, Leave It to Beaver, because Ward Cleaver was the breadwinner, he worked, June Cleaver, she was a stay at home mom. And Social Security basically supports the Cleaver family model in its spousal benefit program, by saying that Ward Cleaver, breadwinner. He'll get a benefit based on whatever that work he was under did. Let's say he gets $1,000 a month at his full retirement, June Cleaver as Ward's spouse at her full retirement age is eligible to receive a payment amount equal to 50% of Ward's full retirement age amount or in our example, $500 a month, that's paid to her in addition to what's paid to Ward, and it's paid to her even though she may not have worked a day outside the home in her life.

Kurt Czarnowski: Now, for June to collect as a spouse though, a few conditions have to be met. First and foremost, Ward Cleaver and needs to be collecting before June can receive that spousal payments. He must be collecting. Second, for June to collect as a spouse, just be at least age 62. Earliest age, spouse can collect no different than on the retirement program. If she's at her full retirement age, when she applies, that's when she gets the full 50% of his full retirement age amount. If she's younger than that, it's reduced.

Kurt Czarnowski: That's the third key point. The spousal payment is based on 50% of Ward's full retirement age amount, not necessarily 50% of what he may actually be collecting. For example, Ward full retirement age amount of thousand, but he waits till 70 to start to collect, so he's receiving $1,320 a month. At her full retirement age, June spousal payment is still only going to be $500 a month, 50% of the full retirement age amount. That's the '50s and '60s. Let's flash forward, '70s, '80s beyond because now in all likelihood, June Cleaver will have worked outside the home, will have paid into the Social Security program and will have earned a benefit on her own. How does that all work together?

Kurt Czarnowski: Let's say Ward's still got his $1,000 dollars full retirement amount, but June's earned to benefit on her own of $800 a month. They had the Social Security together, Ward gets his 1,000, June gets her 800. Social Security starts saying goodbye and good luck and June goes, "Hey, hey, hey, no, can't fool me. Where's my $500 spousal payment that I've heard so much about?" At that point, the good folks at Social Security go, "Sorry, June. As Ward's spouse, you can receive that 50% of his full retirement age amount, or your own, one or the other, whichever one is higher, but you don't get both benefit amounts at once." Because in our example our $800 benefit exceeds 50% of Ward's full retirement age amount, that's what she collects.

Kurt Czarnowski: Now, say she hadn't worked that much, so her own benefit was only $250, well sure at that point Social Security would give her an additional $250 on top of her own, bringing her up to that 50% of Ward's full retirement age amount. Spousal benefits incidentally, the program's absolutely, totally, completely gender neutral. Meaning, the cleavers had been ahead of their day back in the '50s and Ward was the stay at home dad and June was the primary breadwinner, then everything I talked about here would be equally true. That he could get 50% of her full retirement age amount, or his own, but it's always one or the other, not both at once. Next slide please.

Kurt Czarnowski: Let's slash forward though and talk about survivor benefits and here is some good news for June, that's if Ward dies. Because now with widows and widowers, the basic rate for June is not going to be 50% of Ward's full retirement age amount, no it's going to be 100% of his benefit. Oh yes, still or her own, one or the other, whichever one is higher, not both at once. For example, Ward's getting 1,000 June's getting $800, Ward dies, assuming June's at her full retirement age amount, she'll immediately begin to receive an additional $200 a month, moving her from her own $800 benefit up to that thousand dollar level that Ward had been receiving. That's the good news.

Kurt Czarnowski: Bad news though, if you think about it, while he was alive, they were getting $1,800 a month in Social Security payments. Him 1,000, her eight, he dies we'll sure her individual payment goes up, but it's like her old benefit goes away. It's just something you need to plan for because it's one or the other, whichever one is higher. The other point I want to make is this. Ward, full retirement age amount of 1,000 but he opts to wait until age, 70 so that when he passes away, he's receiving $1,320 per month. Well, the better news for June is now her own benefits at $800 payment increases past the thousand all the way up to the 1320 that he had been receiving.

Kurt Czarnowski: Remember that by opting to weight, not only is your own benefit higher than it would be if you started sooner, but it also means that any survivor payments that could be made after your passing is going to be higher as well. Another reason why I tend to think good things come to those who wait. A couple of the points, what is the widowers can start to collect as early as age 60 but the same concept told, you start early, you get a reduced amount. Then it's important to remind folks though that under the rules, say you have worked and paid into the program and your spouse passes away. Well sure you collect on one account or the other at a time, but it is possible to sequence the collection of benefits.

Kurt Czarnowski: Start to receive a reduced payment amount for example on one account and then at full retirement age switch over and collect the full unreduced amounts of the other. For example, June Cleaver, widow at age 60. Opt to collect the reduced survivor benefit, collect, collect, collect, collect and then at her full retirement age, at that point apply for and receive a full unreduced retirement benefits based on her own work activity, or perhaps even wait until age 70, before claiming her own. Again, you get one amount or the other at a time, not both at once,

Kurt Czarnowski: But it's important to point out. If anyone is under full retirement age, whether you're looking to collect your retirement benefit, a spousal benefit or a survivor benefit and you're working, you're going to be subject to that earnings limitation we have referenced a few slides ago. So June Cleaver, widow at age 60 still working, making a half a million dollars a year, she's not going to be able to receive that survivor benefit, not because she's not old enough, not because she's not a widow, but under full retirement age, work and earnings impacts someone's ability to collect.

Kurt Czarnowski: But June continues to work, at full retirement age that earnings limitation goes away so she could conceivably claim the survivor benefit, then be paid that even though she's still working, defer collecting her own, and at age 70 file for her own retirement benefit and she'll have maximize it by waiting all the way to late 70. So, point to note, you collect one amounts or the other at a time, you don't get both payment amounts at once, but it is possible to sequence the collection, that you can collect on one and then switch to the other. Next slide please.

Kurt Czarnowski: Quick reminder about divorce. After many happy years of marriage, Ward had [inaudible 00:40:41] his 24 year old secretary and June divorced him, then she collects as a divorce spouse? Well, if a few conditions have been met. First and foremost, the marriage needs to have lasted at least 10 years prior to the divorce. Generally for regular spousal benefits, it's simply a one year duration of marriage requirement but in cases of divorce, marriage needs to have lasted 10 years. Second, for June to be able to collect, she cannot be married. She has to be unmarried. Ward, he could have remarried without impacting her ability to collect on him, but for her to be able to collect as a divorced spouse, she cannot be married.

Kurt Czarnowski: Thirdly, has to be at least age 62 or older. At least age divorced spouse can collect no different than regular spousal benefits. Now, remember when I talked about spousal benefits, I said June couldn't collect unless and until ward was actually collecting. But what the law says in cases of divorce, as long as they've been divorced for at least two years and both of them are at least age 62, she can begin to collect based on his work record, even if he has not yet started to collect. Again, divorce has to have been finalized for at least two years. They both have to be at least age 62. She can collect based on his work record, even if he has not yet started yet.

Kurt Czarnowski: So those conditions being met what's she entitled to receive? Simple, as if the marriage was still intact, she gets 50% of his full retirement age amount or her own, one or the other. He passes away 100% or her own, one or the other at a time. And the last bullet, the law treats divorced spousal payments is absolutely independently from anyone else in the record. So Ward could have a whole series of 10 year marriages, each one of those exits could potentially collect without impacting anyone else's benefits. When we talk about spousal benefits, survivor benefits, divorce spousal benefits. Next slide please.

Kurt Czarnowski: Quickly bring you up to date on a Social Security claiming strategy that is rapidly going the way of the dodo. This is something called Claim Some Now; Claim More Later, sometimes referred to in the literature as filing a restricted application for benefits. What was it all about? Well we'll illustrate it with the cleavers, this is a situation where both Ward and June had worked, both had paid into the system. Let's say Ward's going to full retirement age amount of a thousand, June's full retirement age amount, 800.

Kurt Czarnowski: June decides to collect Ward though says, you know what, I'd like to wait. And he's wondering is there some way he can get some money while he waits to claim his own retirement benefit under this whole Claim Some Now; Claim More Later strategy, there certainly was. June's collected, but if Ward waited until his full retirement age. He has the option at that point of in essence picking and choosing. He had the option of taking just the spousal benefit, receiving 50% of June's full retirement age amount, without first having to claim his own retirement benefits. By doing that he'd be paid something, but in the meantime his own benefit would be accruing delayed retirement credits growing by that 8% per year.

Kurt Czarnowski: Key thing was June had to be collecting and Ward had to be at full retirement age. Because if you went to Social Security before reaching full retirement age, you didn't have that option of picking and choosing if you will. You always deemed to be applying for both your own retirement benefit and the spousal benefit, you'd be paid one or the other, whichever one were higher. That's the old law. What's the new law say? Well, this all the change was all brought about November, 2015 with passage of something called the Bipartisan Budget Bill of 2015, which allowed for a phase out of this strategy.

Kurt Czarnowski: Under current law, if you were born January 1st, next slide please, born January 1st, 1954 or earlier, if you have reached your full retirement age and your spouse is collecting, you still have the option of filing a restricted application claiming just the spousal benefit without having to take your own retirement benefit first. One more time, for January 1st '54 or earlier, at your full retirement age of 66, if your spouse is collecting, you still have the option of taking just a spousal benefit without first having to take your own.

Kurt Czarnowski: But anyone born after January 1st, 1954, in the vernacular, you're SOL and you no longer have the option of utilizing the strategy, you are going to be deemed to be applying at whatever age you go to. Social Security won't have the option of picking and choosing. By the way, nothing that I've talked about in the elimination of the strategy changes what I had talked about in terms of survivors, widows and widowers, having the ability to pick and choose one benefit and then switch to another. This is simply spousal benefits. So again, windows closing, but there may still be some applicability for this strategy for anyone born January 1st, 1954 or earlier. Next slide please.

Kurt Czarnowski: Just a quick reminder about taxation of benefits. Prior to 1983 Social Security benefits, absolutely completely federal tax free. That year, Congress changed the IRS code. So if you are a higher income Social Security beneficiary, you'd be required to pay federal income tax on up to 50% of your benefit payments. How did they define higher income? Well, single tax file, you had income, an excess of $25,000, a couple filing jointly in excess of 32, then you'd be required to pay federal income tax on a portion of your benefit payments that year. Only about 10% of all Social Security beneficiaries paid settle income tax on a portion of their payments.

Kurt Czarnowski: But what Congress didn't do was index those two thresholds and here we are 36 years later, just be aware, if you're a single tax file or you have income from all sources in excess of $25,000, couple filing jointly in excess of 32, you're not going to be a position where you'll have to pay federal income tax on up to 85% of the benefits you had received in the prior year. Gets treated this ordinary income tax at whatever marginal tax rate you're at. These days about half of all Social Security beneficiaries do pay settle income tax on their benefits. At the end of the year, Social Security sends you a 1099 form you use that as filing your tax returns.

Kurt Czarnowski: And just the important reminder, we're talking about federal tax liability. State tax liability varies from state to state. The vast majority of states, 37 out of the 50 states do not tax Social Security payments, but 13 States do. So you're going to be retired somewhere, need to check with the state tax authority as where you're residing to find out whether or not your Social Security benefits are going to be subject to state income tax.

Kurt Czarnowski: All right, last slide please. Big finish. I would like to wrap up and end where I started. Key message for me is you're making this transition to retirement, learning about Social Security, just recognize the programs intended to provide you a base of income, a foundation that you can count on being there, but it's a base of income that you must take steps to supplement because it was never intended to be your only source of income in retirement and the sooner you recognize that, take those steps, the more likely are to have that comfortable retirement.

Kurt Czarnowski: Hope the information has been helpful. We've got about 10 minutes left. I'd be happy to take questions that people may have on anything I've talked about or didn't talk about.

Brendan Sheehan: So once again, use that Q&A button at the bottom of the screen. While some of those questions are starting to come in, and so far nothing yet so feel free to start plugging away. We still got Kurt for another 10 minutes.

Kurt Czarnowski: So let me answer a question that will anticipate. So how question I get all the time, particularly around the Commonwealth of Massachusetts, has to do with how does the receipt of a public pension based on work not covered under Social Security impact somebody's ability to collect Social Security benefits. Here in Massachusetts, state local employees and public school teachers don't pay into the Social Security program. But they get a public pension based on that work activity.

Kurt Czarnowski: Huge area of misunderstanding, huge area of myths, so let's try and clear this up. If you receive a public pension based on work where you are not paying into the Social Security program, you're going to be impacted by one or two provisions of the Social Security program. One is called the Windfall Elimination Provision and the other is called Government Pension Offset. The windfall probation, that impacts you if you get that public pension. But in addition to your public service, you have worked and paid into the Social Security program for at least 10 years. And that's what you need.

Kurt Czarnowski: You need 10 years of work under Social Security so that's in the program, and to entitle you to receive something down the road. Well, the good news is as long as you have your 10 years of time of the Social Security program, you will always get something each and every month from Social Security even if you received that public pension. That's the good news. The bad news is in all likelihood, the amounts you received from Social Security each month won't be as high as it would have been if you didn't get that public pension because the windfall provision requires Social Security, the yields are different and admittedly less generous formula to calculate your benefits. But you're always going to get something here.

Kurt Czarnowski: Fewer than 30, years where you've worked and paid into Social Security, you'll get less than you would receive if you did have that public pension, but you always get something. Government Pension Offset though, that impacts how receipt of that public pension impacts your ability to collect a spousal benefit or survivor benefit or a divorce spousal benefit. Any of the news is not as good, because depending on the amount of your pension, it's possible you won't be eligible for any type of spousal, survivor or divorce spousal benefit.

Kurt Czarnowski: Because before Social Security will pay you that, they look at your public pension, figure out what two thirds of your pension amount is and will offset or reduce any type of spousal benefits, survivor benefit of divorce spousal benefit you might be eligible to receive by that two thirds of your pension. So two thirds of your pension is more than what you collect in Social Security spousal or survivor benefits, you don't get anything more. But if it's less you get the difference.

Kurt Czarnowski: Why does Government Pension Offset exists? Simple, because when I talked about spousal and survivor benefits, we talked about how you collect on one account or the other at a time. Government Pension Offset basically extends that concept. If you've earned a public pension based on your own work activity, which exceeds what you've collected Social Security spousal or survivor benefits, you don't get both at once. As long as you've got 10 years, even with that teacher's pension or state or local pension, you'll always get something. May not get anything more in the spousal benefits depending on the amount of your pension.

Brendan Sheehan: Yeah, we did get a couple of questions. Why don't we tap on this one first, with regards to... The question is, when determining what taxes I will owe Social Security benefits, will dividends or other earnings from my investments be considered?

Kurt Czarnowski: Sure. If you remember on the slide that talked about Modified Adjusted Gross Income or MAGI, that consists of three things. It is your adjusted gross income from the bottom line of your 1040 tax return, plus any tax free interest you may have received previously, plus 50% of the Social Security payments that you would receive in the prior year. Add those three things up. You're an individual, those three things add up to less than $25,000, then no portion of your Social Security benefits subject to federal income tax. Couple filling jointly adds up to under 32,000, no portion of your Social Security benefits subject to federal income tax.

Kurt Czarnowski: Above that though, you can pay federal income tax up to 85% of the benefits you've received. But basically consists of three things, adjusted gross income, bottom line and your 1040 so it is going to include those dividend, taxable dividends and things like that, plus tax free interest you've been able to exclude up until that point plus 50% of your Social Security benefits.

Brendan Sheehan: That's one of the questions that a lot of accountants get. They say, "Oh, I thought municipal bonds were tax free. Why do I ask to put the interest on my tax return?" It's exactly for this calculation.

Kurt Czarnowski: Lets end this at that. And now tongue in cheek, you should hope, you pay federal income tax on your Social Security benefits, that means you've got income in excess of those thresholds here in the Commonwealth of Massachusetts on a couple lives in retirement with less than $32,000 a year, but that's just it.

Brendan Sheehan: Okay. Another question we have is, is there a time limit to claiming the benefit upon the death of an ex spouse?

Kurt Czarnowski: I guess the answer is... We're talking about survivor benefits for divorced spouse. First and foremost, he can't collect anything until age 60 at the earliest. You could be 55, your ex passes away, you're not going to be able to get anything until you at least turn age 60. Here's another area where it's really important to know what your full retirement age is. Because in terms of collecting benefits, if you're applying for benefits prior to reaching your full retirement age, there's no retroactivity any earlier than the month you actually apply.

Kurt Czarnowski: However, if you are full retirement age or older, when you get around to applying, you can request and receive a maximum of six months of retroactive benefits based on that application. So, full retirement age or older up to six months of retroactive benefits, under full retirement age, generally you can't be paid any year earlier than the month you actually apply. Although in cases where there's a more recent passing, you do have that six months retroactive period which you can apply up to six months after the death, and still be paid back to the month of death.

Brendan Sheehan: We have one more question, but again, keep firing away if you have any other questions. Bottom line, as a political question here is, is there a material risk that Social Security goes away or substantially reduced in the foreseeable future?

Kurt Czarnowski: I get this question all the time and it's always a long line, so what's the future of Social Security? Is it going to be there for me? I always like to answer this first by referring to a Mark Twain who once said reports with my demise are greatly exaggerated. I tend to think reports of Social Security's demise are greatly exaggerated as well. You know each year, social security's trustees issue or financial report on the health of the system, projecting not just what's going on today but attempting project 75 years into the future.

Kurt Czarnowski: 2019 trustees report projects that is currently constituted, assuming no changes to the program whatsoever. No increase in taxes, no cuts on benefits, absolutely maintenance of status quo, they project that Social Security has enough money on hand to cover 100% of promised benefits each and every month between now and the end of the year 2034. Report then goes on to say beginning in 2035, Social Security will still have a revenue stream that will be sufficient enough to cover about 80% of the promise benefits. That's an important point.

Kurt Czarnowski: People talk about, oh there won't be there for me. Keep in mind Social Security's primary source of income, payroll tax dollars collected from employers, employees and people who are self employed. As long as the economy is functioning in some fashion, people are working, Social Security will always have a revenue stream of some sort. The issue is looking down the road is that revenue stream thought to be enough to cover 100% of the benefits that have been promised, and at this point it is through 2034, beginning 2035, only thought to be enough to cover 80% so the issue confronting Congress in the American public and the future of the program is how between now and 2035, you close not 100% funding gap, but you close this 20% funding gap.

Kurt Czarnowski: That's important to remember. Social Security, it's money coming in, it's money going out. So you should confronting Social Security, not altogether different from somebody who's own situation at home, at the end of the month, you don't have enough money to pay all your bills. You either got to bring more money in or pay a little bit less money out. Look at it that way in the same way with Social Security. To close that 20% gap, you can either bring more money in, or you can pay less out. But if you think about it, you close the gap simply by increasing income.

Kurt Czarnowski: But who are you impacting? Younger folks employers, was it simply by cutting benefits, are you impacting old folks like me? I think in the end it's Congress and they should get around to dealing with this. You'll see a mix of some income, increases, some slow downs on the outflow side. But keep some perspective in mind, you're talking about closing not 100% funding gap but a 20% funding gap and the sooner Congress deals with the issue, the better off we're all going to be. But I think the program's been around for 84 years, so continue well on into the future. It's just far too important.

Brendan Sheehan: Okay. Final question is on Social Security income as it pertains to having a disabled child. Can you talk a little bit about that?

Kurt Czarnowski: Sure. It's important to note, Social Security is really this family protection program. We focus on the retirement side today, but it's important to point out that if someone qualifies for Social Security retirement benefits and has kids under the age of 18 at home, those children can receive an additional monthly Social Security payments up until the time child turns 18. Now generally child's benefits end at age 18 or through age 19 is still a full time student in high school, but there's an additional category that allows disabled adult children. These are kids over the age of 18, under a disability that began prior to age 22, to continue to receive a payment beyond age 18 for as long as the parent collects.

Kurt Czarnowski: That's if there are additional folks who could be collecting. That's another factor that comes in in helping determine whether or not maybe you want to collect a little bit sooner rather than wait a little bit, because again, that child's not going to be able to collect anything unless and until you do.

Brendan Sheehan: All right. Well thanks Kurt and thank you everyone for joining us. I am going to put this disclaimer up. This is something that LCL requires us to do pretty much saying that, don't act on any of the information, it's all general in nature. But that's my pitch for Kurt, and for us is that, that's why you want to sit down and speak with someone like Kurt and myself, to actually try to figure out this question. The big one of course is when do I actually start taking my benefits.

Brendan Sheehan: Again, keep your eyes open on our Facebook page, website, et cetera. We will have other workshops like this. Hopefully this has been helpful. For old folks we are going to post this with... It's been recorded so we're going to post this on our website so that if you missed a section of it, you can go back and rewind it and go from there. I think that's it. I do [crosstalk 01:00:07]-

Kurt Czarnowski: I just want to say, if you have any additional questions that happened to occur to you, get them in and they'll get them to me and I'm happy to answer those [crosstalk 01:00:14].

Brendan Sheehan: Yeah, I'm to share Kurt's information. All right [crosstalk 01:00:18]-

Kurt Czarnowski: Thanks everybody.

Brendan Sheehan: ... thank you very much everyone. Have a good day.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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