Retire Eyes Wide Open: Season 2 Episode 1

Introduction:

Welcome to Season 2 of Retire Eyes Wide Open. I'm Scot Landborg, excited to be back. I've got a lot to say we've been busy around here conducting over 20 public seminars last year just on Social Security.

I thought it was best to start the year off strong with what we've seen in the field after all those seminars, meeting with hundreds of people one of the biggest social security takeaways and what social security strategies do you need to consider? That's what this episode is all about.

I'm looking forward to this year we'll have a return of my Money Monologue. The Money Rundown, The Best Thing I Saw This Week and the Scot Strategy Segment will also keep taking your questions. And we have a lineup of exciting guests on all things financial and retirement but today is an in-depth look into Social Security strategies.

This is Retire Eyes Wide Open.

Money Monologue:

Social Security after another year in the field, giving dozens of Social Security seminars and meeting with hundreds of people, one of the top Social Security strategies that you need to be aware of.

1. See if you qualify for the restricted application strategy. If you're born in 1953, or ‘52, and you and your spouse both worked, look into this strategy. If you're divorced, widowed, and born in ‘53, or ‘52, it could apply to you too, so pay attention. The restricted application allows dual-income couples an opportunity claim now and claim more later, and under recent legislations being phased out for those born in 1954 or later. If your spouse turns on their benefit, you can claim a spousal benefit at full retirement age, until 70. Getting some free money before ultimately turning back to get your full benefit, which could be worth 32% more than it was at full retirement age. Our Scot Strategy Segment will dig a little bit deeper on this strategy. If you're born in ‘53 or ‘52, you owe it to everyone else to consider the strategy works for you.
   
2. Understand how social security is taxed. When you worked full time, there weren’t as many tax planning opportunities. But in retirement, there are because you have choices on where you pull your income from. And those different income sources can be taxed differently. Social Security is one of those income sources you need to understand. If you keep your provisional income at certain levels, your Social Security can be tax-free, or only 50% of it subject to tax. Keeping your provisional income low in retirement is possible because only half of your Social Security income is counted toward the limits and other income sources like Roth IRAs, cash, non-qualified accounts, and real estate, could provide additional tax-advantaged income sources. It's not what you make, it's what you keep. And tax strategy is critical at this stage in retirement.
   
3. Understand your long-term tax liabilities. We are so conditioned to think about taxes year over year, “What did I pay in taxes this year? How much of a refund will I get?” But you need to think differently. “How are my taxes going to look over the next 10 years? Over the next decade? What about 70?” Now if I was asking you to think about taxes in your 30s, it would be a useless exercise, because so much can change. Now, if I was going to ask you to think about your taxes and your social security in your 30s the questions would be a lot different because so much can change over that period of time. But if you're 55, 65, 75, you're in that retirement red zone and you can do your best to plan with the current Tax Law. For example, if you and your spouse both work and you're in a high tax bracket, you might be tempted to take your social security at 66. Just to say, the Social Security Income you're getting; Maybe you'll save it, maybe you'll invest it. And as appealing as that may be, I meet with many high-income earners, where waiting often make sense until they're done working. Why? Because while they're working, they're in a high tax bracket. But in retirement, when the home is paid off, or you downsize your home, the kids are off your payroll. College has already been paid for maybe you find yourself in a lower tax bracket. If that's the case for you. Not only will you have 32% more income from Social Security, but it'll be much more tax-advantaged if you decide to wait.
   
4. If you and your spouse have an age difference, consider taking one Social Security later, and one earlier. People often forget that when one of you passes away, the lower social security amount goes away and what's left, is the higher of the two. There's more incentive if you can afford it to have the higher earner wait longer, and the smaller earner takes it earlier. The higher deferred amount remains for both of your lives. This is particularly important when people have a 5, 10, 15-year age difference with their spouse.
   
5. If you need to build up your assets while you're still working, consider turning on your social security at full retirement age, but increasing your 401k contributions to reduce the tax burden. You may be in a situation where your investment assets or your liquid assets are not big enough to support your goals. If that's the case, consider turning on your social security at full retirement age instead of waiting until 70. The issue here is that it increases your tax liability. To offset it, consider increasing your retirement plan contributions. This strategy may allow you to harvest some of your Social Security Income now. But the negative tax consequences offset by the deferral. This strategy may allow you to harvest some of your Social Security Income now but have the negative tax consequences offset by deferring the income and your retirement plan. You then can make withdrawals and retirement for the income that you need, hopefully at a lower tax rate. So, get that tax deduction the year that you need it, harvest that withdraws in the years when you're in a lower bracket.
   
6. Stop worrying about social security cutting benefits. One of the most common questions I get is what happens when Social Security runs out of money, and they project cutting benefits? I think the odds of that happening are low. Why? First, the solution to Social Security is easy. They're going to raise the eligibility age; they're going to possibly look at means testing. Maybe they do some inflation adjustments, but cuts to your benefits? I seriously doubt it. Our government is printing a trillion dollars more per year than it brings in; they can't cut anything; they can't even cut by 1%. Do you think these politicians would have the will to cut your benefits by 10%, 25%? That's the quickest and easiest way to never get reelected again. It's far easier for them to just keep printing money. By the way, despite all of this debt that's being added, our currency is stronger than ever. The greater long-term risk is inflation. Will your dollar be worth as much? With over $20 trillion of government debt, inflation may be the only way out of our federal debt woes. Less likely that they're going to cut your Social Security benefits; More likely that they inflate their way out of this problem. So how do you plan for that? That's a whole other episode but suffice to say investment assets, stocks, real estate, they are your best defense. And that's my Money Monologue.

Money Rundown:

Our Money Rundown segment is where we cover the week's news. There are lots of media sources out there that are going to give you updated information about the economy in the markets. My job is to help summarize and synthesize, help pick out a few stories that are most important for you as a retiree or investor.

Story number #1

The China trade talks continue to be front and center with the markets. Companies and individuals in China were blacklisted this week, and the President is set to meet with Chinese diplomats. What does that mean for you? China has been on the minds of investors all year with tweets and the constant back and forth. I think you need to be thinking about what positions in your portfolio are most at risk if the China tariffs don't de-escalate. The likelihood of some sort of China deal is being anticipated by the market. That's why the market continues to be nearing highs, despite there not being any resolution. It looks as if both parties have an interest in them reaching a deal; Announcing that they're not going to reach a deal could cause the market to go down a little bit further and an announcement that the finalized the deal could potentially mean the market moves higher. So, there's a little bit of market uncertainty, no question about it, and I think as an investor, I think you just have to take this as an opportunity to look at your portfolio and ask yourself, “How much risk am I exposed to if something happens with China? How much risk am I exposed to if a recession started? If the market started to tank?”. “How much risk am I exposed to?” is always a good question to ask and take this as an opportunity to reevaluate your risk.

Story number #2:

The White House announced, this week, that they're not going to cooperate with the house impeachment inquiry. What does that mean for you? Another thing in the news all summer, not only do we have to deal with smaller reports, Russia investigations are dealing with Ukraine now and now a house impeachment inquiry. One important piece of information about this inquiry; The whole house has not voted on starting the impeachment inquiry. Speaker Nancy Pelosi has dictated to some of our heads of different committees to start this investigation. Now, the White House is questioning the legitimacy of that impeachment inquiry. And I think the courts are going to have to ultimately decide how much the president in the White House has to cooperate with that inquiry. As an investor, take this opportunity to reevaluate your risk. Going through an impeachment inquiry by itself isn't something that I think would really impact the market. Also consider that in order for an actual impeachment to happen, not only does the house controlled by Democrats have to vote on it, but also the Senate, which is filled with a majority of Republicans. They would have to vote to confirm any impeachment to remove the president. Likely, barring some other unforeseen news item. The likelihood of that happening is very slim. So as far as how this might impact your wallet, less concerned about that than other things that are going on in the world, more concerned about trade, more concerned about election potential and other financial items that I am about the impeachment possibility.

Story number #3:

Phone scammers and "tele-doctors" were charged with preying on seniors and a recent fraud case, reported by NPR. What does it mean for you? Well, more and more people are getting scam calls pretending to be your doctor. So, beware and make sure your loved ones know that this kind of activity is on the rise. You might not be susceptible to a scam like this. And these scammers are getting more and more sophisticated. They'll send emails from an email address that looks like it's a relative. They'll call impersonating your doctor impersonating your medical office. And you have to be aware of that what we've seen is a rise of people that are ordering prescriptions. They don't need equipment they don't need, and it's something that seniors need to be aware of. If you're 55, 65, 75, you probably don't need to worry about it very much. But maybe you need to worry for your parents, let them know that this is a scam that's on the rise. They need to keep their eyes open, be aware of it as a risk and keep their guard up. And that's our Money Rundown for the week.

Now for a new segment - That Was Interesting:

Each week, we talk about things that are good in the news. The Best Thing I Saw This Week, things that piqued our interest and capture our attention.

“There should be no billionaires.” That's a quote from Democratic presidential candidate Bernie Sanders. He literally said that as he unveiled his new wealth tax. “There should be no billionaires.” Those tax will likely impact only people with wealth over 30 million, a very small group. The statement that “There should be no billionaires”, really caught my attention and causes some serious concern. Did you know that the top 400 Americans' wealth, is worth less than $3 trillion? Some people think that's a big number. I think it's small. Did you know our government spends $3.8 trillion every single year? In other words, if you seized all of the property from the wealthiest 400 Americans, it wouldn't even pay for one year of our federal government, not one single year. Right now, our government is spending almost a trillion dollars more than it takes in taking all the wealth from the top 400 Americans would cover just that annual budget deficit for 3 to 4 years. Talk about income inequality, all you want to make a villain out of American capitalism if you want but taking all the wealth of the richest Americans wouldn't make a dent. They're a convenient target. Wealth taxes haven't worked in Europe. Why would they work here? The countries that have implemented them have repealed them because they're unpopular. They don't raise as much as expected and they're a nightmare to calculate. Even more important than all of this, is the idea that the government wants to seize your assets to a level that powerful billionaires could be extinct. Some people think taking a wealth tax of 2% or 3% of small potatoes for the rich. But over time, it becomes a significant wealth killer. They would move, many of them. And the ones that stayed, will be bled out of existence. The sad thing is a politician is saying, “That's the goal, for there to be no billionaires”. By the way, what happens when billionaires move? When they move their companies? The federal income tax that you're used to getting from the income that they're producing, it disappears too. I get concerned about a government that wants to be the only power. There are billionaires that do good work, great work. Bill Gates, Warren Buffett, have pledged all of their wealth to charity. Jeff Bezos is revolutionizing the space industry. Do we really want to make them the enemy? Let's have a debate about opportunity, about jobs, about growth, about taxes. Could they be more fair? Absolutely. But to say you “want to get rid of billionaires”, charitable ones, and selfish ones, job creators and trust fund babies alike. I think it's just for political points at the expense of real debate. There are plenty of taxes out there that can be levied. A state tax, income cap gains, that's where the debate should be. Wealth taxes, if you look at the data, just haven't seemed to work. The problem is not billionaires. I have no problem with people making money, having power. They can do great good. The question is, how do we keep building opportunity for those poor and the middle class to grow and build the life that they want? You have to remember we've created a country where it's possible to be a billionaire. If you come up with a great software idea in your garage and Cleveland, you can sell it. Not only across state lines, not only to 300 million Americans but to English speakers worldwide from your garage. Technology has made getting wealthy with your crazy idea more accessible than any other generation before. To build an empire, you used to need capital. You used to need connections and a government that wasn't in your way. Now you can pick up free stuff posted on Facebook and resell it on eBay. You can be an expert on Motorcycle Reviews and make a living from an apartment in Imperial Beach. You can be a financial advisor in your pajamas in Florida and have clients coming out of your ears. The same technology that is helping the rich become richer is also helping the poor and middle class with new opportunities. Let's stop blaming, stop picking easy targets. Let's stop criticizing success and start talking about how we can add more success stories to the ranks. How can more people live the American dream? How can the technology be harnessed to make life better for everyone?

And that's the end of my segment That Was Interesting.

Scot Strategy Segment:

Earlier in the show, we talked about restricted application strategy Personal Security. I wanted to pick up on that a little more and give some focused attention. If you're born in 1953, or 1952, or 1951, pay extra careful attention. Make sure that you investigate if it's a strategy that works for you, because people born in ‘54, ‘55 or ‘56, are looking at you with envy. Because they can't use this strategy. It was phased out as part of the 2015 Budget Act. So, what is it? It allows dual-income couples and opportunity to claim now and claim more later. How does it work? The higher-earning spouse at for retirement age turns on their spousal benefit while deferring their own benefit until 70. Why? Because they get a free spousal benefit for 4 years, and their benefit at 70 still increases by 32%. It increases the same amount even if they wouldn't have utilized the strategy. Let me give you the example you're 66, full retirement age. Your benefit is $2,000 a month. Your wife is also 66 and worked, has her own benefit worth $1000 per month. You claim a restricted application strategy, getting 50% of her benefit as a spousal benefit, or $500 per month. You get the $500 a month from 66 to 70. And at 70, you switch to your higher Social Security benefit. Because you waited until 70, your benefit is now over $2600 per month. And you collected that $500 a month spousal Social Security benefit over 4 years. So, a couple of considerations that you should think through when you're thinking if this strategy is really right for you.

#1 “Do you qualify with your birthday?” If you're born in ‘54, sorry, you don't qualify. If you're born in ’55, ‘56, you don't qualify, so you can disregard and move on because it's not going to work for you. If you're born before 1954, it's a strategy you should look at. And by the way, you both don't need birthdays before the new deadline, just the spouse that's claiming restricted.

#2 “Does your spouse have their own benefit?” If your spouse worked or works full-time or part-time and they have their own social security, this might be a benefit that works for you. But if your spouse did not have a lot of earned income, maybe they stayed home, helped raise kids, then a restricted application is not going to work for you. It's for dual-income couples.

#3 “Are you subject to the Windfall Elimination Provision or the Government Pension Offset?” Again, dual-income couples, you have to have both have a Social Security benefit that you're going to be able to collect. If you're a government employee, or if you didn't pay into Social Security and you're subject to a Windfall Elimination or Government Pension Offset again, a strategy that might not work for you.

#4 “Are you divorced?” This is a big one, I recently met with a Boeing engineer. She was 66 years old, planning on working until 70. Wasn't planning on turning on her Social Security until 70 because she loved her job. And what was fantastic for her is that she was able to claim an Ex Spousal Social Security benefit from her spouse from 20 years ago. She's collecting over $1,000 a month now in her Ex Spousal Social Security benefit that she claimed, while still deferring her own benefit, her maximum benefit until 70. If you're divorced, your Spouse Earned Income and you're eligible for the restricted, it's definitely something you want to look into.

#5 “Are you a widow?” Widows also potentially could qualify for this strategy. Again, if you both worked and earned an income, doing the restricted application strategy could potentially work for you.

#6 “Do you have other assets to be able to afford to do it?” One of the biggest questions is if you do that restricted, obviously, you're going to have a little less income by utilizing this strategy. Less income in the short term, probably more income in the long term, especially after 70. If you have other assets that you could pull from, investment accounts, 401k is IRAs trust accounts, other things you could pull from to bridge that gap from 66 to 70 with whatever you're deciding to defer by utilizing the strategy.

#7 Even if you don't need the money, it might make sense. Some people think, “Oh, you know what? I'm just not even gonna think about it because I don't need the money ‘til I'm 17. Not worth looking at.” You really need to run the numbers on this one. Because even if you don't need the money, it might make sense. Because think about it, your benefit at 70 is going to be exactly the same, whether you wait ‘til 70, or turn on this benefit. The only difference is that you missed out on that free benefit that your spouse did have to turn on their benefit in order for you to claim it. So that may not be in your best interest, something you to look at very closely.

#8 Don't get talked out of it by Social Security. I had a client recently who called me after we did some advanced financial planning, put together a full financial plan, decided that doing a restricted Social Security was in her best interest, And she called the tell me that the agent at Social Security was trying to talk her out of it, asked her why she was considering it? Why would she do that? So, make sure that you go into Social Security when you make that election, very few are going to give you advice. But just be careful you don't get talked out of what you think is the right strategy for you. After you've evaluated your options.

#9 Tell your friends to look into it. If you qualify and you're born in ‘53, or ‘52 or ‘51. If you look into Social Security, and you look into the restricted application strategy, if it works for you, or doesn't work for you tell your friends. Tell your friends that are in the same age bracket, “Hey, if you're born during these time periods, you need to look into a restricted application that works for you”. That Boeing engineer I mentioned earlier, she didn't come in and meet with me, she didn't talk to anyone about her social security, she would have missed out on absolutely free money for a 4-year period of time. And I've ran into multiple people that had an opportunity to do it. And they didn't do it just because they didn't need the money, and they didn't know about it as a strategy. So, tell your friends about it. And by the way, if you want to learn more about Social Security, you can go to our website, RetireEWO.com, you can listen to some of our old school security episodes, and you're welcome to join us at one of our future Social Security events that we hold throughout the year at local restaurants, local community centers, local libraries. And that's our Scot Strategy Segment.

Listener Questions:

If you want some of your questions answered during the show. Go to our website, RetireEWO.com, and click on submit a question, we'll do our best to get your question answered during the show. Joining us here today with some of those questions is one of our newest team members. She helps some of our clients with the client service Lindsay Aguilar. Lindsay, welcome to the show!

[Lindsay] Hi, Scot excited about our new season. Thank you for having me. Today, we have some questions about Social Security. Elizabeth in Rancho Santa Margarita. “Hi, Scott. I've been working for 40 years and make a decent living 80,000 a year. If I stopped working at 60, is my Social Security benefit at 65 still going to be the same? I've heard it can go down if you don't keep working.”

[Scot] Well. Hi, Elizabeth, thank you so much for the question. Your Social Security benefit is based on a 35-year average. So, if you've worked for 40 years, if you've made a good living for all of those years, stopping at 60, your benefits likely not going to be impacted very much from 60 to 65. Now, anyone listening you want to do a clear and concise calculation, because maybe those 40 years, only 20 of them, you had significant earnings. 20 of them maybe had minimal earnings. And Social Security, when they're calculating what your benefit will be, they are expecting you to continue working. So, if you have over 35 years of earnings, then not working for a few years at the end probably won't make that big of a difference. But if you have a lot of zeros or a lot of years where you didn't earn a lot of money, it could impact you. So that's something where you want to bring in your full Social Security statement and run a calculation to determine how it might be impacted by you not working

[Lindsay] Jim in Fullerton, “I started taking my Social Security four months ago. Now I wish I would have waited a little longer to get a higher amount. Anything I can do now or am I stuck?”

[Scot] Thanks for the question, Jim. There are things that you can do. If you've changed your mind about your Social Security, you typically have up to one year to change your mind. Now you might not like the prescription that I'm going to give you. In order for you to set back the clock, you're going to have to repay those benefits. You're going to have to repay those benefits, any Medicare payments that were taken out, any payments that were made to a spouse, any payments that were made to an underage child, you're going to have to repay all of that money. So, if you're only 4 months in, it's probably not going to be a huge amount. But that's something that has to be a consideration. You can't just stop it and not repay it and then have the calculation go back to when you started. It’s something you're going to have to repay. So, make sure that you're aware that that's part of your plan.

[Lindsay] Lawrence in Oceanside, “My wife and I make $300,000 a year and we are both 67. I'm thinking about just turning on our Social Security. Now, even though we plan on working ‘til 70 we only have a couple hundred thousand saved for retirement all in IRAs and 401 K's and I feel like we need more cash in retirement. Taking Social Security could help give us more income. What do you think?”

[Scot] Lawrence. Thanks for the question. I can feel where you're coming from. Right? You've been working hard; you've been working hard your whole life. You've saved some money, but you feel like it's not enough. What should you do? Well, I think you have to look really closely at your tax situation and look at your other income sources. How big is that Social Security check going to be? How big is it going to be? Do you have any other pension income? Assuming that you don't have any pension income. Okay, dial into how much that Social Security benefit is going to be. One of the things to remember is if you're making $300,000 a year, you're in a very high tax bracket. You're in one of the highest tax brackets. So, if you take your Social Security, that's Social Security, 85% of it is also going to be taxed at that highest bracket. If you want to take it, if you want to build up your liquid savings, I would encourage you to explore maybe increasing your retirement savings, your deductible retirement savings to help offset the taxes that you're paying. So, let's say you get 30 grand per year from Social Security. If you do nothing, you're going to pay taxes on 85% of that you'll pay whatever your tax rate is. So, it could be a big chunk that's going to be taken away. If you turn around and put that extra money into a 401k for you and your spouse, assuming you're not already doing that, that could potentially help offset the tax. The taxes that you would pay by getting the income, would be offset by the deductible contribution you're making to your retirement accounts. That's one potential strategy. Now, if you're already maxing your retirement accounts, I think you really need to look closely if that's the right decision about what to take your Social Security. Because likely the situation you're telling me, likely you're going to have to be downsizing and retirement. You're going to be making less money in retirement because you just don't have the assets to support 300 grand a year. So, you're going to have your Social Security, you may have your investment income, maybe to sell your home, buy something free and clear, buy something with a lower, smaller mortgage. You've got multiple options and I see it all the time when people will downsize. But remember this, taking your Social Security now when you're in the high tax bracket, you may be given up 40% of it to Uncle Sam. If you simply wait to take that Social Security, wait another 3 years, now that higher Social Security amount, if you're smart about where your other income is coming from, it might be tax-free. Or it might be tax-advantaged, or at the very least, you're going to be the lower tax bracket that you're in today. Hope that was helpful. If I can help you more, Lawrence, feel free to reach out to us. Go to our website, RetireEWO.com, there's an option there to set up an appointment. I'd be happy to talk to you more. One on one.

That's our show for this week.

If you want your questions answered during the show, go to our website RetireEWO.com and click on “Ask a Question”. Go like us on Facebook to get our most up to date content. Subscribe to our podcast on iTunes, Google Play or wherever you listen to podcasts.

And we'll see you next time where I'll show you how to Retire with your Eyes Wide Open. Don't go into retirement with your eyes closed. Go into it, with your eyes wide open. I'm Scot Landborg. See you soon!