SCOT:

Welcome to Season 3, Episode 6 of Retire Eyes Wide Open. I'm Scot Landborg here with Steven Murphy.

Today we're talking Social Security strategy and summer money insights.

I've done over 70 Social Security educational events over the past decade.

What are the top Social security planning strategies available right now?

Summer markets. It's been a hot first half of the year. All time highs. Will the good times continue? 

And in my Money Monologue we'll talk about the top Social Security strategies.

You'll hear our segment Five Minutes on the Market.

We'll cover the top news in the Money Rundown.

In our Money with Murph segment, Steven is going to talk about Social Security and public employees, WEP, GPO, how do teachers and police officers and firemen deal with Social Security planning when you have a pension.

We'll also take your questions.

This is Retire Eyes Wide Open.

SCOT:

And now for the Money Monologue. I've done over 70 social security educational events over the past decade. In-person events at local libraries, dinner events. I've done webinars too. What are the top Social Security planning strategies still available right now? We're going to talk about that. The first question I often get is, is Social Security going to be there?

I think it is. I really think it is going to be there, especially if you're over 55. Social security is pretty easy to fix. They simply raise the eligibility age for younger workers. If you're 55 or older, you're likely in the clear. Younger people, they could get a raise in their full retirement age. They'll just boost it. Instead of 67, now it’s 68, now it’s 70. That's one easy fix for them is just raising eligibility age.

They can make adjustments to the inflation calculation. They can also do means testing for higher income earners for higher income people. That would mean that they could potentially cut your benefits if you made over a certain amount of money. Now, while that's a possibility, it's unlikely because of how unpopular it would be.

What are my top strategies for Social Security? Here we go.

Strategy number one, stress test Social Security reductions in your overall financial plan. While unlikely that they're going to cut benefits, it is a possibility. And if Social Security is, say, 70% of your retirement income, it's much more important to go through that exercise than for someone where their Social Security is maybe only 25% of their income.

We use a software called RightCapital when we're building our financial plans for clients, and they've got some really powerful stress testing tools to first let you understand your probability of success in meeting your income goals and in your overall income distribution strategy. And there's all kinds of different levers that we can pull to help give you confidence about what your income is going to be in retirement.

More than that, we can push it to the limits and see where that probability of success is going to break down. With Social Security, we're also able to test not only different income levels, but different problems that might occur in your financial plan. So for example, we could run a scenario. What if Social Security is cut by 20%?

What if I live five years longer? What if inflation is higher than we expected? What if medical costs are higher than I thought? Stress testing those things can give you some real peace of mind, and you should stress test how a cut to Social Security might impact your financial life. It's why I think having a comprehensive financial plan is so important to really think through different scenarios, different what ifs, and plan for those possibilities, even if they're unlikely, to know what you would do in those different situations.

Strategy number two, be honest about longevity when determining break even. Now, what do I mean by - first, what do I mean by break even? Well, break even is the point where you're going to make a decision. If I should have turned it on at 62 or 67 or at 70, what's that break even age for you? And I think the first step in thinking that through is to dust off your crystal ball and think about how long you are going to live.

Average break even for a married couple is age 80. So dust off that crystal ball. Are you going to be 80 or are you going to be 85? Are you going to be 90? What does longevity look like for you? I can't tell you how many people that I meet with that are not honest about longevity. I meet with people that are super healthy.

They've got great genes, their parents lived a long time, and they're afraid they're going to drop dead tomorrow. That, I mean, others that are severely overweight, they're in terrible health. Their parents lived until their mid 70s, and they're convinced they're going to live to be 100.

It's crazy to see people come into my office with irrational views on longevity and being rational about longevity is important to determining when's the right time to turn on your Social Security.

But it's important in so many other things in your financial plan.

Should I be converting to a Roth? Where should I pull from and when? And running scenarios where you live to age 90 versus 95 or 5 years earlier, say 85? It can really vary significantly what the best course of action is for you.

Strategy number three, conservative or aggressive, your investment profile impacts your break even age. So when you're thinking about Social Security, when is the right time? When should I turn it on? Well, if you wait for your Social Security benefit, if you wait from 67 to 70, every year you wait, you're going to get an 8% increase in that benefit if you take it at age 62.

If you take it early, you might only be getting about 75% of your full retirement benefit amount. So what makes sense for you? Well, not only is age, not only is longevity an important factor, but also important is your investments and how they've been performing. What kind of investor are you? If you're a conservative investor, there's often incentive for you to take that benefit later because those increases to the benefit are more valuable to you. 

If you're a more aggressive investor, if your investments are performing well, there's more of an incentive for you to take that benefit earlier. Let me explain. Let's think about this for a minute. If instead of using your Social Security benefit from age 62 to 70, if you have the ability to invest those proceeds, and if you made over 6% a year on those investments - This is just hypothetical here. 

How does that impact your break even? Well, that break even age, instead of being age 80, gets pushed out to age 82 or later. What does that mean? What it means is there's more incentive for you to turn on your benefits earlier, the better your investments are performing. And just some common sense, just some perspective.

The higher the rate of return on your investments, the further out that break even age is going to be pushed. The longer you need to live to justify when you turn that benefit on, and the more incentive you have to take it earlier.

Think about what type of investor you are. If you're a conservative investor, if you've got all your money under a mattress, if you're a CD type investor, those statutory increases from Social Security from 62 all the way up to age 70 are more valuable to you.

Now if your investments are high single digit, low double digit return, if you invest more in the broader market, if you've been getting good performance, then there may be more incentive for you to take that benefit earlier to either invest those benefits or maybe to take pressure off your portfolio so you don't have to pull as much from your investments for your lifestyle. 

So what type of investor you are really matters.

Strategy number four, plan for survivor benefits. This is really important for a married couple. When one of you passes away, it's not if it's for when when one of you pass away, guess what? That lower social security amount. Poof! It's gone. It's going away. So if you're Social Security benefit, let's say 30 grand a year, your spouse's is 20 grand a year.

When one of you pass away that $20,000 benefit is disappearing. You've got to make sure that you've planned for that possibility. It's an important piece in building out a comprehensive financial plan.

What if one of us dies earlier? What happens now when we run these mathematical breakeven analysis on Social Security, one other interesting point is if we looked at an example where you passed away when you were 70, okay, but your wife lived until 90, you would normally think that that person would have made the wrong decision to turn on their benefits at 70, but by waiting until 70, even if they didn't receive a nickel of their own benefits.

By doing that, it may be increasing the lifetime benefits of your spouse. So make sure that's part of your calculation.

Strategy number five, how does Social Security fit into your short term tax strategy?

This is so important. Not understanding how Social Security is taxed could be one of your biggest mistakes. There are certain threshold or Social security becomes 50% taxable and when it becomes 85% taxable, all depends on your provisional income. 

Now when it's adjusted for your gross income, not counting Social Security benefits, plus nontaxable interest, half of your Social Security benefits. If your provisional income is $25,000 to $34,000, that's for single people. For married people. If your income's between $32,000 and $44,000, 50% of your Social Security benefits are taxable, if that provisional income is more than $34,000 if single, more than $44,000 for a married couple, up to 85% of your benefits may be subject to income tax. 

So how social security is taxed is very important. What are some real life applications? Well, let's say for example, you're married. Your Social Security income for husband and wife is 40 grand a year. Half of that $20,000 is going to count towards your provisional income.

What that means is that you could have another $14,000 of taxable income and likely pay nothing in federal income tax.

Why? Because you'd be staying under that provisional income threshold. Now this becomes really important when you're thinking through a distribution strategy for retirement. Maybe you pull - you've got that Social Security income, and maybe you pull another $14,000 a year from your IRA.

Anything beyond that, you may want to start pulling money from other sources, maybe pull money from your tax free Roth, maybe pull money from cash reserves, maybe pull from a liquid position, your taxable brokerage account.

Maybe you liquidate some of those bonds that haven't appreciated much in your taxable account, ones that don't have a lot of gain. It's important that you build an income distribution strategy in retirement that's tax efficient, and tax smart. It's not what you make, it's what you keep. And you want to explore different ways to optimize and be as tax efficient as you can be.

Strategy number six, how does Social Security fit into your long term tax strategy? Well, the first question is, what tax bracket are you in today versus retirement? It's important to think about your taxes year to year. But it's also important to think about your taxes over the next decade. What is your long term tax situation look like? Tax brackets can be an important piece.

I have a client of mine, an attorney wanted to turn on and Social Security at 67, but he was in a really high tax bracket. I said, hold on, hold on, wait a second here. Let's think about this. At age 70, 3 years down the road, he's planning to be in a much lower tax bracket. Why? His house is paid off. His kids are out of college, out of school. They're off the payroll. And he's, in fact, going to be relocating to a lower cost community. So he's planning right now. He's in a very high tax bracket in retirement. He's going to be in the 12% or 22% tax bracket. So for him, one of the biggest things about Social Security is it didn't make sense to turn it on now, have a bunch that Social Security subject to income tax while waiting, not only does he get those 8% increases from 67 to 70, but also he'd be in a much more tax efficient situation.

So taxes are a big, big piece, not just short term but also long term.

I think one of the most important things regarding Social Security for the long term is if you have other outside assets, a lot of clients that I meet with, they've got a big IRA, a 401k from their employer. Most of them, that's money that's tax deferred. Okay. You got a tax deduction for that money going in, when you pull the money out you'll have to pay income taxes. But you want to be smart about how you're going to harvest that money in the most tax efficient way possible.

From the moment you stop working until the moment you turn on your Social Security, or the moment you turn on those required minimum distributions from your IRAs and 401ks, there's a unique planning opportunity. There's a window where you may want to start taking some extra withdrawals, or you may want to start converting to a Roth IRA.

Converting to Roth is a few things. It moves money from that pretax IRA status to a tax free status of a Roth. Now you've got to pay income taxes on the conversion. Okay, whatever your income tax rate is, you have to be very conscious of where those tax brackets are. But once you make that conversion now it's in a tax free status.

By the way, you can have the taxes for that conversion often withheld. So you're not going to come out of pocket to pay the taxes. Have those taxes withheld. But now you have a tax free bucket. And that's really, really important to have tax diversification in your overall strategy. When you're pulling distributions in retirement to be as tax efficient as you possibly can be.

When we're doing tax planning for clients, a lot of clients, they're in that 12% bracket. Now, if you're married filing jointly and you're doing the standard deduction, you can have about $120,000 of income and still be in the 12% federal bracket. So let's say your income sources are 70 grand a year. You may be able to do a $50,000 conversion and only pay 12% federal tax.

Most of the time for clients, that one's a no brainer.

That makes sense to do. If you had $1 million retirement account, if you were able to convert $50,000 a year over time, it really builds up to be a bigger tax free bucket.

The next bucket we're looking at is that 22% tax bracket. And maybe you're coming to me, Scot, I've got a pension, Social security, all that stuff. My income's over $120,000. Okay. Now that we know that we know anything coming out of those retirement accounts, if you've got a big retirement account, you're going to pay 22% as you pull it out. So is it better to pay 22% now or better to pay 22% ten years from now, if that money has grown in the future?

It may make sense to systematically move that money over so that you've got a bigger tax free bucket, not only to give you more options during your lifetime, but also at the end of the day, your heirs are going to be super thankful that you've got more money on that tax free sleeve and also more money for you.

If you want to spend $50,000 on something, or $10,000 on something, or make $100,000 withdrawal, you have a pocket of money that's now in a tax free state. So important things. 

Strategy number seven, be smart about Roth conversions.

This is a big one with your Social Security. Having money in a Roth is really important because it helps tax optimize your entire picture.

But there's a couple things that are really important to a Roth conversions one what is your income tax bracket? You don't want to convert a huge IRA to Roth all at one time. If it's going to put you in a really high tax bracket, be very conscious of where that 12% bracket ends, where the 22% bracket ends, where the 24% bracket ends.

Be conscious of  that. The other thing you want to be really aware of is the Medicare tax brackets. Now, most of you probably haven't thought about this, but if your Medicare age, if you're 63 years old, they're going to use the tax return from age 63 two years prior. When you turn on your Medicare at 65, they're going to use your tax return to determine what your Medicare premium is going to be.

So it's an important part of Roth conversion. So, in the 12% bracket, you're fine. But you can have income of up to about $205,000 for tax year 2023, and still stay in the 22%. The majority of that being the 22% bracket. 

And keep yourself below that first Medicare threshold where your Medicare premiums start to increase. So it's another important piece to think about when doing Roth conversions.

Strategy number eight, do a deeper dive in certain more complicated cases.

There's a number of people, I think qualify for a deeper dive into more sophisticated social security strategies. If you're born before 1954, if you're born in 1953, 52, 51, we should chat. There might be some additional strategies available to you if you're a widow. We didn't get a chance to talk about that today.

If you're divorced, there are other strategies that may be available to you that you can take advantage of. some of the most important ones for widows is if you're working and you may be able to collect a widow benefit, while deferring your own benefit. If you're divorced. If you're divorced, the good news is you're eligible.

if your marriage lasted ten years or more, you're eligible for a divorce spouse benefit equal to about half of the full retirement age benefit of your ex-spouse.

Another interesting benefit is if your divorced spouse passes away, you could get a step up to their full benefit amount. So a bunch of different provisions that we can talk more about.

In short, Social Security is a complicated topic. We normally spend over an hour going through the nuts and bolts of Social Security. If you want to attend one of our webinars, click on our link in the podcast description.

Go to our website. RetireEWO.com. You can schedule a time to attend one of our Social Security webinars, or one of our in-person events in your community. We'd love to connect with you. And if you want to talk more one on one about your individual situation, I encourage you to schedule a one on one consult. There's no charge to you. 

Happy to talk about your Social Security and how we might be able to help.

And that's my Money Monologue.

SCOT:

And now for our segment, Five Minutes on the Market. If we look at where the market is for 2024 through halftime, through the end of June, S&P up 14.8%. The Dow up 3.9%. Russell up just 0.1%. Emerging markets up 6%. Bonds down 2%.

If we look at our Sterling market risk heat map, 90% of the technical indicators that we track are positive. Just 10% of them are negative. So market continues to trend in the right direction. 

Our average composite model client for someone that we're managing an IRA with a moderate risk tolerance, right now they've got an allocation about 60% to buffered equities, 30% to traditional equities, 10% to bonds, enhanced yield.The more conservative portion of a portfolio. So we're pretty bullish on the market.

We're trying to mitigate and manage risk, though with some of those buffered equities that offer a buffer of protection on the downside, there is some cap on the upside. In focus. The most relevant news item is that we're tracking. This was the best first half to an election year in 50 years and over half a century. Where do we go from here? Well, we're pretty optimistic, pretty bullish on where things can go.

Ryan Detrick at Carson Wealth wrote a piece on what happens to the S&P for the second half. After the first half was up in double digits, and it's a good sign Over 82% of the time, the market is higher for the rest of the year, 100% of the time, going back to 1954, the market ended the year positive.

So all good reasons to be optimistic about where the market ends up at the end of the year. Of course, that's not - that doesn't assure us of what's going to happen this year, but it is a good sign.

US economic growth has been exceptional, America's been fueling the global economy in 2024. I think that's a good sign. 

We're keeping an eye on what's happening with the Federal Reserve. Former Chicago Fed President Charles Evans said that a September rate cut is possible.

I think it's important to see what the Fed does.

Bowman said that they don't see any rate cuts, possibly for 2024. They're shifting cuts to 2025. I think there's still some uncertainty on what the fed is going to do with cutting rates this year. We do still think that they will cut rates 1 to 3 times before year end.

Minneapolis Fed Kashkari is seeing 2% inflation sometime in the next year or two.

I think that's the biggest driver on what's going to happen to the Fed cutting interest rates is what's going on with inflation. So we'll want to keep a close eye on that.

Market commentary what's the most relevant market commentary?

A.I. optimism has been really strong. We could see, according to one analyst, the S&P boosting their returns by end of next year, 2025 to S&P 7000, could be a big jump.

One of the perma bulls, Tom Lee, expects the S&P is going to be up to 5800 by the end of the year.

That would mean another potential 5% move higher in the market for the second half.

Not everybody's rosy. There's definitely some bears on Wall Street. One of the analysts’ thinking that the market could fall 30% or more, and we move into a painful recession.

Just remember there's always naysayers out there, but we try to take a balanced approach to see what some of these top market strategist are saying,

Dan Ives, very bullish on the market and the economy. He wrote recently, they believe the Nasdaq has another strong second half ahead as tech stocks will be up in his mind 15% the rest of 2024.

So very bullish on tech, he said, the A.I. party, it's 9 p.m. and this will go on until 4 a.m. in our view. We believe tech bull market has legs. What does he say. He's saying - that's on another quote. That's a 1995 moment not a 1999 moment. In other words, he thinks it's the beginning of A.I. pushing the market and the economy higher.

What's the most relevant market data?

I thought this was an interesting statistic. What it shows is since 2020, while inflation has been strong, personal incomes have been growing at an even faster clip. So it's good news for the economy and for the market.

Why are stocks up? Why were they up 25% last year? Another 15% this year? Here's a hint. Forward earnings expectations continue to climb higher. I think it's a good sign. 

Now a little warning, I think volatility could rear its head in the second half of the year. We've only seen a retreat from the peak of the market a 5.5% this year. A 10% or more correction on average happens once every year. And during an election year, volatility on average is about 13%. So definitely could see some more choppiness into the second half.

Even though we're optimistic, you have to be prepared that that could happen. Another fun fact S&P bull market right now is only 427 days old. On average since 1957 they've lasted 1141 days. So we're still a little bit early in the history of bull and bear markets.

Quick reflection of where the market is today. If we look at the top analysts on Wall Street, where the market is today, has outperformed almost every one of those analysts where they thought the market would be at year end. So it's been a really strong first half. No question about it.

One of the top questions I get today is with the market being an all time highs, is it a good time to be investing? I thought it was a great piece by JP Morgan showing that if you invested when the market was at all time highs, you typically outperform on almost every time period imaginable. Whether it's one year, three year, five years out, you typically outperform.

Now, that's no assurance that that will happen this time. But investing when the market's at an all time high, there really shouldn't be any fear that that's the time to take chips off the table. In fact, it could usually be a positive sign that the market is moving in the right direction.

Our most relevant market commentary, I do think there's more upside potential in this market.

We've been increasing our active equity exposure.

I think equity selection is also very important. What stocks are you in, what sectors are you in, picking winners and losers I think is more important in this market than ever before. We still like buffered equity. We're still favorable on it.

Just the types of buffered equity is changing. We want a little more upside, a little less protection is needed.

Small caps still present an opportunity not as great of an opportunity as they did at the beginning of the year, mostly because they're more interest rate sensitive.

And so if interest rates stay where they are, small caps likely will not rally as much.

If they do start to cut interest rates at the end of the year, or a forecast that they'll be cutting into 2025, small caps could get a little bit of a run, a little bit of a bid.

And I also think it's important to understand your own individual risk assessment, how your positioning your portfolio over the long term.

And that's our Five Minutes on the Market.

SCOT:

And now for the Money Rundown. Our Money Rundown segment is where we cover the recent news. There's tons of media sources giving you updated information about the economy and the markets. Our job is to help summarize and synthesize, help pick out a few stories that are most important to you as a retiree or an investor.

And joining us today, financial advisor Steven Murphy.

Welcome, Steven.

STEVEN:

Hey, Scot. Thanks for having me. Happy to be here as always.

SCOT:

Hey thanks for sitting around. It was like the longest money monologue we've ever had. So thanks for sticking with us.

STEVEN:

Awesome.

And our first headline presidential debate number one is in the books. Does it matter for your money, former President Donald Trump and current President Joe Biden and their first presidential debate in June, 65% of people polled think that Trump won the debate. There is serious talk if Joe Biden will actually become the Democratic nominee amid health and age concerns after his debate performance.

So does this impact financial markets?

SCOT:

Thanks for the question, Steven. Political questions. We always tread carefully. There's people that are listening today that are huge Trump fans and people that are huge Biden fans or people that hate Trump or people that hate Biden. There's people all over the spectrum.

The question is, how does it impact your money, your wealth, your financial future, and how do we try to look at it in a level headed way?

So what's interesting is we're recording this podcast now. It'll be a week or two before it actually goes live. So things are definitely developing in real time. I saw some interesting stats on the probability, the betting probability that Biden is the nominee, and before the debate it was 90 plus percent. I think a few days after it was like 50%. Today it's like 25%. so it's been moving all over the place.

And I think markets in general don't like uncertainty.

That is one thing that I, that I would say, but as far as who is president, whether it's a Republican or a Democrat, we've seen the market do well under Republican and Democrat presidents, both. so that's important to keep in mind.

I think the bigger driver this year is going to be inflation. And what the Fed does. I think it's actually a bigger driver than the presidential election for the markets. That doesn't mean you can't have huge opinions and feelings about one candidate or another. Just from a pure dollars and cents standpoint, though, I think what's going on with inflation, the Fed is likely to have more impact than the presidential election cycle. 

That being said, markets don't like uncertainty. They don't. If there's things that are uncertain, I would expect a little bit more choppiness.

STEVEN:

Yeah. And just to add on to that, the talking about how the markets will perform regardless of who is in office, when you look statistically and historically, they go up, no matter what party is in office, but if you have held through all presidents that would be best. whether you held through only Republicans or you only invested during Democrats. But if you invested during the time, no matter what party was in office, that would have hands down the best results of your investment returns.

So we get people that, like you said, Scot, that hate one political party or the other. And when that party that they hate comes into office, they say, I want to take all my money and go to cash and get ultra safe.

And, you know, certainly there's some fears and some, legitimate concerns that people do have. But our encouragement to our clients is, you know, statistically and historically speaking, we need to be rational and as unemotional about this as possible. Everything will be okay. There's going to be external factors, like you mentioned, inflation and interest rates, that can have material impacts. 

But the reality is from a historical perspective, whoever's in office politically does not really tend to have much of an impact on your investment performance. 

SCOT:

And Steven, I agree with you. Some of the biggest mistakes I've ever seen in this business is when someone says, oh, this guy got elected. I pulled all my money out. 

I've seen that multiple times be a terrible, terrible decision, especially because, getting out is one thing. Getting back in is even harder. Anybody can say, hey, pull all my money out.

But if you don't have a systematic approach to when you would get back in, an unemotional approach to when you would get back in the market, you could miss years of growth potential. Now, there are certain sectors of the market that might do better under a President Trump versus President Biden. There's no question. Different sectors of the market are going to perform differently, but to be completely out because you don't like the politics of someone is often a mistake.

STEVEN:

In our second story, the fed is keeping rates steady. No recent adjustments to interest rates from the Federal Reserve. Many people thought at the beginning of the year that the fed would have cut rates 3 to 6 times this year, but so far it hasn't panned out. There hasn't been a single rate cut yet. Where are our rates going from here, and why does it matter?

SCOT:

Thanks, Steven. Good story. Important. I think the Fed cutting interest rates is contingent on inflation getting under control. And I think it's going to be one of the biggest drivers of the market. Even what sectors of the market are going to do well has something to do with interest rates. For example, small cap, we thought we'd have a really good year. Hasn't really, moved at all this year despite the rest of the market moving higher and because they're more interest rate sensitive.

So I think, you know, the fed is hoping that they don't have a repeat of the of the 70s, 80s inflation where you had one wave followed by another. They don't want that to happen. 

So I do still think the Fed's going to cut a couple times this year, but they're going to be data dependent. And so I think that's the biggest driver I think is inflation came raging back.

The market's going to have a tough time digesting it. If inflation can stay more muted, I think they start cutting interest rates to get more on target with their longer term, goals with interest rates. But I think it's going to be one of the bigger drivers of markets.

STEVEN:

There's been a lot of talk. And I think I'm a little bit more in this camp that rate cuts should be more of a tool to help fix what's going on in the economy rather than just a thing they do with no rhyme or reason.

There's been a lot more talk that they think that rates might stay pretty stagnant until we see some economic turmoil, whether that's two months from now. Two years from now, who knows?

And I do tend to fall a little bit more into that camp, but there certainly is, you know, it's been a surprise to everyone that there hasn't been a rate cut yet. And with seemingly us avoiding a recession, you know, depending on who you ask. But everything's staying status quo. 

I don't think the Federal Reserve is in any hurry whatsoever to lower interest rates.

SCOT:

I think it's interesting, Fed Chairman Powell was talking here this week, and he mentioned that the budget deficit that we have is really unsustainable. 

The Fed tries to stay out of fiscal policy, but they did say something really interesting. Fed chairman was talking about how big the budget deficits are.

So the Fed has telegraphed where they want longer term rates to be. If you look at where where they're looking at to be more like 2.5%. So them cutting rates would be consistent with that.

I do think there's a real problem with where rates are with how much debt we have, how expensive servicing the debt is, that they would want to see lower rates because of that, and not using it only as a tool to spur economic growth.

If something's broken and there's been some historical precedent to them, cutting rates when the market's near all time highs and it's typically been positive for the market.

So we'll have to see where things go. But I think inflation not getting out of control is not in anybody's interest. You don't want to see more inflation when you go to the grocery store, when you go to the gas pump, when you pay for stuff and it's also, I think, going to be rough sledding for the economy as a whole, if inflation comes back.

STEVEN:

And our third and final story, new all time highs. The stock market hit all time highs in July with A.I., artificial intelligence and technology leading the way. 

Is the market strength poised to continue or is a bubble about to burst?

SCOT:

Great story and great point. You know, I talked about in our Five Minutes on the Market, it was one of the big stories was investing in the market at all time highs. Actually one of the best times to be investing. It's contrary to what a lot of people would think. Oh, we're at an all time high. It's time to take chips off the table. Often it's the start of something bigger.

I mean, your average bull market lasting multiple years, and we're only, you know, a year and a half into this one.

So that's one of the reasons why investing at all time highs is good is because often highs begin other highs. You get some broader momentum in the market, and it can be a good time to be investing.

And I do think, I don't know if it's 1995 for technology or if it's 1998, but I don't think it's 1999. I don't think we're right at the edge of something really changing.

And the difference in 1999 with A.I. is the PE ratios were insane, bidding up companies without revenue. A lot of this growth that we've seen in A.I. in the market has been tied to earnings. 

And I think that is a really good sign that this could be the beginning of something that's going to be a longer trend in the market.

Murphy, what do you think?

STEVEN:

Yeah, I would agree with you, Scot. I think it is incredibly difficult for anyone to conceptualize and believe that investing at all time highs is totally fine and totally normal.

I think the question then becomes is when the next bear market comes, the next drawdown, significant drop in the stock market, whether that's tomorrow or ten years from now, we don't know. 

But you need to have a plan of action beforehand. When times are good, now, it's easy to get lackadaisical and not have a plan of action for when tough times do come, because inevitably they will.

So whether you are willing to ride the volatility in the roller coaster of the stock market, whether you start doing some passive, conservative holdings to offset some volatility, whether you have active management strategies or whatever your solution is, what you need to do is make sure you already have a plan in place while things are good. Because when times are tough, making emotional decisions because you're seeing your account go down every day is when you are going to make poor decisions.

So always have a plan in place when times are good, to make sure that when the bad times inevitably come, you are doing what's prudent and best for your situation.

SCOT:

Great point, and that's our Money Rundown for the week.

SCOT:

And now for Money with Murph.

STEVEN:

I work with a lot of public pension members, primarily CalSTRS and CalPERS members, but there are a lot of county specific pension plans and pension systems that I work alongside with for clients.

So no matter what public pension system you are a part of, really, they all, for the most part, are going to work, by and large, the same.

They all have their little nuances. But Social Security is a big question for anyone. No matter what you worked. If you were a stay at home parent, if you work private sector, public sector doesn't matter. Social security is a big question for everyone.

Well, as a public pension member, you probably have two additional hurdles and things to consider when it comes to turning on your Social Security and when is the best time to do so.

And that's really what I want to hone in on today.

So I want to go through a couple of definitions before we dive into some things to think about.

The first one is really what is a government pension in relation to Social Security.

So like I said, everyone's going to have big decisions when it comes to Social Security. 

But if you have what's called a non covered pension, then then you're going to have the two additional hurdles that I'll touch on a little bit more in depth in just a moment.

So a non covered pension is a pension you earned during employment and a job while you were not paying into Social Security. So for instance if you're a CalSTRS member like my mom or my wife, they are not paying into Social Security during each paycheck. 

Now what I do want to highlight is everyone, no matter what job you have, private sector, public sector, you are paying into to Medicare. So I want to make that distinction. Paying into Medicare. Everyone does it. The question then becomes, are you paying into Social Security?

Like I said, CalSTRS members, they do not pay into Social Security, CalPERS and some of the county specific public pensions are going to be a little bit different.

So it's important for you to know if you are paying into Social Security or not. So an easy way to remember this. I am not paying into Social Security, therefore I have a non covered pension.

So NON, NOT, not the perfect little remembrance tool there, but you know, it’ll help keep you on track. 

So if you have a non covered pension, the two additional hurdles to your Social Security are going to be windfall elimination provision aka WEP and Government Pension Offset aka GPO.

So what is WEP and what is GPO?

Windfall Elimination Provision WEP that only affects your Social Security benefits. So that's a very, very important to note. This is your Social Security benefit. If you go on SSA.gov, look up your Social Security statement, or perhaps you've got one in the mail throughout the years, this is going to affect that number.

Now, as of the time of this recording, 2024, the maximum windfall elimination provision, penalty or reduction, whatever you want to call it, is $587 or one half of your gross monthly pension amount. Whichever is less.

So it's a reduction in your own Social Security benefit because you have a non covered pension. The other thing is GPO, you know, this is going to affect only benefits you receive off of somebody else. So this will be a spouse an ex-spouse or hopefully this isn't your situation but a deceased a spouse.

This is a pretty straightforward calculation. You're going to take your monthly gross pension amount. You're going to take two thirds of that. And that'll be the reduction amount based off of your benefits you're receiving off of somebody else.

So many times this does wipe away spousal benefit, a widow benefit and its entirety. It may not, but it's something to keep in mind.

So for instance, let's say your monthly pension amount is $3,000. The GPO reduction would then be $2,000.

So hopefully that makes sense. Some things to consider that I want to make sure you're aware of.

GPO, I already gave you the formula. It's pretty straightforward. Two thirds of your monthly pension amount. That dollar amount will be the offset to any benefits you receive. 

WEP is going to be a little bit more complicated. I said that the maximum penalty or reduction that WEP can have on your benefit is $587 or one half of your pension amount, whatever is lower.

But it's a complicated formula. I can't just say a your WEP reduction will be X because of because of a Y. It's not that straightforward.

I can help calculate it. And that's something that with clients that we work with that have public pensions. This is certainly something that we're doing behind the scenes to help understand what your Social Security actually will be.

But we're going to need things like your date of birth, what age you think you'll be when you retire, what is your gross monthly pension amount and your full earnings history from Social Security along with your Social Security statement?

So remember, it can not completely remove your Social Security benefit, which is very good, but it will have a solid chunk be removed from your social Security benefit. Another thing to keep in mind, you can be affected by both GPO and WEP.

Now remember, WEP only affects your benefit. GPO affects benefits you receive off of somebody else. So it's entirely possible to be affected by GPO and WEP. In fact, it's quite common.

Because many times Social Security benefits are so reduced, many times it makes more sense to wait for the person with the public pension until their full retirement age, or even possibly older, to turn on their benefit. Now, that is not a blanket statement.

It's entirely possible for you that it might make sense to turn on your benefit before your own full retirement age. It's just something that I commonly see.

A lot of times it makes a little bit more sense to wait until your age 67 or older to turn on your Social Security benefit to to have your benefit grow larger. And hopefully you get a larger dollar amount after WEP or GPO has taken their reduction.

Something to think through. You cannot get rid of GPO. It's possible, but rare to get rid of WEP. So this is going to be a little bit more of an in-depth explanation, but by and large, if you have 20 years or less of what is called substantial earnings, so substantial earnings to the Social Security Administration for 2024 is $31,275 or more of wages that you earned while you were paying into Social Security.

So if you have 20 years or less, then WEP is going to be in full force. And that's pretty common.

Perhaps you worked private sector while you were in high school or college, but you got in your career as a first responder, as a teacher or some government official, and you spent vast majority of your career in that field? 

Well, probably you're going to have less than 20 years of substantial earnings, and therefore WEP will be in full force. 

Now, that number, of that $31,275 will have be lower throughout history, because that number has risen over time with inflation. But if you have 20 years or more, the impact of WEP starts to be reduced. 

So every year over 20 years, WEP is lessened each year. Once you hit 30 years or more, the impact of WEP goes away completely. So again, people say, can I get rid of WEP? Well, it is possible, but to get rid of WEP completely you need to have 30 years or more of substantial earnings. 

And that is a little bit more on the rare side to have someone with a significant pension and have 30 years or more of a job where they did pay into Social Security. It is possible. But again, maybe you have a long career. Maybe you've worked 50 years, you did 20 years in public service, earning a pension and 30 years in the private sector paying into Social Security. But it is a little bit on the rare side.

Now, what I do want to highlight is if you have a covered pension, which obviously is going to be the opposite of a non covered pension, WEP does not apply to you. So what is a covered pension? A covered pension is a pension you earned while you were paying into Social Security. 

in fact it's possible to be a public pension member, pay into Social security, and therefore you have a covered pension. And if you do, GPO and WEP will not affect you.

Another thing to keep in mind the number you see on your Social Security statement at various ages, whether you turn it on at 62, 67, 70, whatever age you are seeing on your Social Security statement, that is before WEP is reducing your benefit amount.

There's a common misconception. I see a lot of people making their Social Security statement in the mail says at age 67, they're going to get X dollars. Well, they think that's after WEP, but no, the Social Security Administration has no idea what the WEP impact will be before you retire and turn on your pension. So very common misconception.

Something to keep in mind when you're building out your income plan, that that number on the Social Security statement is before the reduction from WEP.

And finally, one other thing to keep in mind, WEP only affects the person that earned the pension. So what does this mean in real life?

What's an example of this? Let's say you earned a non covered pension and you pass away.

God forbid you pass away prematurely or just at any point. You have a surviving spouse that you leave your pension to. Now he or she is able to collect that pension and even though it's a non covered pension, because they are the surviving spouse, WEP does not follow them. WEP will have no impact on their Social Security benefit.

So thankfully, if you pass away and they collect your pension, it will have no negative impact on his or her Social Security. So WEP, quote unquote, dies with you. So those are some things to keep in mind.

I know I just threw a firehose of information at you, but like I said at the beginning, Social Security is a big, big decision no matter who you are. And if you have a non covered pension, a pension where you earned it while you were not paying in Social Security, you have those two additional hurdles in WEP and GPO, and hopefully that gave you some things to think about. And I'm happy to talk through your situation a little bit more in-depth at any time.

SCOT:

Steven, thanks for giving us that information today. If you like what you heard from Steven about public pensions, Steven does a webinar every month on this topic for teachers, firemen, police officers and specifically digs deeper into covered and non covered pensions, how they are going to impact your Social Security. So if you want to take advantage of that, I encourage you to go to our website, RetireEWO.com 

In our description for the podcast, you could click a link to schedule a meeting with myself or Steven, and you're also able to RSVP to one of our upcoming webinars on Social Security or on our Public Employee webinar series. So hopefully you take advantage of that. 

And that's money with Murph. Thanks, Steven.

STEVEN:

Thanks, Scot.

SCOT:

And now for our listener questions.

If you want your questions answered during the show, go to our website. RetireEWO.com and click on Ask a Question.

Our first question, Steven. Take it away.

STEVEN:

Our first question comes from Blake in Huntington Beach. And Blake asks, can I turn on my own benefit and defer my spousal benefit?

SCOT:

Blake, thanks for the question. This used to be a strategy that was available until the Bipartisan Budget Act of 2015 came into effect. It used to have something called a restricted application strategy, where you'd be able to actually file for a spousal benefit while deferring your own benefit. If you're born in 1953 or ‘52 or ’51, it may be available to you now. 

However, if you're born in 1954 or later, it's been phased out. No longer available. It was something we used to call the double dip strategy, very popular. But if you're born in 1954 or later, it's no longer available. If you're going to collect a spousal benefit, you're either going to get the higher of your own benefit or the spousal benefit.

You don't have the option of taking the smaller one and deferring the other.

Next question comes from Connie from Orange, California. She writes, I was a stay at home mom, but now I'm divorced am I out of luck because I won't get my own benefit?

STEVEN:

Connie, that's a great question. Thankfully, you are not out of luck. 

The main variable here is if the marriage lasted more than ten years, then you'll be eligible for ex-spousal benefits. If you've been divorced for more than two years, then it doesn't matter if your ex-spouse has turned on his own benefit or not. 

You are able to turn on an ex-spousal benefit whenever you see fit. Now, there's certainly some play to when that makes sense. Should you turn it on at 62, your full retirement age or age 70? And that is something I'm not able to answer because I don't have enough context for your situation.

But your main question overall, thankfully, you are able to collect an ex-spousal benefit if the marriage lasted for ten years or more.

The other thing to keep in mind is if you are potentially considering remarrying, that is one thing to consider. Obviously, your love and your marriage needs to take precedence, but an ex-spousal benefit would cease upon remarriage, so certainly something to keep in mind. You could potentially switch to a benefit off of your new current spouse. 

But that is something to keep in mind. If you got married or remarried, would your benefit go up? Would it go down or would it stay about the same? Scot, anything to add on that?

SCOT:

I think you answered it pretty clearly. I mean, there's definitely some different caveats. If you are divorced and I think one of the one of the big benefits is that ex-spousal Social Security benefit similar to a spousal benefit.

I think one of the big benefits is it doesn't matter if your ex-spouse has turned their benefit on or not.

If you've been divorced for more than two years, then your benefit decision is independent of what they're doing. Also, keep in mind the benefit you're receiving. It's not coming from the ex-spouse. It's a benefit in addition to, so I think those the other things that I would add.

STEVEN:

Our next question comes from Dave from Whittier. Dave writes can I work and still receive Social Security benefits?

SCOT:

Dave, thanks for the question. So you can work and collect Social Security benefits at the same time. But if you are before full retirement age. So if you're between 62 and whatever your full retirement age, most people 67, there is a earnings test criteria that you need to be aware of. So Social Security's going to penalize you $1 for every $2 you make in excess of about 20 grand a year.

That's the earnings test. So if you're working full time and you're making 40, 50, 60, 100 grand, 200 grand a year, it's usually not going to make sense to turn on Social Security before you get to full retirement age. Now, the year you turn full retirement age, you can earn around $50,000 to $60,000 a year and not be penalized.

And then after full retirement age, there is no penalty. So if you wanted to turn your Social Security on at 67 and keep working till you’re 70, there is no penalty after full retirement age. So you really want to be aware of what those penalties are. Also, keep in mind from 62 to 67, that earnings limit is only earned income.

It's not dividends. It's not withdrawals from your retirement account. It's not pension income. It's not passive real estate income. It's none of those things. It's just earned income. Also, if you're self-employed at 20 grand a year, is the net income number to you. It's not the gross. So if your business made $30,000, you wrote off $15,000 had expenses of $15,000, only 15 grand of earnings from the active business.

You still would qualify, where you’d be okay under the earnings test. So hopefully that helps, Dave. And if you want to talk more about it, happy to do it.

STEVEN:

And our next question comes from Mark from San Diego. Hi, Scot. Is it true that my Social Security is tax free?

SCOT:

Is your Social Security tax free? It is tax free in the state of California - for California income tax. It's not exempt from federal income tax. That's the big distinction. Now earlier in our podcast we talked about provisional income. And if your provisional income is under a certain threshold then your Social Security is tax free. If it hits another threshold, half of it’s subject to income tax.

And then by the third threshold, 85% of it is subject to income tax. So you want to know what those are or to determine if your Social Security is going to be taxable. And you want to make sure you're planning your distributions in retirement to be conscious of that. If you could be aware of where that provisional income threshold is, your Social Security, plus additional withdrawals from an IRA, you could stay potentially under those thresholds to be as tax efficient as possible in retirement. 

Beyond that, keeping your Social Security tax free for a lot of people with big retirement accounts or pensions or other assets, often keeping your Social Security tax free is difficult. But being taxed overall tax efficient is where you want to be focused, right? If you're going to be in the 12% federal bracket, how do you harvest everything in that 12% bracket?

If you're in the 22% bracket, how do you harvest everything in that 22% bracket? That's where a lot of the advanced planning is going to be focused on. Optimizing your tax efficiency, not just year to year, but over the decade ahead.

STEVEN:

Our next question comes from Shane from Laguna Niguel. Shane writes I am 64 years old and my wife is 61. I am planning on waiting till age 70 to turn on my benefit. I know that means my wife will be 67 and entitled to a full spousal benefit. Will she then get 50% of my benefit that I am getting at age 70 or a different amount.

SCOT:

Shane, thanks for the question. If you're looking at spousal benefits, your wife is going to first get her own benefit. Anything addition will be the spousal benefit.

Now she's entitled to get her full benefit or half of your benefit at full retirement age. That difference, the excess is going to be categorized as the spousal benefit. Now that spousal benefit, if she waits until she's 67 and you're 70, that spousal benefit’s not calculated on age 70 it’s calculated on age 67.

Spousal benefits do not go up from age 67 to 70 at that 8% per year increase rate that you get on the main earners increase. 

So the answer is no, she will not get 50% of your benefit at age 70. She is eligible for a benefit about 50% of your benefit of full retirement age, considering she waits until full retirement age.

Steven, is that a correct assessment that I missed anything? 

STEVEN:

Yeah. No. You're correct.

They're going to look back that the number at your full retirement age, that benefit amount is called your primary insurance and your PIA. So even though your benefit will be higher because you waited those extra three years, they're essentially just going to look back in time, quote unquote, to your PIA at your full retirement age, and they'll give her half of that, and then adjust it back for inflation.

So, unfortunately won't get half of your benefit, but she will get 50% of your primary insurance amount. 

SCOT:

Next question comes from Jenny from Las Vegas. I receive a pension from CalPERS, and I'm currently 63 years old. I'm not sure when to turn on my Social Security benefit. I'm a widow, unfortunately, so I think that might have some impact.

Do you have any thoughts?

STEVEN:

Well, Jenny, I don't know either. No, no. All kidding aside.

I would need to see your situation to make a proper recommendation based off of other income sources. What is your living expenses?

There's a whole list of variables that go into when does it make sense to turn on your Social Security benefit.

What I will say is I can give you certainly some things to think through and reading this question, there's certainly some things that come to mind.

The first one is understanding whether you have a non covered pension or not. What I touched on earlier in the episode is the difference between a covered pension and a non covered pension?

CalPERS is going to be job specific. I work with CalPERS members that did pay into Social Security even though they were working a CalPERS job. So therefore they have a covered pension. And I have clients that, are part of CalPERS and they have non covered pensions because they didn't pay into Social Security. So understanding that dynamic is going to be very crucial for you from the get go.

I'm sorry to hear you're a widow. Certainly, that is quite an unfortunate situation. That does add another variable in, because there's something called deemed filing.

Now, when you turn on your own benefit or when you turn on Social Security, if you are married or you are receiving benefits from an ex-spouse, Social Security will automatically give you the higher between the two. you can't choose which one you turn on. 

However, if you are receiving survivor benefits, which could be the case here, you do have the option to turn on your widow benefit and defer your own benefit. Let it keep growing and then switch to that in the future, or vice versa. You turn on your own benefit now and let your survivor benefit keep growing. that's a common methodology that we see happen with those that are in that unfortunate situation.

If you do have a non covered pension, then again, WEP, GPO will come into play. So you have a lot of variables of when, how much you're going to get, how much you receive from a survivor benefit.

Does it make sense to turn on your benefit now or later?

I really wish I could give you some more straightforward details, but there's just so many variables with your overall income plan.

WEP? Will it affect you? Will GPO affect you? Do you have a non covered pension or not? What is your own benefit amount? What is your survivor benefit?

There's a lot of calculations that need to be done with whoever you work with, whether you're a DIYer or you're working with an advisor, make sure that you are looking through the different scenarios of when to turn on different benefits. And at different ages. So, that would be my encouragement to you. I wish I could get a little bit more specific, but there's just a lot of variables that I would need to know to make a proper recommendation.