Mary Beth Franklin is our go-to expert for all things Social Security benefits. With over 40 years as a financial journalist and a CFP designation, she has a wealth of knowledge and understands Social Security from the financial planning point of view. She is a contributing editor at InvestmentNews, an author, and an in-demand speaker and frequent guest on numerous radio and television programs.
Listen in as she joins Micah and Tammy today to discuss the best strategy for taking your Social Security benefits, why you may want to consider waiting before pulling them, and how your marriage should factor into your overall benefits strategy. You’ll learn some of the common misconceptions about Social Security benefits and get actionable tips to maximize your benefits and make positive progress in your retirement planning—starting today.
What We Cover:
- The best time to start your Social Security benefits.
- What the “earnings test” is and why it matters to your benefits.
- How retirement and survivor benefits differ.
- Why you should be considering tax implications when planning your retirement benefits strategy.
- Why you might be setting yourself up now for higher taxes in the future.
- How COVID-19 has impacted Social Security benefits.
- The timeline for applying for Social Security benefits.
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, thrifts, savings plans, too. You can save your own way, with help from Micah and Tammy. You can save your own way, save your own way…
Micah Shilanski: Welcome back to the Plan Your Federal Retirement Podcast, I’m your cohost, Micah Shilanski. And with me as usual is the amazing Tammy Flanagan. Tammy, how are you doing ma’am?
Tammy Flanagan: Hey, Micah, I’m really good. And I’m excited about today’s show because-
Micah Shilanski: Yes.
Tammy Flanagan: … I’ve always admired Mary Beth Franklin. She’s my go-to, whether she knows it or not, she’s my go-to Social Security person, because if she can’t answer it, there’s not too many other people who can. So I’m really happy that we can explore some of these things with her today.
Micah Shilanski: Yeah, we’re super excited. She’s going to be a wealth of knowledge and some great information, so without further ado, Mary Beth, welcome to the show.
Mary Beth Franklin: Thank you, Micah, and thank you, Tammy. I’m thrilled to be with you two. And as far as the mutual appreciation society here, I turn to Tammy for everything federal retire related, and considering I’m married to a federal retiree, that’s an important topic multiple.
Tammy Flanagan: Thank you.
Micah Shilanski: Before we get into the list, Mary Beth, we have a whole lot of list of questions for you, but if you, as our listeners are not familiar with Mary Beth Franklin, you should. I would highly suggest Googling her. She is a contributing editor at InvestmentNews, as well as a certified financial planner. So not only does she have great information on Social Security, she understands it from the financial planning point of view, which is my biased, is always where you should because Social Security is an important piece, but it’s only one piece of your benefits. So you need to understand how that works and how it fits into the grand scheme of things. So really important to follow her articles and some information that she has.
All right. Mary Beth, we had some great things we wanted to chat about. As you know, our listeners are federal employees so we wanted to talk a little bit more about how benefits work, and Tammy and I just like to run through some general questions with you that we normally get from federal employees. Is that okay?
Mary Beth Franklin: Absolutely, Micah.
Micah Shilanski: I guess the biggest question we have is people always want to know when is the best time to turn on their Social Security? And that’s such a loaded question, right? But when is the best time or what are the strategies people should be thinking about when they want to turn on their Social Security income?
Tammy Flanagan: I was going to say, before you started, Mary Beth, because I always hear this from clients, is that it’s going to go away or I better get it while the getting is good. And it seems like the bias is to take it at 62. And so even though I don’t tell everyone to take it at 70, I try to get them to think of both ways. So I’m interested to hear what some of the things are that you would tell a client if you were trying to get them to see both sides of that coin.
Mary Beth Franklin: You both make excellent points. First of all, Social Security is a piece of your overall retirement income puzzle and it’s a very personal decision. Particularly when you have many federal retirees who retire before full retirement age and they may be looking for that extra cash. The first thing we have to tell people, because so few people understand this, yes, you can claim your benefits as early as age 62, but if you do, they are permanently reduced for the rest of your life. A lot of people do have this incorrect idea that if you claim at 62, and then when you reach your full retirement age of 66 or 67, your benefits are going to magically pop up to the full amount. They will not.
If you make that decision to claim early, which may be appropriate for some people, those benefits are permanently reduced. The other thing people fail to understand is that if you claim benefits before your full retirement age and continue to work, there is something called the earnings test. If you earn too much money from a job, which in 2020 is $18,240 a year, you are going to lose some or all of your Social Security benefits. In my mind, that’s just plain stupid.
But if you’re not working and if you need the money, it may be a good decision for you to claim early, but part of it’s going to depend on your health and your marital status. The whole idea of waiting until your benefits are worth more is based on the assumption, you’re going to be around to collect them. I like to say, it’s a bit like the lottery, you must be present to win—got to be around a long time, you may not want to delay, but frankly, most people significantly underestimate how long they’re going to live.
Tammy Flanagan: I was going to say, I heard that just the other day that most people underestimate their life expectancy by eight years. They’ll say, “Oh, I’m only going to live to 80,” when in fact they end up living to 90 or 88.
Mary Beth Franklin: And one costly mistake that can be particularly if you’re married. Married couples need to think of their Social Security claiming decision as a household decision rather than two separate decisions. And I like to hedge my bets. I think it makes sense for one spouse to wait up until age 70, if possible, to create the largest possible retirement benefit, which may in fact translate into the largest possible survivor benefit for the spouse that’s left behind. But having said that it might make sense for the other spouse, depending on whether he or she is working to go ahead and claim benefits early.
Yes, those retirement benefits are reduced, but it brings some cashflow into the household, takes away a bit of the sting of having the other spouse wait till 70. And the other great secret of Social Security is, even if I collect my Social Security retirement benefits early and my retirement benefits are permanently reduced, it has no impact on my survivor benefit if I’m at least full retirement age at the time. I could collect early reduced retirement benefits and still be entitled to full survivor benefits.
And here’s another lesson, retirement benefits as a spouse, my maximum benefit is half of my husband or half of my wife’s benefit. A survivor benefit is 100%. So it really makes sense for married couples to coordinate these claiming strategies.
Tammy Flanagan: I wanted to piggyback on that if I could, Mary Beth, because it brought to mind something about a younger widow. Let’s say that you have the unfortunate situation where the husband dies early and I’m turning 60, and I know you can claim a widow’s benefit as early as age 60. So if I take that widow’s benefit then, could I delay my own benefit till 70 and collect that widow’s benefit while I’m waiting for mine to grow?
Mary Beth Franklin: You could, but I would encourage people in those situations to meet with their financial advisors and let’s compare the numbers. To start with, a survivor benefit and a retirement benefit are two different pots of money. And you may be able to claim one type of benefit first and switch to the other one later if it’s larger, but there were other things to keep in mind. Yes, I can claim Social Security survivor benefits as early as age 60, they are reduced and I’m subject to those earnings restrictions.
My retirement benefits can keep growing up until age 70, the survivor benefits max out at my full retirement age. So let’s say I’m a widow and I’m still working. Because I’m still working, it might make sense at my full retirement age to collect my survivor benefit, let my own retirement benefit keep growing up until 70 and then take that maximum benefit, assuming my retirement benefit plus delayed retirement credits are bigger than the survivor benefits. If it’s the other situation, I’ve been a stay at home mom much of the time, I don’t have a big benefit on my own and maybe I’m not working.
Maybe I want to collect my own reduced retirement benefits early as 62, and then wait till my full retirement age and still switch to my full survivor benefit, because now I’m full retirement age. So you’re dealing with two different pots of money, two different timelines, and you have to figure out how to maximize that.
Tammy Flanagan: But you made it simple. It sounds doable. Thank you for explaining that.
Micah Shilanski: And I think it is. It’s a good math question that’s going to be there, but the good news is it’s basic math, it’s not going to get too complex. But sitting down, and Mary Beth, I really liked what you said, you have those two different pots of money and how do you best utilize them. And I think this is people’s misconception with Social Security and I’d love to know if you view it differently, but especially when I’m working with clients.
They’re not viewing it as how to maximize their entire retirement, they’re just looking at as one source of income. And that’s where I think people can make mistakes with Social Security planning is there’s many different strategies that you can use to get the most benefits.
Mary Beth Franklin: Absolutely. And particularly for many federal retirees who are middle income, upper income, they may be really surprised at how much they’re paying in taxes in retirement. Part of the strategy is how do we maximize our retirement income streams in a way that’s going to minimize our taxes. And a lot of people will say, “I’ve got this 401(k), and I’ve got Social Security, and I’ve got my pension. How do I put these pieces together?” We have to remember that we are currently living in essentially a zero interest rate environment and have been for about the past decade, and at this point could be another decade.
If you say, “All right, if I took my Social Security benefits early at 62, I don’t need the money.” What are you going to do with it? “I could stick into my bank account.” That’s great, you’re going to make zero. If you say to Social Security, “I’m willing to wait. I’m going to get 8% a year between my full retirement age and 70.” There is no place else. You can get a risk-free return of 8% a year. Now, that same person might say, “I’ll put in the stock market.” Great. You might make 30%, you might lose 30%. You have to compare that to a risk-free investment, which is essentially your bank account, no place else are you going to get 8% a year.
Micah Shilanski: And Mary Beth, I love that point of view and I bring it to clients all the time. And for them, I like to compare it to their TSP fund, because the G Fund is a guaranteed fund, and the G Fund has a guaranteed rate of return, and most of the time it’s higher than a bank account. But Tammy, do you know what the current G Fund is right now?
Tammy Flanagan: G Fund? Between one-and-a-half and two, somewhere in there.
Micah Shilanski: Okay. Let’s be generous, let’s say it’s two. I think it’s little, but let’s say it’s 2%. Mary Beth, to your point, that’s not even close to the guaranteed 8% a year increase you’re going to get in your Social Security benefits. And I love pivoting that point of view. Now this is again, assuming we have a place to live on other income. So assuming this isn’t an income need, maybe we can live off of TSP or live off something else. Now I have a guaranteed 8% rate of return on my investment. Why not defer that Social Security to have that higher paycheck?
Mary Beth Franklin: Great. And now let’s go to a next level, this gets a more complicated, but we talked about how to minimize taxes in retirement. Every penny that comes out of your TSP is going to be fully taxable at your regular income tax rate. Worst case scenario on your Social Security benefits at this point is 85% of your benefits can be taxed at your ordinary income tax rate. So let’s say I now agree it might make sense for me to delay Social Security until 70 to get that extra 8% a year, but I still need money.
It may make sense for me to start drawing down that TSP even before I have to, because now it used to be at 70-and-a-half, we had to start taking it out. Now it’s 72 for new people, but once you have to take that money out in what they call required minimum distribution each year, you’re locked into it. That money’s coming out with either need it or not and you’re paying taxes on it.
So if you could start tapping those accounts earlier now for income, it means most likely your annual required minimum distribution in the future will be smaller and you will be required to pay less income tax on it. So it’s another way of getting money out and minimizing some of those future taxes.
Tammy Flanagan: That’s such a good point, Mary Beth, because I hear that from clients all the time that, “I’m not touching my TSP account because I don’t need it right now. Social Security is going to happen next year and I have my government pension benefits. I’m just going to let it go.” But they’re forgetting that it’s growing while they’re waiting, so not only are the required minimum distributions based on what they have in it now, but it could be a lot more than that coming out later, which could…
I know we said, we’re not going to talk much about Medicare today, but it could also affect how much you pay for Medicare.
Mary Beth Franklin: Absolutely. And let’s take it one step further. We’re going to have your listeners thinking who is this crazy woman talking about this stuff? Just think of it as the Queen’s Gambit, but we’re doing Social Security instead of chess.
Tammy Flanagan: There you go.
Micah Shilanski: There you go.
Mary Beth Franklin: The next thought is if I wait until I have to take that money out, and my income taxes, and my Medicare premiums are all going to be based on my joint income as a married couple. What happens when one of you die? Suddenly the income thresholds for both your income taxes and your Medicare premiums now switch to a single person, but you’ve just inherited all those assets from your spouse. You are going to be paying through the nose if you wait for the tax laws to dictate how much you have to take out every year. If you start tapping that a little earlier you have a little more control.
Micah Shilanski: Mary Beth, I just love that, and this is the part, I think people also miss on taxes. So often we get into a tax planning mode and all we do for tax planning is March and April comes around, we look at last year, how much did I pay in taxes? And what can I do different about last year? That’s like driving looking through the rear view mirror. We got to look through the windshield, we’ve got to look at the maps. We got to navigate where we’re going to go in taxes is a 20-year game. And that’s what you’re referring to, is what decisions can we make now to lower your taxes over the next 20 years?
You can have such an impactful time before 65, right before Medicare comes in as a planning opportunity, so from retirement to 65. Then I say from 65 to 70 is our second windows. 70 because that’s when our Social Security income will probably come in if we’ve deferred it. what can you do in that period in time to take money out of TSP, to do Roth conversions, to do other planning opportunities to save taxes in the future when you know you’re going to be kicked into a higher tax bracket? And we haven’t even talked about tax laws increasing.
We can throw that on there as for another thing to look at, but just if taxes stay the same, a lot of federal employees are setting themselves up for much higher taxes in the future.
Mary Beth Franklin: Right. And I’d also say there’s two other windows there. I would argue that a planning window for a lot of people is now stretched out to age 72 because for the required minimum distributions, but and a more immediate window is 2025. The current tax laws, we had a slew of tax law changes, and I believe it was the jobs tax cut—
Yes, 2017 as opposed to the other tax acts that lowered individual income taxes through 2025. And if Congress does nothing, those higher tax rates jump back into effect on January 1, 2026. We have no idea what’s going to happen. We do know we’re going to have enormous budget deficits as a result of COVID and all the economic stimulus packages. I would not assume rates are going to come down.
So I would say, people who have the opportunity, for example, to make some Roth conversions between now and of 2025. Now, nobody likes the idea of paying taxes sooner than they have to, but we do have this flashing light saying, “Your income tax are on sale through the end of 2025. If you want to catch this bargain, you may want to convert some of your traditional retirement accounts to a Roth IRA each year.” You don’t have to do it all at once, in fact, that’s probably a bad idea, but you may want to look at your existing tax bracket and say, “How much more income do I have between my current income and the top of that tax bracket?” And convert that much this year, and next year, and the following year incrementally.
You don’t have to get it all into a tax-free column, but if you have some money in a tax-free column, it means each year when you’re deciding where your retirement income is coming from, you could say, “I have to take this required minimum distribution from my TSP and I’ll have this from Social Security. But if I have additional income needs, if I took it from this tax-free pot of Roth IRA money, it may be holding down my income taxes and my Medicare premiums.”
Micah Shilanski: And a good way to look at that is when we’re working with clients for last year, doing Roth conversions, just run two different… I know sounds fun, right? I geek out about it, but run two different tax projections, one with 2026 numbers, which is the same as 2017 numbers, right?
Mary Beth Franklin: Right, right, right.
Micah Shilanski: What will your taxes be versus what are they now, and that’s a really good motivating factor, as you said, it’s 20% sale. Sometimes we’re less motivated. The other way to say that is your taxes are going to go up by 22%. That’s the bill that’s going to be there if tax laws don’t change, so take action on it. Yeah. Sorry. I’ll geek out about it because I love it.
Tammy Flanagan: I love you on that.
Micah Shilanski: I was going to say, jumping back on Social Security.
Tammy Flanagan: Oh, yeah. I was going to ask the question about, we were talking about COVID-19 and how it’s impacting tax planning and other things, but also has it really impacted just in general, dealing with Social Security or claiming benefits and talking to someone about your benefits? What have you noticed in this year of COVID that’s different from what was in the past?
Mary Beth Franklin: I think like the rest of the federal government, the hardworking Social Security representatives are also working from home and they’re dealing with a flood of requests because a lot of people who have either lost their job because of COVID may be applying for benefits earlier than they may have planned. And other people are concerned for their health and deciding not to go back to work and retiring early. So you have, in addition to the normal demographic requests for retirement benefits, you have these COVID-related early retirement requests for benefits, and you’ve got all these Social Security reps working from home.
Now, it’s a weird year and I have no personal knowledge of what supervisory communications are going on between frontline workers and their higher ups in the Social Security administration. But I have read letters that clients and readers have received from Social Security that simply make no sense whatsoever. People are applying for benefits, in many cases, those who are older than full retirement age are rightfully asking for lump sum payouts of up to six months of retroactive benefits as is their right.
And they’re getting letters back from Social Security saying, “Yes, you’re eligible for these benefits, but we can’t pay you because we don’t have the money.” “I’m sorry, what does that mean? What does that mean?” I’ve heard this over and over again from a lot of advisors that work directly with clients adjudicating Social Security decisions. They have seen everything from you must send a “wet signature.” In other words, fax a copy with your signature, even though you should be able to just do this over the phone or online.
Some were saying, “You must come into the office with ID.” “Your offices are closed, how do I do that?” The Social Security administration response to my questions have said, “They are trying to make exceptions on the most dire cases to allow people to cover the office,” but they never define what dire cases are, so it’s just a mess. And I will say that if you know you’re entitled to a benefit, and this is the key, I have a lot of people who say they are claiming Social Security benefits early and are miffed that they can’t get their six months of retroactive payments.
It’s because you can’t. You must be at least full retirement age or older to request a lump sum payout of up to six months of retroactive benefits, and those benefits can start before full retirement age. So if your full retirement age of 66 and you are 66 in six months, you can request six months of retroactive benefits in a lump sum, and you would be paid going forward as if you claimed at 66. You can’t double dip there. But if you’re 66 and three months and your full retirement age is 66, you can only request three months of back benefits because the lump sum can not start before your full retirement age, no.
Micah Shilanski: Mary Beth I think that’s just such a great planning tool right there is that six months. Now, most of the time we don’t actually use it with clients, but working with them. Sometimes we’ll have clients that are just like that, “You know what? I want to turn it on before I lose my Social Security, before they take it away.” Or “I want to make sure I get…” Now, we just talked about the benefit of deferring it, letting it grow at that 8%. So sometimes working with clients, I’ll say, “Look, how about we just kick this down the road three months?” Or “How about we kick this down the road six months?”
And guess what? If I’m wrong, now, again, as you said, they have to be FRA, full retirement age, but if I’m wrong and you’re not happy in six months, go back and get that last six months of income, turn it back on. It almost gives us that flexibility with Social Security, because it’s not a one infinite date, at this date you have to turn it on. We have a range of eight years that people can choose from for their own situation. So if you’re on that borderline about, should I take it or not? Maybe defer it, especially if you’re over your full age.
Because what I’m hearing, Mary Beth is they could defer it and then they could always go back and at least get the last six months if they’re over that full retirement age.
Mary Beth Franklin: That’s correct. And I also tell people when they’re making a decision, Micah, you raise such a good point that your Social Security claiming decision is not on a by year basis that you decided 65, 66, 68, it’s any month in between. You can apply for that benefit at any time. And I had a client the other day who was a 68-year old woman, never married, so she was single. She’d been going back and forth, taking care of her mom in North Dakota and she lived in D.C. Her mom had just passed away and she was just looking at a whole new lifestyle.
And she said, “I think I might request the six months are retroactive benefits.” And I said, “That’s a great idea in your situation, because one of the best reasons for someone to delay and maximize that benefit is when they’re married, because you’re trying to create that bigger survivor benefit, but you’re single. Nobody’s going to get a survivor benefit. Your decision is strictly yours based on cashflow and personal needs. And if you’ve decided this is going to make your life easier, go for it.”
Tammy Flanagan: That’s what I like about the FERS as opposed to the old CSRS system because you have three separate benefits. Most people will start their first benefit because you want to continue your health insurance, but the TSP withdrawals, the Social Security claiming, that can happen at different times. And I think that’s a real benefit to think about not necessarily turning all three of those on at the same time. Because as you guys are both pointing out, there’s some real financial advantages to staggering it perhaps for someone.
Mary Beth Franklin: Right. You mention a great point, Tammy. The one downside of requesting that lump sum of six months of retroactive benefit is you’re getting it all at once in one year, which could affect your taxes, which could affect your Medicare premiums. So you need to crunch the numbers and look at the big picture.
Micah Shilanski: Mary Beth, let’s talk a little bit real quick about applying for Social Security. What are the actual steps that people need to do? And what’s the timeline that we can expect. We know with… Tammy and I were just talking about with OPM, the Office of Personnel Management, when someone applies for their FERS or CSRS benefits, we got a plan on like six to eight months before benefits will probably start coming in. We don’t know, so we need to have a decent amount of cashflow set aside.
But what about for Social Security? If someone wants to turn it on at maybe their full retirement age, how long should they plan before from when they apply to when checks start coming in?
Mary Beth Franklin: That’s a great question, Micah, and this is the one area where Social Security does really well. And I can say this from personal experience, I just turned 66 last week and I applied for my Social Security benefits in November, the month before my full retirement age birthday. And within two weeks I received a letter from Social Security saying, “We’ve received your application. Your benefits will be paid for December, the following month in January.” So that’s the way Social Security works, the month of your entitlement is paid the following month and each month afterwards.
I have been encouraging people for years to apply for Social Security benefits online rather than going into the office in-person, and it was so prophetic because now it’s the only way. Social Security benefits and you can apply for benefits online up to four months before you want your benefits to start. And as I said, I just went through this personally, it’s a very simple process. You have to start with having an online Social Security account, my Social Security account.
And once you have that, you can go to the homepage and click on apply for benefits, and it takes you through a questionnaire. It’s asking you your name, your address, your Social Security number, your birth date, your marital status. And then it asks you other basic questions to make sure you are who you say you are. And it will ask people about military service and whether they’ve been married and divorced, and whether they have minor children and you work your way through it.
In my case, it’s only about 15 minutes to complete the application, and mine was a straightforward, I’m full retirement age, just pay me my benefits. Now, a lot of my readers would say, “You’re always talking about the value of delaying till 70. Why didn’t you wait till 70?” It’s because I’m taking another piece of my own advice in that married couples should coordinate their claiming strategies. And what happened a couple years ago, it was actually October of 2015, Congress changed some critical claiming strategies, rules, depending on people’s birth date.
The first thing was this very lucrative strategy that was called file and suspend. And back then in 2015, it said, “Okay, anybody who is 66 by April, 2016 can do this, nobody else can.” So I lost that strategy. Then there was a remaining strategy for married couples and eligible divorce spouses. And it said, “As long as you were born on or before January 1st, 1954, and if you’re married and entitled to your own retirement benefit, and that as a spouse, you could choose to claim spousal benefits only worth half of your spouse’s full retirement age amount while your own retirement benefit continues to grow.”
Unfortunately I missed that cutoff date by 11 months, but my husband who’s two years older could still do that. He could claim spousal benefits, but the catch is, I had to claim my retirement benefits first to trigger a spousal benefit for him. So mine was very straightforward online. Got a piece of paper within two weeks in the mail saying, “Yep, your benefits are going to start.” With that paper in hand, we then went online so Mike could claim his benefits as a spouse only.”
Now, Mike is a CSRS offset retirees. I think it is interesting that we have not gotten a piece of paper yet from Social Security telling us about Mike’s benefits. Now, we all know, we hear about windfall elimination provisions, which can restrict Social Security benefits for people who have public pensions like the old CSRS system where they didn’t pay into the system. And there’s also something called the government pension offset rule that applies to spouses and survivors who try to collect Social Security benefits if they have a public pension.
But we also know, particularly in this CSRS case, because he has more than 30 years of FICA covered employment, he is not affected by WEP reductions. And because he paid FICA taxes during at least the last 60 months of his government service, he is not affected by the government pension offset. My question will be, does Social Security know that?
Micah Shilanski: They will when you’re done, that I feel confident. How’s that?
Mary Beth Franklin: And I’m sure I’ll get another column out of this.
Tammy Flanagan: Yes. If anybody’s listening that’s under what your husband’s under, CSRS offset, we’ve always called that the best of both worlds for the very reasons you just outlined, he’s not affected by the WEP, he’s exempt from the government pension offset. But what we didn’t see coming down the pike was that there are so few of these people that are fortunate to be under offset that sometimes if it gets in the wrong hands, both at the OPM side or the Social Security side, things can go wrong.
So you need to be aware of what you’re entitled to, and maybe ask somebody like Mary Beth or myself or Micah that understands both sides of this, both the Social Security piece and the civil service piece, because it can get tricky and things can go wrong. But when they go right, it’s wonderful.
Mary Beth Franklin: I suspect we’re going to have a long email pin pal relationship among the three of us until this is-
Micah Shilanski: That’s right.
Mary Beth Franklin: … resolved.
Tammy Flanagan: Absolutely. It’ll last a while.
Micah Shilanski: One thing to point out real too, real fast as well is for our FERS listeners, Federal Employees Retirement System, this does not apply to you. Under yours, yep, and you’re still getting your federal pension, which is great, but you’re also paying into Social Security, so you are not subject to the GPO, government pension offset or the windfall elimination provision. I know that’s a frequent question that we get.
Mary Beth Franklin: Tammy and Micah, you both mentioned earlier that you hear from clients, “I am just going to grab Social Security 62 before the system goes broke.” I do hear that a lot. I don’t try to persuade people one way or the other, it’s certainly their decision. I just want them to make an educated decision. But I say it’s like having investments in the stock market and the market goes down 30% and you’re so you want to pull all your money out. The only thing you’ve guaranteed is you’ve locked in a loss.
Same thing with claiming Social Security at 62 if you don’t really need it, the only thing you’ve guaranteed is you’ve gotten smaller benefits that you might have gotten otherwise. If you’re good with that, that’s fine. But I think it’s not a good idea to grab your benefit as soon as possible out of fear. If you have a legitimate cashflow need, it’s your money, it’s your benefit, that’s what it’s there for, take it. But if you’re doing it because you’re afraid it’s not going to be there, I think that’s foolish because Social Security is the most popular and successful federal program in history.
And even as dysfunctional as our current congress is, and this is from a former Capitol Hill reporter for your United Press International. I covered the Social Security reforms in 1983. They are not going to cut your benefits. Then you’re not going to let this go dry. There will be changes going forward, I guarantee. If I was to pick my top three changes, I would say eventually Congress will raise the full retirement age, which is currently slated to go to 67 for people born in 1960 or later. I think it may go to 70, but wait a minute, I’m talking for today’s two-year-olds. They won’t get used to it. They’re going to live to 120 anyway. It’s fine.
I also think we talk about taxes in retirement. Currently, up to 85% of Social Security benefits can be taxed at ordinary income tax rates. But the threshold for taxing those benefits is ridiculously low. It was set in 1983, was never index for inflation. It’s 25,000 for singles and 30,000 plus for married couples. I think at some point, 100% of benefits may be taxable, but I think the threshold for taxing them will be much higher.
Tammy Flanagan: Yeah, I agree with you.
Micah Shilanski: And these are all what? Stripes, so we would plan with what we know. We know things will change, but we can’t wait for them to change to make our plan. You got to start today. We got to start taking action about your retirement, so it’s a good transition, Mary Beth. This podcast is not about informing our listeners, but it’s about action items. So what are some good things our listeners should do today, this week, this month to make positive progress in their retirement planning?
Mary Beth Franklin: I think every American 18 or older who has ever worked should have their personal online Social Security account. If you don’t have one, stop what you’re doing, do not collect $200 in Pascoe. Go right to ssa.gov and set up a my personal my Social Security account. What is that? It’s going to give you 24/7 access to the same statements we all used to get in the mail each year before our birthdays that says, “This is what your estimated benefits would be at 62, at your full retirement age, at age 70. This is what your survivors would get under your current earnings record. This is what you would get under disability.”
Critically important document for any kind of financial planning. And even though those people who already have it set up, congratulations to you. Now you should check it at least once a year. Because it’s your employer’s responsibility to send that earnings information and FICA tax information into Social Security every year, but it’s your responsibility to check it. And if something’s not right, if you know you made $80,000, but it says zero, there’s a problem and you need to fix it because your future benefits are based on your average lifetime earnings. And if you’re earning statements not correct, your benefits aren’t going to be right either.
Tammy Flanagan: That’s right. Good advice.
Micah Shilanski: I think it’s great. To put a timeline on it, one of the things we reach out to our clients is we do it at tax time because we’re thinking about it anyways. So coming up in April, March and April when clients are getting their taxes done, we’re going to say, “Hey, great, get your Social Security statement. You have to go back two years, because they won’t have… This will be for 2021, they won’t have 2020s data available yet, but they’ll have 2019’s.” And so for us, it gives us a date and time to make sure they’re looking at that.
So maybe it’s tax time for you, maybe it’s another time, but give it a place to live on your calendar to make sure you do it.
Mary Beth Franklin: There’s one other thought there because it not only talks about what your benefits will be in the future, but it lists your entire earnings throughout your career. It’s this wonderful snapshot and how much you have paid in FICA taxes that support your Social Security benefit. Add up those taxes you have paid over your lifetime. That’s the best incentive I can think of of why you want to maximize your Social Security benefits.
Micah Shilanski: It’s a great point. Mary Beth, I’d love to add onto this as well, especially with talking to you for the last 30 minutes. Social Security is complex. It may not be as simple as turning an age and turning it on. Yes, that’s an option, but you may not get the most out of your benefits. So I would say an action item, what’s your strategy for our listeners out there? What is your strategy that you’re going to have to maximize your Social Security? How does it work with your cashflow? How does it work with your survivor?
These are things that you need to learn about, to figure out, to have a plan. Mary Beth, as you said earlier, you don’t have an emotional reaction to Social Security. How do you make this a financial reaction, not emotional one?
Tammy Flanagan: Great. I love both of those. I always tell my clients, I say… They’re always worried, “What if I die and I never get any Social Security?” I said, “That’s not a problem. When you’re gone, you don’t need the money.” My bigger concern is, what if I live to be 90, I don’t want to run out of money. So one way to guarantee income coming in every month as long as you live is to get Social Security and a pension. Those are two streams of income that you really can’t outlive those, at least not yet. Let’s hope Congress doesn’t take that away, but I don’t think they will. Like you said we’re so dependent on it in this country that it would never disappear. We’ll see it in a different form, we’ll see changes made. And like you said, Mary Beth, most of those changes will be… I don’t know if that’s the politically correct word anymore, grandfathered in, but they’ll be affecting the next generation more so than ours.
Mary Beth Franklin: To put it in perspective, the last major Social Security reform was in 1983. Okay? Nearly 40 years ago and it is not fully implemented yet. That last piece of raising the full retirement age to 67 for people who were born in 1960 or later doesn’t take effect until 2027. I think that is an excellent way to make changes in critical public policy like Social Security. I was not a fan of the bipartisan budget act of 2015 changes to Social Security. They gave us six months notice on one strategy and four years on the other, depending on your birthday.
There were a lot of people who were planning to use those strategies and the rug was pulled out from under them. And I think the American people can get used to any change as long as they have enough time to get used to it.
Tammy Flanagan: And to plan.
Micah Shilanski: Mary Beth, thank you so much for being on the podcast. I know I learned some, I have a lot of takeaways. I was writing down as we were chatting some things to do individually with clients, so I’m sure our listeners got a lot of information out of it.
Mary Beth Franklin: Thank you for what you both do because again, married to a federal retiree, there are so many moving pieces with the rich federal benefits, which are great, but the key is to coordinate them with these other pieces. And there’s a lot of moving parts and it’s helpful to have experts like you guiding people on, not so much the answers they should have, but the questions they should ask of their trusted advisors.
Micah Shilanski: I love it. If you want more information on Mary Beth Franklin and where to find her, you can visit our website planyourfederalretirement.com/fourteen/14. And then that’s going to link directly to this podcast. We’ll put a link up there with your information on it, Mary Beth so readers can find you as well.
Mary Beth Franklin: Great. And one other thing, I do have an ebook on maximizing your Social Security retirement benefits, and we’ll send you a link to that as well.
Micah Shilanski: Okay. That would be wonderful having to put that up. Thank you so much again for being on our podcast. Tammy, anything else?
Tammy Flanagan: I could think of 100 other questions—
Micah Shilanski: I know.
Tammy Flanagan: … from her. I’m sure we will do it again. I was just excited to introduce you to Micah and vice versa, and I just think this has been a great show. I’ve learned a lot as well.
Mary Beth Franklin: This was great. Thank you so much for having me guest on your podcast. Really appreciate it. Happy holidays, everybody and happy new year. It’s got to be better this one.
Micah Shilanski: Amen. Until next time, happy planning.
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