Ep #70: Changes in Planning Over The Years, Social Security

Full Episode Transcript
With Your Hosts
Micah Shilanski and Floyd Shilanski

Micah: Welcome back to another amazing episode of Plan Your Federal Retirement podcast. I’m your host Micah Shilanski and with me today is not Tammy Flanagan as usual but we have another legendary person speaker presenter in our recording studio today. We have the one and only Floyd Shilanski. Pop’s, how’s it going?

Floyd: You know, I am blessed to be here and it’s another day in paradise. Thanks for inviting me to come on.

Micah: This is fantastic. Well, if you didn’t recognize by the name or by pops, yes, Floyd is my father. He started our financial planning firm. Well, he started really first in financial planning in 1978, a couple of iterations here and there and brought us into the business which we’re very, very grateful for. So thanks, boss.

Floyd: You know, if I’m looking back in my career, I’m glad I did what I did. All right, you guys have just you and your sister Jamie have just done phenomenal things in here and we’ve helped so many people, especially in the federal market.

Micah: Yeah, the federal employees and that’s really what our passion has moved into throughout the years and there’s so much incorrect information out there about federal employee benefits, which is a big reason that we’re doing this podcast as our listeners know, we have a goal as a team that we want to help over 1 million federal employees with a retirement that’s a huge number right? So we definitely need your help and your our listeners help sending this information out etc. And our listeners if you have not filled out our listener survey, we would love your help in doing that. Jump on our website, plan your federal retirement.com fill out that listener survey so we can get your feedback because this podcast is all about providing benefits to you. But if we don’t know your feedback as hard to do, we have to make up our own things. But in the meantime, while we’re waiting on that great feedback coming in from you guys pops I know one of the things that we were talking about and one of the questions that we get all the time when working one on one with our financial planning clients is that question on Social Security. And social security, I’m gonna say is a really important question because as you know, federal employees their benefits are based on three things, right? They have their federal benefits, their pension, social security, and the TSP the Thrift Savings Plan. There’s kind of the three tiers which make up the first Federal Employee Retirement System benefits package, and that Social Security is a big one, because we have options we have different ways that we can take that and there’s a little bit of misconception sometimes out there at least when I’m talking to people about this, but what are your thoughts on that boss?

Floyd: You know, over the last 40 some odd years, I’ve been doing this, the flow of Social Security has been it won’t be there. It will be there. It won’t be there. It will be there. And then when CSRS and FERS shifted on the mid 80s, I guess it was a lot of the conversation with our federal employees. Where do I stay with the old system or go with the new ones? Right? And I will tell you today some of the ones that stayed or say oh, that was the best thing I’ve ever did. And on the other hand, some of our first clients go best thing I ever did was get out of our system because now I can control it right. Funny thing about Social Security though. 40 years ago, many that people planning their futures again CSRS-ers. I don’t have it. I’m not worried about it. And so they set aside their own funds to to mimic what the sole security would be at that time. First guys and gals it was mandated that it went in there. All right. So it has become an integral part of the retirement system. The question I see a lot and that we talk to our clients a lot. Do I turn it on at 62? That’s the first year that you’re eligible. Sure, unless your surviving spouse or something has happened, right? And then you had this thing called full retirement age and planners call it FRA right. And that’s all based off the years that you were born, and then a hot topic that I’ve had recently. Well, you know, FoId security isn’t going to be there when I get ready to retire now post free go any further.

Micah: So the FRA the full retirement age that’s generally between 65 and 67. Right? Grow between 65 and 67 depending on when you’re born. Most people that haven’t retired yet, that 66 or later is probably that full retirement age for them on average, but that is identified on your Social Security statement. You can pull that and see what that is.

Floyd: And that that’s correct. If you apply for Social Security, start receiving it before your full retirement age, you get deemed starts at a 20% permanent pentylene and worked its way down until you hit the full retirement age. Conversely, if you delay after full retirement age, you get an increase in that benefit every year, and it’s guaranteed plus COLA. So this last year in 2022 people that delay taking Social Security say from 67 till 70 got a double digit increase in benefits. Stock market didn’t do that in 2022. So I tried to get my clients or the people that we talked to to listen and say guarantee versus risk right? You want to guarantee increase the income. Maybe you want to delay. Now that delaying comes to the risk. Will Social Security be fully funded by the time it gets to 2035? And the answer is that depends. Right? Will Congress bite the bullet and do something to fix it? But this isn’t the first time you’ve been here Micah would have had to work on Social Security and fixing it multiple times, even since you’ve been born.

Micah: Yeah. And then by fixing it, we’re just kicking the can down the road. I mean, there’s just to the next thing to the next thing to the next thing, etc. So, alright, so you you’ve painted a complex picture there. Let’s start pulling the threads on this one step at a time. So you got a couple of questions. One, when do I file for Social Security? Two, what’s the benefits pros and cons for filing early or delaying filing? And I guess a subset of that would be is Social Security going to go away at some point in time and lots of great questions there. So let’s take that last one. That’s kind of punt that I mean, that’s what Congress does. Anyways, right? They put that decision. Let’s just get down the road and kick it down to the end of the podcast. Give our listeners a good reason to stick on to get our opinions on that one. But before we get into that, really when I’m sitting down working clients, pops I’d love to know your thoughts on this or where you disagreed. Turning on social security number one is a cash flow question. That’s the number one way that I look at this and I think so often, that federal employees can get caught up looking at spreadsheets looking at numbers looking at you know, I got it what’s my breakevens at 82 or this or that and says no, no first thing we got to look at is just your cash flow. Cash flow is the heartbeat of retirement. And that means if you have solid cash flow coming in, you’re able to do some really fun things retirement and if you don’t have solid cash flow, you can’t do fun things in retirement. So the first thing we have to look at is cashflow. How much a month are you spending where’s that money going to? And where’s that money coming from? How much is your pension, how much would be security etc. Those things I want to look at first before we even get onto a Social Security conversation. What are your thoughts on that?

Floyd: Don’t forget the emotional side? Yeah. And so many of our early retirement I call them early retirees, people that want to punch out at 62 and say we’re done. Alright. The question is, what are you going to do going to go live off the grid and a hermit? Well, okay, maybe 62 make sense, but so many times it’s the emotional decision. It’s my money. I want it now. That’s one. Two. I don’t trust the government and it won’t be there when I get there. Well, that’s another one. All right. But let’s talk back to your cashflow side if we start before our FR for retire retirement age, the recipients are permanently penalized with one exception. During the first year. You can turn it off and go oh man, did I make a mistake and suspend it and you can delay it. You will get some of your money back but if you had taxes withheld, so you don’t get that back, which makes it a little more complicated and a little more on the financial side versus just the emotional side. And then just back to what you were talking about cash flow wise, that guaranteed every year 7% Plus COLA that’s pretty exciting stuff from a guaranteed position.

Micah: Yeah, so let’s let’s break that down just a little bit. So we have a couple of things that are moving there. One is the cash flow question, where’s your money going to come from? And so often I get clients that are gonna look at this and says, Oh, well, I’m giving up ABC money. If I don’t turn my Social Security on now. It says okay, well hold on a second. If you’re planning on spending $8,000 a month and that’s going to be good cash flow, net after taxes, money to you, you feel good. Doesn’t matter where it comes from, if you’re getting $8,000 a month net, just for a quick emotional conversation, not a planning conversation. And most of the time the answer is no, as long as there’s 8000 a month net hitting my checking account, everything’s good. Okay, great. Well, fantastic. Now we have to look at this and say mathematically, where’s the best place to pull money from? Well then pops, I love to use your scenario that says like, every year you delay, Social Security is guaranteed increase. Now, we use that G word here because we can’t use it somewhere else now. The TSP G fund that you guys have in the G fund is fantastic. It’s guarantee you will not lose money, but it’s not guaranteed it will make money. Now most of the time it’s paying a positive interest rate and rate it always has. But that doesn’t mean it’s paying a great interest rate. I mean, for years insuring the TSP has been really low. Now it’s starting to increase as rates have come up. But if we delay your Social Security, you’re getting a much larger increase, right? So if I had a choice, I had money in the G fund that’s paying a whopping I don’t know what it is right now. Say it’s two and a half percent. You’re paying 3% in the G fund, or I have social security which every year I choose to delay it is growing between six and 8% depending on when you’re deferring it, etc. Okay, well, would you like to lower that? Let’s say switch gears only growing by 6%. Well, which investment do I want to keep? In which investment do I want to cash out? Do I want to cash out the one that’s paying 3%? Or do I want to cash the one paying 6%? Well, the one paying 3%, right, I’d rather give up that lower return in order to get more money, a higher investment growth. And I think that’s that’s a way that people don’t look at social security. They don’t look at it as an investment return. If we took it out and said, Hey, look at a quarter million dollars, one’s paying 3% and a quarter million dollars in a bucket that’s paying 7%. Which one do you want? And they’re like, I want the quarter million dollars, just 7% that’s the bucket that I want. I don’t want this thing. 3% etc. Great news you just selected to delay your Social Security. Assumingly have other pots of money that we can pull from the Azure cash flow to come in. And it makes financial sense to delay security which we have to look at as well. That’s a quick way to look at it.

Floyd: 100% that’s back to that conversation that we were talking about earlier, the emotional decision versus financial. So many times when individuals that don’t deal with money every day, they make emotional decisions. Wait a minute, it’s still security that I’ve already paid into it. I want it now and they come in they say well, let’s delay the G fund for later. Emotional right? Mathematical. Wait a minute, I can pull from a two and a half 3% rate of return and get a six seven or 8% rate of return over here. Okay, look at it from the math position, the emotional side, and so many times investors all right, someone’s getting ready to retire. Their whole world is kind of tipsy. Turvy right. Guaranteed Income. All of a sudden I retired my income goes down how do I replace that income? Oh my god, can I do this? Can I do that? You and I both know that when people retire, they spend more money than when they were working? Because they’re catching up on all the things they didn’t do. So I’d like to refer to it as turning points from the start. You said it’s a cash flow question guarantee. So it’s 62. Do I need the money? Maybe let’s just say yes. Well, maybe we have to turn it on. Well, no, I don’t think so fine. Because after 62, whether it’s 62 and a half, 63, 64 and a half, I can turn it on when I need. So I like to say hey, we have turning points for decisions, right? If you take an early retirement prior to age 60. There’s 59 and a half so we don’t have families taking money out of things. Right. So from the retirement side of the graveyard, right? Okay. And then you’ve got a 62 is the next one. That’s the next option. All right, and then you have FRA full retirement age, and then you had age 70 for max benefits. So during that 10 year, seven year four year period of time, you have different options. But once you turn on Social Security, typically it’s on very rarely very seldom in my 40 years of doing this, I think I’ve only suspended it once we turned it on, maybe three times. People said oh my God, what did I do? I don’t want to pay taxes on it, how to I roll it back? And then again, that first year, you have that opportunity?

Micah: Now also with that, keep in mind so screening, it’s not a as you said before, it’s not a if I decide to wait at 62 and turn it on at 70 I gotta wait eight years. You can make a decision every single month. Every single month. You could look at this and says oops, I changed my mind. I want to contrast with security. And I want to turn this on come on. So this is not like it’s an irreversible decision. So when I have clients that are on the borderline between A and B says Should I turn it on? Should I not turn on etc. So look, if you don’t know, let’s defer because we can always turn it on and start that income coming in. But it gets to a certain point we can’t shut that income off anymore. And now when we turn it on, we’re locked into those benefits. Yes, we might get COLA in the future will you are eligible to get COLA as it goes up. We don’t know what COLA is going to be. Alright this last year is big but many years it was zero several years it was negative but yes, negative COLA because what happened you didn’t get a real increase in your Medicare Part of all sudden with my gross doesn’t increase but my expenses have gone up on my paycheck. My net deposit is down. And so those are things that can happen in retirement time. So before we go to flip that switch on, I think it’s the best decision we got to look at that. We’re gonna think about survivor benefits.

Floyd: Oh, well before using survivor benefits. How about I quit my job working for the feds? I’m tired of it. I’m 64 years old, and about six months into retirement. Somebody knocks on your door and says Hey Micah, I like what you were doing over here. Come to work for me. And then all of a sudden, here’s my Social Security taxed at 80%. All right, you’re on Medicare because you’re over 65 And what happens to your Medicare expense payments when as the as your income goes up? This little thing called erm, and all of a sudden you find yourself paying $500 a month for Part A was a part B equals part A’s pay for it right? For part B and Medicare. You can’t turn that off. But it could have been affected by reapplying for Social Security or not applying for Social Security and then land it.

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Micah: Let’s connect those dots for our listeners posp. The way that was affected is you are tired so you get your pension you no longer getting a paycheck. But now you’re getting your federal pension coming in then you turn Social Security income on it. Let’s say you turn it on for a year. We can’t shut it off Now. That income is now coming on. Let’s call it 40 grand a year in income 30 grand a year and so security income then you go get another job that’s paying 120, $150,000 a year. Will you add that plus your pension plus your erm that Social Security might bump you up over that erm restriction, which is 194,000… Don’t quote me these numbers are 194,000 ish number. It is what it is. It’s an also your gross income right not after deductions, your gross income that all gets added up if you’re above that number your Medicare Part B premium, as you said increases it goes up. Now we there’s some cases where if you would not have turned on your social security, that would not be the case. So does that mean taking Social Security early as a bad decision? Formed decision that’s what we’re going to push on and most the time we are encouraging clients to delay their Social Security, why? I’m getting a 6% at 1.8%. If I delayed after my full retirement age, Social Security. Let’s say your full social security age is 67. Every year delete it after 67 You have a guaranteed 8% increase every single year your social security that’s fan friggin tastic we don’t get that money anywhere else. So sometimes we want to look at it from that perspective to say hey, let’s get that increase let’s make sure that income is coming in.

Floyd: Oh 100%. And it just recently… last October November I met with someone, Hey Floyd, we’re retired and we punched right we punched out we’re going to take six months off. I’ll see you around Christmas time. So he comes back to Alaska. We happen to meet up and I says all right, well, we got amins he did that I did that I did that. Great. Let’s go through the numbers. And he was hesitant and I looked at him I go okay, What aren’t you telling me? I took a job. You know, the $200,000 a year give government contract. So now he’s got his pension from the feds. All right. And all of a sudden, he’s got this Social Security turned on and I said Well, good news is you’re under six months. We can turn it off. Well, no, you can’t. You can’t. Well, you can as we discussed a little earlier. There’s some negative things about it. But you suspend it and it dropped his income back down.

Micah: You have to repay it. That’s the negative part of it. Oh, that’s exactly.

Floyd: Yeah, and they don’t take it out in the future. You do it now. Correct? Yeah. So all these little things in nuances that go with it. And and you know that Micah and one of the things that really I get concerned about this, because we see people come in every day that Google stuff and read only the first three lines of Google what to do, and they don’t read the next four lines as as unless unless unless, so emotinal versus financial backforth we started at the first.

Micah: First, you know and one of the things to think about too on the social security side of it is just remember this Survivor Benefit question right? With survivor benefits. The way that it works is that husband and wife is when you’re married, the surviving spouse gets the higher of the two benefits but not both of the benefits. So I’m going to take an example my wife and I, I am the income earner, she stays home with our kids. And so clearly, her social security is going to be less than mine. Right? I have more years I’m paying into it. So let’s just say for discussion, my Social Security would be $3,000 a month she is eligible for half of my social security, which is $1,500 a month even though she hasn’t paid it. So she would get we’re both retired, we would get $4,500 a month and so shooting my 3000 plus her 1500. That’s the way it would work if we were retiring today. Now God forbid but I pass away. What’s her income? She gets the higher of the two so she gets $3,000 a month. Now no longer that extra 1500 because she gets the higher. Now if we change that scenario around I say hey, instead of applying at 67, like I did in my imaginary situation, what if I applied at 62? Okay, well now I’m taking almost a 30% reduction in my benefits and so now I’m a quick math here and getting $2,100 ish among those got $2,000 a month in income. So that cost her $1,000 a month in quick quick math here. I know it’s slightly off, but it cost you about $1,000 a month and benefits is what she is losing because I turned my Social Security on for survivor benefits. Well, guess what, that’s a lot of money. And now also what she claims on is going to be less as well. So I mean, all these things kind of compound.

Floyd: Exactly. We had a client about a year and a half ago, her husband passed away 70 getting max benefits, spouse was 61. So at 62 she goes to Social Security office wanting to turn it on. And they convinced her it was really a good idea. We met I met with her maybe a month or two after that. And we’re going on I said, I want you to do this. And she said well, the security office says it’ll compound better and we go through the math. She says oh my god didn’t explain it that way. So again, within a year, we’re able to turn it off. All right, now cashflow wise, it’s just been was a very it was 1000 bucks a month. So she’s going through it. How do you place $1,000 a month? Okay, well, you’re over 59 and a half so we started taking money out of the IRA you know, $12,000, $24,000 to get her over the penalty phase, and now she’s getting full benefits, emotional decision versus financial decision. So for the listeners very, very important to talk to an independent individual, whether it’s you know, us or someone else that gives you financial information and can quell your emotional conversation, talk to the emotions, not add them, talk to.

Micah: It’s a good thing whenever you’re talking to your benefits personnel, the TSP office, associated office, etc. I’m not ragging on him, benefit. These benefits are complex, right? It’s so easy to have a simple scenario and say, Oh, it’s not that complicated, until you start throwing exceptions and what ifs and all these things kind of build on on each other. And that’s what makes planning this a little challenging, which is why we have a goal of helping so many federal employees because we want to make this less challenging, but we can’t just take information in a silo and say oh, because I talked to the TSP I should do this or because I talk to security I should do this etc. So security office could be great in answering a lot of questions. For example, what’s your tax rate going to be when you have to take your new RMDs now I say new because a secure 2.0 depending on your age between 73 now and 75 you have to start taking your RMDs so now you have to start taking RMDs well at 73 you’re already have taken Social Security what impact is that going to have in your net cash flow? If your taxes go up, your paycheck goes down. So we got to think about these things. So it’s not just an isolated question.

Floyd: You know, I’m listening to you and I’m smiling over here. The guy sitting there RMDs FRAs, previous surviving benefits.. This is why they’re going on well, it’s all the stuff mean, right? And that’s unfortunately that’s the world that we live in ROIs and year to date and yield returns and required mandatory distributions and early distributions.

Micah: You still like saying required mandatory distributions such as required minimum distributions, man, but you’re like, nope, it’s mandatory. We got to take well into your defense for so long. There is a massive penalty. Yeah, up until recently right now the penalty has been reduced down to 10%. There’s now I little hesitation on my voice, so forgive me because whenever Congress passes a law, everyone says to go around and interpret what they meant by it and sometimes IRS interpretation is a little bit different than how everyone else in the world reads. So we’re gonna see what that really means. But it does look like the penalties are massively dropping down which is fantastic. So pops it always say in there no, these required mandatory distributions is really making sure people took that money out of their account. Now on that I know I mentioned last podcast, so forgive me, secure act 2.0 did pass. It did change inherited IRAs. And in fact, even before that, December of last year, there was a change or clarification from the IRS his perspective on how RMDs are to be calculated with inherited IRA accounts. So if you have inherited an IRA from someone in the last couple of years, that means they passed away and left us the beneficiary. You need to talk to a professional that understands secure 2.0 The rules are now different. You could be complying with them accidentally, right? So you could be okay. But you’re may not be so I’m telling everyone hate these rules are no different than what everyone thought they would be. Make sure you understand how it works.

Floyd: You know, like that’s, that’s a whole nother podcast, right? Totally just talking about that. But the sad part is many of our clients and people that we talked to have parents and put up some very structured things for retirement plan transferring, alright, cool, inherited IRAs that could be withdrawn over the lifetime of the youngest individual. Those are things that have changed. So just because it’s their mom and dad or grandma and grandpa may have done something that just doesn’t work today.

Micah: Very, very true. All right. This podcast is all about action. Items…pops, we always want to give people as you know, actualize what are the things they can do this week today, etc, to help improve their finances? So I’ll put you on the spot and kick you off. What do you got for our first action out of our listeners?

Floyd: If you haven’t established a ssa.gov account? Do that number one, and that was social security.gov. Right. Okay. That way you can verify what your benefits are could be and not only verify this time of the year when you get your W two or multiple W twos compare your contributions, what was paid into Social Security and make sure it matches what is on the W two.

Micah: And there’s other stories we’ve talked about before on this podcast that works that has negatively affected somebody not all that fresh got reported you have a limited time. So that is a really, really good one to think about. Other one is I would say determine what your cash flow is going to be. What is your cash flow going to look like in retirement? How much do you want to spend, then where is that money compounded? Pension, how much is from Social Security? And I like to call it my retirement income timeline, you know, next 10 years, where’s that income going to flow from?

Floyd: And not only that, we have to worry about the tax bracket too where you go, you know, and we don’t think so. We don’t know. Right? Well, I’ll go back to work I’ll get a big job. I won’t go back to work and literally live off the grid and island off Sitka Alaska, you know, not to worry about it anymore. All those things, all those things play into it. So thinking about the future and just plotting it through and you know, you know me or those of you that don’t know me, I like five year plans I like to save for the next five years. Here’s what we anticipate. It may not happen, but if we’re planning for it, and taxes go down, you win. What happens if you don’t plot for it and taxes go up? Cash Flows suffers?

Micah: Yeah. All right. Other thing I really recommend you do join us on our nation webinar. Tammy Flannagan and I are getting together on March 1, and we have the first of a four part series we’re putting together that again, our goal helping over a million federal employees with retirement. So join us for that webinar, and we’re learning more about your benefits and it’s not just learning about your benefits. It’s taking action items that you can do something to it just learning about it is not enough. You got to take action with everything we’re talking about.

Floyd: Amen. You know, was and I can’t forget who said it. It’s not what we think we know is what we know that just a saw.

Micah: Amen. Well, pops, thanks so much for joining us. And until next time, happy planning.

Floyd: Thanks for having me here. Happy planning.

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