- David Scranton: Well with all due respect Dr. Kotlikoff, I’m sure your book has a lot of valuable tips. But can our viewers just call the Social Security Administration in and learn the stuff directly from them?
- David Scranton: I’ve called also and I’ve had the same result, where you get so many different answers it's frustrating. And can you tell our viewers, roughly how many different ways there are that anybody approaching retirement can actually elect to take Social Security so they can better understand the complexity of this.
- David Scranton: We’re just starting to peel back the onion on Social Security today with you and I can already see you know the head spinning of a lot of our viewers. We’re going to take a quick commercial break. We’ll be right back with Dr Kotlikoff and where to identify some of the most common mistakes that people make when making their Social Security benefits. And then we’re going to talk to him about why he decided to throw his hat into the ring for the Presidential Election. We’ll be right back.
- When you realize it or not your Social Security benefits might just be the single largest asset on your balance sheet and sometimes the difference between taking your benefits in the number one best way versus the second best way could mean an additional one hundred thousand dollars or more of additional income over the course of your lifetime.
- Even if you have one million dollars in a stock or stock mutual funds today, with average dividend around two percent, that still earns you just twenty thousand dollars per year of income.
- Let’s say, for example, if you decide to leave your one million dollars in stocks or stock mutual funds for those eight years and another major market drop occurs like the two we’ve had already since the turn of the century, remember the first drop from two thousand to two thousand and three when the technology bubble burst took a nearly fifty percent drop and then it took seven years to get back to its previous peak.
- In fact, even if you were taking out only 40 thousand or 50 thousand dollars a year from that one million dollar asset you may end up with less than half of your one million dollars seven years later.
- Now it gets a little bit bigger, in that the difference is bigger because when you factor in cost of living raises, historically speaking, what that means is for many of you watching the show if you wait from age sixty-two to age seventy, instead of getting seventy-five percent of the benefit, you’re getting 132 percent of the benefit.
- Now it gets a little bit bigger, in that the difference is bigger because when you factor in cost of living raises, historically speaking, what that means is for many of you watching the show if you wait from age sixty-two to age seventy, instead of getting seventy-five percent of the benefit, you’re getting 132 percent of the benefit.
- But even more importantly according to a recent OASDI trustees report, even without these reforms, there are enough reserves in the system now, to pay one hundred percent of promised benefits all the way to age two thousand and thirty-six..
- Think about the fact that you might have one million dollars generating two percent per year.
David Scranton: Welcome back to The Income Generation the show where we share valuable financial information for that critical period in life when you're either in or approaching retirement. I'm David Scranton, your host. And today we're going to be focusing on one of the most important ingredients in retirement planning no matter who you are and that is Social Security. When you realize it or not your Social Security benefits might just be the single largest asset on your balance sheet and sometimes the difference between taking your benefits in the number one best way versus the second best way could mean an additional one hundred thousand dollars or more of additional income over the course of your lifetime. Making the most of your benefits requires making the right decisions and there are a lot of decisions to make when it comes to Social Security and a lot of options to consider. In fact, as you'll hear later from our guest, for a typical couple in their sixty's there might be over five hundred possible combinations of different options and different ways in which you could take your benefits. And the less typical your situation, the more your options increase up to as many as twenty-five million different options in certain cases. So on today's show, you're going to learn what you can do in order to; Number one, feel confident that you're making the best decisions for your personal situation. Second, avoid costly mistakes.
The Social Security System
You're also going to learn some things about the Social Security system itself that you should know and perhaps most importantly you're going to learn why it's so necessary to coordinate your benefits with the rest of your retirement plan. This means having the right asset allocation for your other sources of retirement income. If you are apart of The Income Generation, meaning those of us age fifty or over, then today's topic is especially important for a lot of reasons. But allow me to just highlight three. First, the Social Security system itself is struggling and there are a lot of people in our age group that have concerns about its solvency. One of the biggest challenges facing the system is the fact that, people are living longer and longer than ever before. That means the Social Security Administration is paying up benefits to people for a longer period of time much longer than the administration ever thought that it might have to.
Compounding that problem is the fact that, the worker to retiree ratio has changed dramatically over the years. When Social Security first started there were approximately forty people actively working, paying into the system for every single retiree. Whereas as of today, there are only two point eight people paying into the system for every one person that retires and within twenty years or so it's projected to be only a two to one ratio. Different proposals have been on the table for years now to address some of these challenges. But even more importantly according to a recent OASDI trustees report, even without these reforms there are enough reserves in the system now, to pay one hundred percent of promised benefits all the way to age two thousand and thirty-six.. In other words, Income Generation can feel reasonably assured that our full benefits will be available to us when we're ready to take them. But that doesn't necessarily mean that everything is hunky dory with us. This brings me to my second reason why this topic is so important. Now as you may know for only the third time in over forty years the Social Security Administration announced that recipients would receive no cost of living increase in their benefits for two thousand and sixteen because of low inflation. Unfortunately that begs the following question: What happens if we should sink back into another recession or even worse go into a long term deflationary economy? Might the administration then decide to eliminate the cost of living adjustment known as the COLA benefit? Might they decide to eliminate long term or even permanently or even worse in a deflationary environment maybe take some benefits away?. I think it's at bare minimum a possibility that needs to be at least considered when you look at how many private companies have totally eliminated the cost of living increases since the last recession. Lastly, the third reason I'm devoting an entire show to this topic, is the one that I mentioned at the very start. Social Security is simply a major financial asset if not the major financial asset for most retirees.
Think about it, say your monthly Social Security benefit is two thousand dollars, in order to replace that income through another investment source and to feel reasonably confident that you'll have that income until the end of your life, you would need to start with a pool of money somewhere between five hundred thousand and eight hundred thousand dollars. For the average American, that means that Social Security represents about forty percent of their retirement income. So it is a big deal. So big, that you simply cannot afford to make the same costly mistake that eighty percent of Americans do every year. You'll hear more about that today from our special guest, Dr Lawrence Kotlikoff. He's co-author of The New York Times bestseller, 'Get What's Yours- The Secrets To Maxing Out Your Social Security'. You'll also learn why trying to figure out your best social security options on your own is extremely difficult and why the last place you want to go for help or for answers is actually the Social Security Administration. As a governmental agency, the Administration can only provide you with basic information and it actually isn't allowed to make specific recommendations for your situation. Of all the different areas of retirement planning this is one area where I firmly believe that you can really truly benefit by working with a qualified financial advisor with Social Security as a specialty. A truly qualified advisor has access to industry software designed specifically for social security planning and he or she has the experience and how to use it. A good advisor can process your personal information to make recommendations, that the Social Security Administration isn't qualified to do or even allowed to do. And just as importantly, an advisor can help you see to it that your benefits are well coordinated with your overall retirement strategy. In fact as I said earlier, that's crucial. And that's why it's going to be the topic of today's market breakdown. So stay with us, we'll be right back after the break.
As most people know you have the option of taking your Social Security benefits any time after age sixty two but you have to begin taking them by age seventy. Most people also know that generally speaking the longer you can delay taking your benefits, the more money you'll be entitled to. So people end up falling into one of two categories; they either start taking benefits the day they retire or they retire and postpone their benefits in order to get a higher amount. In my experience, both of these strategies work best with an asset allocation that's conservatively designed for income instead of growth. Which of course is one of the reasons I stress this concept so much on the show. This means an asset allocation designed to protect your principal, and to generate enough interest in dividends to supplement your Social Security income. Now let's say you start taking benefits the day you retire, whenever that might be, but now let's say you haven't looked at your asset allocation and you are generating enough interest or dividends that is income from your investments. In that case, you might very well end up having to supplement your Social Security by taking money from principal and that could be a big problem.
As we've talked about in previous shows, any financial strategy that requires you to draw down your principal, even occasionally, is extremely dangerous. Think about it, the average life expectancy today is longer than ever before. In fact, people today typically need to plan for about a thirty year retirement. That makes spending any principle a very slippery slope when you're in your sixty's or early seventy's. Think of it like a thirty year mortgage at the very beginning, tell me are you paying that much principal at all? Of course not. At the beginning, you're paying primarily interest and just a wee little bit of principal but with each passing year you pay a little less interest and a little more principal as the balance gets paid down. Somehow by the time the thirty years goes by your mortgage is completely paid off. Now I'd like you to think about that for a moment in reverse. Think about the fact that you might have one million dollars generating two percent per year. If you take just a little bit more than that twenty thousand dollars of interest per year just a little bit of principal that sum will be depleted within thirty years. Just like that mortgage is paid off within thirty years. So if all of your money is in a bank or in C.D.'s, for example, when you retire then you clearly don't need me to tell you that it probably isn't going to generate enough interest to eliminate the risk of spending principal. Even if you have one million dollars in the bank at two percent interest, if you're lucky, that's only twenty thousand dollars a year to supplement your retirement income.
But what about the stock market? Well, unfortunately the math is eerily similar. Even if you have one million dollars in a stock or stock mutual funds today, with average dividend around two percent, that's still earns you just twenty thousand dollars per year of income. Which for most people simply won't be enough. And in this situation, some people end up selling shares of their stocks or stock mutual funds every year to supplement their income. This is a trap you definitely do not want to fall into during retirement. I call it reverse dollar cost averaging, and I've talked about this on other shows. It basically amounts to cannibalizing your mutual fund or cannibalizing your stock portfolio and it is one of the most common and costly mistakes that retirees can make with their money today. But what if you fall into that second category for taking benefits, the one where you retire at age sixty two, for example, but delay your benefits until age seventy in order to get the higher amount. Well in that case, you not only have to think about supplementing your Social Security income once it kicks in but you have to think about how to fill the eight year gap until it does. So if you don't have the right asset allocation the same potential problems exist but even for a longer period. And the potential risks associated with this, what I call reverse dollar cost averaging, in this case are even worse, and here's why. Let's say, for example, if you decide to leave your one million dollars in stocks or stock mutual funds for those eight years and another major market drop occurs like the two we've had already since the turn of the century, remember the first drop from two thousand to two thousand and three when the technology bubble burst took a nearly fifty percent drop and then it took seven years to get back to its previous peak. Then when it finally did get back in 2007 then from 2007 to 2009, the market took nearly a 60 percent drop during the financial crisis. And this time it took approximately six years to recover. So the question becomes, what would that mean for you as a sixty two year old retiree, who's taking assets, who's spending down a portion of principle for those eight years while you're waiting to get Social Security?. Well if you should get caught in one of these downdrafts as I like to call them, it means that each and every year that the market drops, you have to sell more shares of your stocks or more shares of your mutual funds to get that same withdrawal, to get your needed cash flow. So even when the market finally does come back within seven years or so, by the time you get to age seventy you still will not have come anywhere close to getting back all your money. Again, that's because you were forced to cannibalize your fund by selling more shares in all those years when the market was down.
In fact, even if you were taking out only 40 thousand or 50 thousand dollars a year from that one million dollar asset you may end up with less than half of your one million dollars seven years later. In the end, you will have cannibalized your fund to the point where it would have been better had you put in the bank or actually even better had you put it under the mattress. Here's the bottom line, no matter what option you decide is best for taking your Social Security benefits, having the proper asset allocation for your other assets is absolutely critical. Again that means that allocation that is every bit as secure as Social Security itself. And asset allocation that generates enough interest and dividends to satisfy your Social Security income without having to touch your principal. Ideally you would also want an allocation that gives you an opportunity to maximize your Social Security benefits even further through strategic reinvestment of interest and dividends. Think about that for a moment. What if you could set your retirement savings up in such a way that it gave you all the income you needed to live comfortably and to achieve whatever your financial goals are? This would make Social Security a nice to have luxury that you could simply put to work for you. How would that feel? Wouldn't that give you an extra sense of security and increase your odds of being able to leave something nice behind for your children? Of course that would. And the good news is that it doesn't have to be a pie in the sky dream, it can and probably should be an achievable goal but it requires the right strategy. If you watch the show before, you know that I believe this means a strategy built around conservative non stock market alternatives designed specifically to generate income through interest and dividends; alternatives designed to protect your assets from major market downturns. Again one of the greatest things about Social Security is that it's secure. It's an income source you can count on from retirement through the end of your life. And from everything that we can see and hear so far from the Social Security Administration, it's not going anywhere. In that sense, it serves as a good example of what I believe the mass of the vast majority of all your assets should look like as you approach retirement. That is secure and is going to generate more than enough income to meet your needs and reach your goals. Stay with us. We'll be right back after the break, with Dr. Kotlikoff.
I'm happy to say that we have the absolute perfect guest for today show, Lawrence J. Kotlikoff literally wrote the book on Social Security benefits. It's entitled 'Get What's Yours- The Secrets To Maxing Out Your Social Security'. It is a New York Times best seller which was recently published in a revised updated edition. This particular book has also been called 'An Indispensable Guide', for anyone wanting to get the most out of their Social Security benefits. In fact, is just one of the many books written or co-written by Mr. Kotlikoff who's also an Economics Professor at Boston University, an Associate of the National Bureau of Economic Research and Director of The Tax Analysis Center He's also President of a Financial Planning Software Company, among many other things. He also happens to be running for President, so we'll definitely talk about that.
Welcome to the show, Dr. Kotlikoff. Good to have you.
Dr. Kotlikoff: Ready to be with you David, thanks for having me.
David Scranton: Your book opens with a chapter, entitled, 'Why We Bothered', which explains what motivated you to and your co-authors to write the book in the first place. Can you talk about some of those motivating factors?
Dr. Kotlikoff: Well, people are leaving hundreds of thousands of dollars or tens of thousands of dollars, depending on the circumstances on the table, because they don't understand the reality. Terribly, complicated, outrageously long number of rules or that Social Security has. They don't understand the payoff from waiting till seventy, just start collecting your retirement benefit and the payoff to wait till sixty six in many cases for your spousal or widower benefit or divorce benefits. And they also don't understand that there are about twelve different benefits that are available to you under Social Security not just your retirement benefit. They don't... and the third thing that they do you not understand is how to time your benefits to be strategic to make sure that you get as much as you can. So we're trying to make sure that everybody gets what they paid for, we're not trying to bankrupt the system; the system is already bankrupt on its own. We're trying to make sure that things are fair within each generation. If we're going to change the law to fix the finances, we should do that and I recommend that. But we should not have a system where some people get a whole lot more money than others just because they understand the rules and the others don't.
David Scranton: Well with all due respect Dr Kotlikoff, I'm sure your book has a lot of valuable tips. But can our viewers just call the Social Security Administration in and learn the stuff directly from them?
Dr. Kotlikoff: No. You wouldn't want to ask Social Security anything. You want to really be in a position to tell them what to do. The combination of this book at which is revised 'Secrets To Maxing Out Your Social Security', and my company's software, which is a forty dollar program which is called maximizemysocialsecurity.com. Those two things together will put you in good stead to tell Social Security exactly what to do. I've had a lot of people have been told the wrong thing by eight separate people from Social Security; they would have cost them tens of thousands of dollars if they had just said, "Ok, that's the answer"
David Scranton: Right.
Dr. Kotlikoff: You know, in the end I kind of communicate with people so it's pretty got things fixed. But eight people in a row had it wrong. And that's very typical. You get people all the time getting the wrong answer.
David Scranton: It's interesting, because I hope you know that I was being facetious in asking that question as a financial advisor?
Dr. Kotlikoff: I realize that.
David Scranton: I've called also and I've had the same result, where you get so many different answers its frustrating. And can you tell our viewers, roughly how many different ways there are that anybody approaching retirement can actually elect to take Social Security so they can better understand the complexity of this.
Dr. Kotlikoff: Well giving ideas. Suppose you're a spouse and you've got your... so you're married and maybe the husband is older than the wife. Maybe you've got a forty five year old wife and a sixty two year old husband and they have a disabled child. Well, there could be twenty five million combinations of decisions about when they should take a child... there's thousands of benefits: child disability benefits, disabled child benefits and they call that retirement benefits for each spouse then there's survivor benefits for the child for the wife. It just goes on. So
David Scranton: Twenty five billion.
Dr. Kotlikoff: They have software where they can handle all that.
David Scranton: Twenty five millions' a huge number it's bigger than what I've heard. How about for just a normal couple entering their sixty's? I'm sure that number would be a lot smaller than twenty five million so approximately what would that be?
Dr. Kotlikoff: Well it could be it could be as low as five hundred. You know our software actually calculates the number of choices we look at. Many are dominated so when we say that if there were looking at thirty thousand choices it could under... you know, it could really represent twenty five million. But a typical run of our software would have thirty thousand different combinations that we're actually analyzing.
David Scranton: Right. That's actually gotten to be a smaller number because there were some methods that I understand were actually taken away just a few months ago in the month of April, is that correct?
Dr. Kotlikoff: Well there was some... the ability for younger people; people under sixty two on January second of this year 2016; the ability of those people to take just a spousal benefit out for retirement age and with their own retirement benefit grow 'til seventy, that's been taken away for those younger people. But there are still a lot of people in that age range between sixty two, let's say, and sixty six who can still collect just a spouse benefit while waiting to get their own retirement benefit. Then you've got some low income spouses or divorce spouses who can still collect on their current spouse or their ex-spouse, they can still collect spousal benefits. So it's not like we've eliminated spousal benefits, we've eliminated those for higher earning spouses but not low incomes spouses. And then you have cases, where you might have a young spouse who is too young to do this but a sixty four year old spouse who could collect. Now you have the question, should the young spouse at sixty two take her retirement benefit early so the older spouse at sixty six can collect a spousal benefits on the younger spouses work record. And then when the younger spouse reaches sixty six they can suspend their benefit and wait till seventy to take a higher number. So there are lots of different combinations that we do need to consider.
David Scranton: You know we're just...
Dr. Kotlikoff: This would mean that big money.
David Scranton: We're just starting to peel back the onion on Social Security today with you and I can already see you know the head spinning of a lot of our viewers. We're going to take a quick commercial break. We'll be right back with Dr Kotlikoff and where to identify some of the most common mistakes that people make when making their Social Security benefits. And then we're going to talk to him about why he decided to throw his hat into the ring for the Presidential Election. We'll be right back.
We're back today with Dr Lawrence Kotlikoff who again literally wrote the book on Social Security benefits entitled 'Get Whats Yours- The Secrets To Maxing Out Your Social Security'. Dr Kotlikoff, tell us what are some of the most common mistakes that cause recipients to shortchange themselves when it comes to Social Security benefits?
Dr. Kotlikoff: Well the biggest mistake that my co-authors and I focused on in this book, is impatience. Everybody has it in their mind that they're going to die on time that their life expectancy or they're actually going to die but before the life expectancy. They don't want to think about living til ninety six, like my mom she's ninety six. Because I think they're worried about jinxing themselves. They think that if they start focusing on living to an old age they'll die tomorrow. But the real danger with financial matters when it comes to longevity, is not dying early. And not getting your Security benefits. Because if you die young, you'll be in heaven you won't need any money, right? Now the real problem is living to one hundred on cat food. So if you wait till seventy to take your retirement benefit, you're going to get a seventy six percent higher number adjusted for inflation than if you take it at sixty two. Now most Americans, only two percent, are taking it seventy so ninety eight percent are taking the retirement benefit before age seventy. So this has got to be the wrong answer for almost, you know, not for everybody but for probably about eighty five percent of the population, they're taking the benefits too early.
David Scranton: And when I've seen the numbers, we factor in cost of living many times the benefits taken at age seventy can be close to double the benefits taken at age sixty two, which means most people don't realize that all they really need to do is live to be eighty and they're ahead by waiting. Isn't that correct most of the time?
Dr. Kotlikoff: You know, what we have to really... David look at not just kind of a break even scenario because, this is an insurance product. Social Security is just a big insurance company and we have to worry about the catastrophic loss. In the case of our house, it's our house burning down so we get maximum coverage. Here it's our living to one hundred. Maximum coverage means, getting the highest benefit for the longest amount of time. And that means being patient, waiting till seventy to get the seventy six percent higher number than if you take your benefit at sixty two. Now I want to hasten to say, that for many, many households taking your benefit at seventy is not optimal. You may want to take your benefit at sixty two. If you're that husband who's sixty two and has a younger wife and a disabled child, he may want to take his benefit early in order to get benefits going for his wife and his child. So it's a different optimal solution for each person really. But in the main, we're taking our benefits far too early, in the main we're not understanding all the benefits are that are available to us. In the main, we're not timing things correctly. That requires knowledge and also software to get the two things straight.
David Scranton: I love your analogy about comparing it to insurance and a catastrophic loss. I think it's very, very insightful. Lot of engineer types try to analyze the numbers is to as if it were just a mathematical equation they fail to realize that catastrophic loss is what they really need to protect against. But let's have some fun for a couple minutes here let's talk about politics. Everybody remembers Clinton's, 'Is The Economy Stupid', you know, the slogan for more than twenty years ago but it's kind of sort of still the economy isn't it?
Dr. Kotlikoff: What is the economy and... but I think it's more our children. So my slogan for my campaign is, ‘It’s Our Children'. I'm not calling anybody stupid, I'm just saying it's our children. And the economy obviously is critical to our children also to ourselves but we also have, over the years, accumulated a massive fiscal bill that we're leaving our kids a massive indebtedness that we're keeping off the books to pay for all the retirees program frustrating Medicaid. And I value and cherish those programs, but the way we finance those programs is on the backs of our kids and grandchildren. So we have an enormous, economic time bomb that we have laid under their legs and we have to address that, we have to be honest. So I started this writing campaign, I wrote a one hundred thirty page book detailing exactly how I would fix things. It's a very readable book, it's not going to put you to sleep it says in very short order how to fix each of our major problems; Social Security, The Tax System, The Banking System, The Healthcare System, the energy policy education, the way economists think about these things; I'm speaking in large part for my profession. I'm an Economist, one of the first Economists ever run for president. My website is Kotlikoff2016.com. I hope everybody will come and volunteer to help me and to spread the word about the website. Read the book, for the book and let's realize that the two parties are really not out for us. They’re really out for themselves or out for according their own power. We need some real answers; we need to fix these problems and we also need to be very firm with enemies like North Korea and Iran. When they're building miniaturized nuclear bombs, in the case of North Korea, that they can put on ballistic missiles that they're now testing every day (or not every day) but routinely to hit us. And we're just sitting back; our politicians are sitting back ignoring that. So I'm offering very bold leadership with respect to economic reform and with respect to foreign policy action because we can't just sit back and say our kids will deal with the problem of North Korea having ballistic missiles they can hit everywhere in the country, no way.
David Scranton: You're preaching to the choir in many ways. I agree completely so in the thirty seconds or so we have left, you know tell us, you know that it's difficult, not possible to write in candidate to actually attain the presidency. So tell our viewers what you hope to achieve by this effort.
Dr. Kotlikoff: Why do expect to become president? You know it was difficult for the Ukrainians to get together and overthrow their dictator was difficult for the Egyptians to get together and overthrow the empire. But the way they did that was with the Internet, The Internet is really empowering each of us to have a huge megaphone. So if each of us to go to this website kotlikoff2016.com and let everybody in the country know that all they have to do is go to the poll and write me and my vice presidential candidate it's just going to be, you know. 'Laurence Kotlikoff For President’ And whoever the vice president is for vice president. That's just as easy as pulling a lever for a politician that you don't want. Fifty seven percent of our country do not want either Secretary Clinton or Mr. Trump to be president. I'm offering an option
David Scranton: And I've actually read your paper, you know for President, but don't write me in. So that's at your website, so for our viewers there are, I'm sorry I think I misspoke. Right here he said,' The Right Man but Don't Send Me A Penny’, that's right.
Dr. Kotlikoff: Yeah, I'm trying to get across the idea that it's not money that we need its votes. And it's a viral exchange of information we need a network to just expand and expand exponentially. And they've done this all around the world with political organizations, and we can do it here the US. We do not need to be beholden to the Democrats or Republicans anymore, they're passé.
Dr. Kotlikoff: you can go to Dr. Kotlikoff website, you can get his white paper, 'Write In But Don't Send Me A Penny'. Dr. thank you very much for your time today, I very much appreciate it.
Dr. Kotlikoff: My pleasure, thank you so much.
David Scranton: We'll be right back in a minute with Morgan Thompson and she and I will talk about strategies that can help you get the most out of the Social Security System. Stay with us, we will be right back.
Morgan Thompson: As always a lot of great information, David, and I know you wanted to use this segment to address some of the questions viewers might have about the basics of Social Security and cover some not so basic issues.
David Scranton: Absolutely, yes. You know Social Security benefits are calculated based upon people's average earnings.
Morgan Thompson: OK.
David Scranton: And the formula the Social Security Administration uses, as you could probably imagine with any governmental formula, is somewhat complicated. But the bottom line is that, you have the more years you work and the higher your income you generally get a higher benefit
Morgan Thompson: So I want to qualify, it's actually over a lifetime?
David Scranton: That's correct, that’s right. It's over a lifetime of earnings.
Morgan Thompson: And what determines your primary insurance amount, R.P.I.A?
David Scranton: Well what they do is they take this average income that I mentioned and they actually index it up for an assumed inflation rate. So the fact that in your early years maybe you made ten or fifteen thousand and now you're making a lot more, it doesn't work against you because they index that up. In the average together that should take the highest thirty five years and that becomes your primary insurance amount. Now what that means, is that for people who actually haven't worked thirty five years, for people who worked maybe twenty or thirty, maybe moms that decide to take some time off and stay home with their children there to get a significantly reduced Social Security rate because they haven't had the thirty five years of income. And what basically happens is, if you have a zero income year then it's put in the average as a zero.
Morgan Thompson: OK.
David Scranton: And what I want you to know is, what they also do is they skew it toward the first dollars of income so that if somebody makes one hundred thousand a year before they were tyrants, at a thirty thousand that person making one hundred might get less than double the benefit of the person making thirty, So it's not proportional, it's skewed to help the people who really need it that much more but again the primary insurance amount the P.I. A, is what somebody gets at standard retirement age
Morgan Thompson: OK. What is standard retirement age?
David Scranton: Great question. Well, for Income Generation members who were born between 1943 and 1954, standard retirement age is age sixty six. That's considered to be the age at which that you get the full standard rate based upon this calculation I just mention. You actually get your P.I.A, your primary insurance amount. But for significantly younger viewers, people maybe in your age bracket, for example, then there's a phase out period where standard retirement age is somewhere between age sixty six and sixty seven.
Morgan Thompson: Ok, so it's not really a set in stone thing?
David Scranton: That's correct.
Morgan Thompson: So what if I decided to take retirement as early as possible say, age sixty two how would that affect me?
David Scranton: If you take it early, then you would get a reduced benefit.
Morgan Thompson: OK.
David Scranton: So let's assume that again for average, your average Income Generation member, that your standard retirement age (the age at which you get your primary terms) amount is age sixty six you're born between 1944 and 1954. If that's the case, then every year that you retire early you actually get a six and two third's percent reduction in benefit. So that means, if you retired at age sixty five you get 93.3 percent of the benefit. And if you retired at sixty two that last year, it's only a five percent reduction. So if you retire sixty two, for that standard age viewer, as I described it, he actually gets three quarters of what they get at sixty six. So literally, by retiring four years early, you lose a quarter of your benefits.
Morgan Thompson: Ok, so that doesn't sound good. As long as I'm healthy, let's say I want to wait as long as possible and retired age seventy, how much extra do I get then?
David Scranton: Well, at age seventy, that's the maximum. And at age seventy, if you don't take it by seventy which is no reason not to, you wouldn't get any additional benefits by waiting beyond that. So what you do is you get eight percent per year, simple interest on top of that. So from age sixty six to seventy by the way, and I know your standard retirement age is going to be sixty seven, but for sixty six to seventy, in my previous example, that means you're getting 132 percent of what you get age sixty six at age seventy. Now it gets a little bit bigger, in that the difference is bigger because when you factor in cost of living raises, historically speaking, what that means is for many of you watching the show if you wait from age sixty two to age seventy, instead of getting seventy five percent of the benefit, you're getting 132 percent of the benefit. Which is less than double but when you factor in cost of living increases in many cases it's literally double. So by waiting eight short years you can often double your Social Security benefits that you get every single year for the rest of your life time.
Morgan Thompson: Wow. So it really makes sense to wait for age seventy if you can and certainly there's no plan waiting past it because you don't anything extra.
David Scranton: There are a lot of factors that go into that such as, health, longevity in the family but also goes on your personal needs and your personal situation how much you have of other assets. So it's a more complex answer to that question but just mathematically speaking if you're going to live past age eighty yet delaying to age seventy actually gives you more benefit.
Morgan Thompson: But we're going to take a break right now but don't go anywhere because when we come back we're going to discuss more crucial things about Social Security that you need to know.
Morgan Thompson: Welcome back to the income generation, today we're discussing Social Security how it works and what you should know. Now David, I'm curious to know how you are taxed on benefits and are there ways to minimize your tax obligation?
David Scranton: Well traditionally benefits were not supposed to be taxable.
Morgan Thompson: OK
David Scranton: And you might remember President Bush, the first President Bush saying, 'Read My Lips No New Taxes' and then...
Morgan Thompson: You know how that worked for you know.
David Scranton: You know the end result was that up to half your Social Security benefits could be taxed
Morgan Thompson: OK
David Scranton: And then President Clinton came in a few years later and said, ‘Well (inaudible37:55) might as well tax eighty five percent of the benefits'
Morgan Thompson: OK
David Scranton: But what the government has done is they put together this thing called Provisional Income Formula, where they take your total income and they add to it one half of your Social Security benefits and in some cases up to eighty five percent the benefits. Then they add to that, what's supposed to be your tax free municipal bond interest, so it's really not tax free. And then if that income is over a certain amount then part of your Social Security is taxed. The problem is, those amounts which are Social Security becomes tax is a really fairly low. Oh for example it's twenty five thousand or thirty two thousand dollars whether you're single or whether you are your joint tax payer filing jointly. And we adding half your Social Security benefits to get to twenty five or thirty two thousand it's really not that high of a number. Which means, unfortunately, for most Americans collecting social security yes some of your benefits are taxed because you got pension benefits, required minimum distributions, interest dividends and everything that cause it to be taxed
Morgan Thompson: Now are there ways in which your benefits might be reduced or even taken away after you start receiving them?
David Scranton: Yes, even worse is the fact that you can lose benefits.
Morgan Thompson: Oh
David Scranton: And what they really do is they don't take them away, you actually have to give them back after you've received them. So it's kind of like, it's really a concern because it has to do with working. You know, the taxable issue we talked about had to do with total income from interest dividends required minimum distributions pension and so on. The reduction of benefits, the requirement to pay back benefits, only has to do with those who are working and earn income by going to work and so whether the self-employed or they work for a company. Now if you wait till standard retirement age again sixty six or sixty seven, then you can go back to work you can make as much money as you want and you do not have to give back any of your benefits. However, if you start collecting your benefits before standard retirement age and you make over a certain limit in terms of your earned income, and that limit is actually quite low it's actually lower than the limits at which Social Security is taxed, but if you earn over that limit from going to work at a double- two or self-employed income then, yes you end up having to give back a good part of the Social Security benefits.
Morgan Thompson: OK
David Scranton: Let's face it no one ever once they have to try to make sense out of a lot of complex government rules and regulations. In fact, they told Dr Kotlikoff earlier I'm sure that many of your heads were spinning just from everything we cover today. But be happy that you did. Why? Because hopefully its information is going to help you a lot when it comes to addressing this important milestone in your own retirement plan. If I had to identify just two key takeaways from today's show. First I'd say that understanding that maximizing the value of your Social Security benefits, involves identifying the best time an overall strategy for taking them and requires making sure that your other assets are well allocated for retirement. That means, making sure that they're also secure and geared toward generating dependable income. In addition to that though, understanding that this part of retirement planning is simply too important to take lightly or try to guesstimate. In fact, as Dr Kotlikoff pointed out, doing it the right way takes knowledge and also takes the right software. In other words, it takes working ideally with a qualified financial advisor whom I believe ideally is one who specializes in the universe of income generating investment strategies.
I once had a gentleman tell me that he didn't want to take the time to come to my office to go over social security options because he hasn't retired yet he was all out of vacation time to take a day off from work which simply cost him too much money. As it turned out this particular gentleman was making about one hundred thousand dollars a year. So I estimated it that taking one day off would have cost him about four hundred dollars. And I asked him, what if by coming in you could end up earning an extra one hundred thousand dollars in benefits and entire year's salary? Wouldn't that be worth a four hundred dollar investment to make one hundred thousand dollars extra over the course of your lifetime? Clearly it didn't take him a long time to give that thought. He ended up coming in, and to this day he's thankful that he did. Before we go, I again want to thank my special guest; Dr Laurence Kotlikoff. I also want to thank all of our regular viewers as well as those of you watching for the first time and I want to announce as promised a moment ago, special surprise. Because you know in showbiz it's all about ratings and I am not above or beyond bribing you, our loyal viewers to get better ratings, so as a result of that. You can for more information and to see how you can qualify for strategies doing the three social security screening. Go to our website theIncomeGeneration.com, right after the show. There you can also download a copy of our white paper entitled 'Social Security Allocations', as well as, you can access other free materials packed with helpful and important information including my special report entitled, 'The income generation' and our newest report entitled, 'Renewable Retirement Resources- The Case For Fixed Income'. Again you can find all those and register to receive my bribe your free Social Security Analysis at the IncomeGeneration.com. I'm David Scranton and thanks for watching.