#188 – How Retirees Can Optimize Their Social Security Benefits with Mary Beth Franklin

Wes Moss [00:01:20]:
You are so good. Yes, it is.

Mary Beth Franklin [00:01:23]:
Usually they send you an announcement three months before your birthday month.

Wes Moss [00:01:28]:
Only that’s not Social Security 101. That’s Social Security. Like, that’s graduate level Social Security. The fact that you would know that.

Mary Beth Franklin [00:01:37]:
So I could be making money reading tarot cards and convincing you I know all the answers, right?

Wes Moss [00:01:44]:
Which leads me to this. This is big news. Would you say you retired from investment news, or are you just taking a break from writing for them, or where are you?

Mary Beth Franklin [00:01:56]:
Well, I officially retired from writing for investment news on December 31, 2023. So I was wrapping up twelve years as a columnist for them. But I will continue being on the speaking circuit at financial conferences and doing client events for financial advisors. And people can still find me at my own website, which is marybethfranklin.com. Now, warning, since I’m not a big corporation, I’m a sole proprietor with a great design team. Every once in a while, I get people saying I can’t access your website on my laptop. Malware or something. Do it from your phone, you’ll get right through.

Wes Moss [00:02:40]:
Are you for hire? I mean, could the retire sooner team recruit you and say that you’re the full time Social Security expert?

Mary Beth Franklin [00:02:49]:
We could discuss a consultancy relationship. I try not to be exclusive because I have a lot of retainer deals with other firms.

Wes Moss [00:03:00]:
I know, but we’re just happy that you come on and explain what is such an important thing yet so confusing and confounding. For so many Americans. And today is going to be a really good refresher for everyone listening here on the retire sooner podcast, the question around Social Security. And I was doing a planning session with someone who wes a teacher in the state of Georgia. They put in a lot of year. They’re going to get to their 30 years soon. So we were looking at are they a teacher that is going to be impacted by their pension or not in this case. Fortunately, this teacher has also paid into Social Security, so should be fine when it comes to getting the Social Security, but could have some government pension offset, I believe, if it comes to having her spouse.

Wes Moss [00:03:47]:
But we’re going to get into that in just a minute. Why don’t we start with this? So the essence of today’s show is to speak with a foremost expert on Social Security. We all want to know how to maximize it. If you’re single, you want to maximize it. If you’re a couple, you have to be a little more strategic to think about maximizing it. There’s all sorts of things that go into the decision of when to flip the switch with Social Security. And I think we, maybe the two things I want to start with is Social Security going to be here? Because when you’re doing planning, and even if this is for high net worth families that have a million, 2 million, $3 million, $5 million, as much as Social Security as an amount, it’s poo pooed for two reasons that I see. One, oh, it’s not that much, so I’m not going to count on it.

Wes Moss [00:04:35]:
And two, it’s not really going to be there, so I’m not going to count on it. However, if you’re facing the facts, if you start to look at Social Security planning, the numbers can be pretty big, meaning three, $4,000 a month for one spouse and two, three, four for another spouse. I mean, that’s big money if you’re thinking about a couple, can be three, four, five, $6,000 in a month every month, adjusted for inflation, for the rest of your life. It’s not something to dismiss, is my point. So let’s start with, and I think about another change. I noticed Marybeth is on the Social Security statement that I downloaded in the section. I think it’s called, it’s going to be here or there for me. Section, is Social Security going to be there for me? I remember it being they essentially said you should get $80 for every $100 you’re promised, which seemed like a little.

Wes Moss [00:05:41]:
Even if the trust fund quote, runs out in 2034, which seems like a little bit of an improvement. I remember it saying 70 or seventy five cents on the dollar. Is Social Security going to be there for us?

Mary Beth Franklin [00:05:52]:
Well, let’s start with the big picture. Yes, I firmly believe Social Security will be there for current and future retirees. Will there be some changes? Probably. Will it affect everybody? Not sure about that. If you look historically, Congress very seldom cuts benefits for existing or near retirees who have baked these numbers into their retirement income plans. Congress tends to make changes that take effect in the future. For example, maybe if you’re 50 years old as opposed to 65 years old, maybe there may be some change in your benefit when you get to your full retirement age. I think what we’ll see is a combination of maybe Social Security payroll taxes will increase either the percentage rate that both employees and employees pay, perhaps the maximum amount of wages that can be taxed, that could change it’s taxable wage.

Wes Moss [00:07:01]:
They could keep pushing that higher.

Mary Beth Franklin [00:07:03]:
Right. And let me explain a little history of how Social Security is funded and where the challenges are right now. Basically, every one of us, about 95% of american workers pay into Social Security. They pay 7.65% of their wages into Social Security. The majority of that is funding Social Security. A little piece of that is funding Medicare. And then their employer matches that contribution. That’s your payroll tax up to about how much?

Wes Moss [00:07:39]:
Because that number keeps going up and up and up and up every year.

Mary Beth Franklin [00:07:42]:
Right. That taxable wage maximum goes up each year with inflation, and for 2024, it’s $168,600. Now, that’s compared to the previous year of $160,200. So an increase of more than $8,000. That means most people are going to be paying the same amount of FICA taxes as last year, unless their income is like 160,000 or over. Now, they’re going to be paying FICA taxes on more of their income than they did last year. But say you make $500,000 a year, you are only paying those payroll taxes up to the taxable maximum, $168,600. So this is one of the big challenges.

Mary Beth Franklin [00:08:36]:
When Social Security went through its last major reform in 1983 and when Social Security was truly in danger of not being able to pay full benefits for the first time, the congressional members tweaked the taxes, the FICA taxes, and they said back then, as long as 90% of US wages were being taxed for FICA payroll taxes, Social Security will never run out of money. The problem is so many people make so much more than that taxable wage base. Now say you’re making 170,000 plus you are not paying FICA taxes on those excess wages as a result of this great income inequality. Now we are only taxing about 83% of total us wages.

Wes Moss [00:09:31]:
Again, this was back in what year did they.

Mary Beth Franklin [00:09:33]:
1983, the last time there was major reform.

Wes Moss [00:09:37]:
So in 83, their assumption was a little off. They thought they’re getting to 90% of income. They’re really only getting to 83, is your point?

Mary Beth Franklin [00:09:46]:
They were at 90 back then. But the difference is wages, salaries or wages have increased so much in those past 40 years and the taxable wage base has not caught up with it. So, so many people, a chunk of really wealthy wage earners are not paying taxes on those excess earnings. So that’s taxes that is not funding Social Security. If we let that float back up, you would probably be taxed on your first $250,000 of wages as opposed to $168,000.

Wes Moss [00:10:21]:
So right there. So it wasn’t necessarily a miscalculation in. I always think of the discalculation tables. Yeah. The actuarial issue is on longevity. It’s not a longevity progression that has made the Social Security trust fund start to run low. However, it was relative to when we started. Wasn’t there originally kind of miscalculating longevity? And now you’re saying they miscalculated income a little bit?

Mary Beth Franklin [00:10:53]:
I don’t think they miscalculated. I think two things happened over the last 40 years, Silicon Valley and hedge funds. No one expected so many people would be making so much money that wasn’t being taxed.

Wes Moss [00:11:05]:
Got it. Okay, that makes sense. So if you think about this reservoir of money that is the Social Security trust fund, when you read your statement, and it clearly is trying to address the worry that so many americans have that it just, quote, won’t be there when they say it could run down to the zero, meaning the reservoir of money by the year 2034. I believe it says that’s when the system, again, if nothing changes, if they were 100 miles an hour into a brick wall, goes away. The reason we would still have eighty cents on the dollar of what your quote promised paycheck would be per month is because. Why?

Mary Beth Franklin [00:11:48]:
Because of the ongoing payroll taxes. There would be enough money coming in from everybody paying their payroll taxes to fund about 80% of promised benefits. Again, let me give a little history lesson here. Back in 1983, when Social Security was in danger of not being able to pay full benefits for the first time, that bipartisan commission on Social Security run by a guy who, at the time, most people had never heard of Alan Greenspan. Long before he was chairman of the Federal Reserve Board, he chaired this bipartisan commission on Social Security. And the Greenspan commission did a lot of really smart, forward looking things. One of the things they said is, well, in 1983, looking ahead to the retiree of the massive baby boom generation, let’s raise taxes, payroll taxes now, and bring in more money than we need now, and stockpile that excess money in what we’ve come to know as the trust funds. So from about 1983 to about 2010, we were collecting extra FICA tax revenues and stockpiling it.

Mary Beth Franklin [00:13:01]:
We didn’t need it.

Wes Moss [00:13:02]:
So it was growing.

Mary Beth Franklin [00:13:03]:
The reservoir wes growing, growing to like $3 trillion growing. And that reservoir, the trust fund, was also earning interest on that money. When we get to 2010, two things happened. It was the beginning. The first wave of baby boomers started to retire, which meant they’re not working, they’re not paying FICA taxes, their employer is not paying FICA taxes. And we had the great Recession. A lot of people lost their jobs. You lose your jobs, you’re not paying FICA taxes, your employer is not paying FICA taxes.

Mary Beth Franklin [00:13:36]:
So for the first time, the ongoing FICA tax revenues were not sufficient to pay all promised benefits. So that’s when we started tapping the interest that the trust fund had earned. And that worked for another eleven years when we got to 2021. Now we’re in the midst of the coronavirus pandemic. A lot of people aren’t working, and a lot more baby boomers have retired and started pulling money out of the system. So for the first time, FICA tax revenue, interest on the trust fund, not enough to pay all promised benefits. 2021 is the first time we started tapping the actual trust funds. We are drawing down those reserves to help pay benefits.

Mary Beth Franklin [00:14:19]:
If Congress does nothing between now and approximately 2034, that date changes from time to time. The trust funds, the excess tax revenues, will run out, but there would still be enough money from ongoing FICA payroll tax revenues to pay about 80% of promised benefits. Now, I don’t foresee that happening. Social Security is the most popular moss successful federal program in history, and Americans, regardless of their income, really care about it. Does Congress really want to tick off 70 million voters by saying, I’m going to cut your benefits? I don’t think so. But the sooner they act, the less drastic the changes will have to be.

Wes Moss [00:15:10]:
Mermaid. We went through this period of time with very low interest rates, so government debt was yielding very little. Is that a big part of this calculation on how much the trust fund is earning, or are they not necessarily forecasting a certain investment rate of return on that pile of money?

Mary Beth Franklin [00:15:31]:
Under current law, the Social Security trust fund revenues can only be issued in special issue government bonds that nobody else can get access to. And it pays a pretty low, I think it’s like 2.1% or whatever. So one of the potential reforms would be, can we take some of that trust fund money and invest it for higher returns? It would literally take an act of Congress to change how that money is invested. And of course, it’s supposed to be there for the rest of your life, no matter how long you live. And it’s cost of living adjustment. So they really don’t want to take chances with these funds. But the argument could be made, wow. Look, over the past few decades, how much more the trust fund could have earned if at least a portion of it may have been invested for a higher return.

Wes Moss [00:16:24]:
Not only treasuries with higher rates today, but, God forbid, stocks. What’s interesting, if you think about, and this is a whole nother conversation, but if you really look at investing in bonds versus investing in stocks versus a combination, really over time, the combination has actually been really one of the most efficient ways to not run out of money and still be able to keep up with inflation. But that’s a whole nother episode. I think we called that the 4% plus rule episode.

Mary Beth Franklin [00:16:56]:
One other comment on this. Now, Social Security is massive. It sends benefits to 70 million people every year. It’s paying out a trillion dollars a year in benefits. It has more than 60,000 employees nationwide. And yet it is so incredibly efficient. As far as the money that funds the system and the money that goes out to pay it is pretty amazing what they do. When you think that virtually every american 18 and older has a Social Security number, they’ve got to keep track of that.

Mary Beth Franklin [00:17:32]:
They’re paying out benefits. They’re paying retirement and disability and survivor benefits and benefits to dependent. So it’s really a crucial system that is pretty cost effective, but it’s going to need probably new infusions of income because the longer this problem goes unaddressed, I worry that the typical fixes of let’s raise taxes a bit, let’s tweak the benefits a bit, aren’t going to be enough in a short term. So you do hear some people talking about maybe Social Security needs at least temporary transfer of revenues from general tax funds to Social Security. Now, that has never been done before. Social Security’s funds have always been earmarked to pay Social Security benefits. So it was a self funding program. The question is, if you start using general tax revenues, even if it’s just for one generation to get us over a demographic hump, now you’re subject to annual congressional funding and all the craziness that happens on Capitol Hill now, that.

Wes Moss [00:18:53]:
Sounds like a total nightmare. And Americans know that once there’s something new that takes money out of their pocket and it’s supposed to be, quote, temporary, it almost never ends. So that’s going to be a hard one to get through Congress. Now, in summation, if you’re 30 listening to the retire sooner podcast, the statement you get today may look a little different in the future if something doesn’t change. If you’re 60 today and your promised benefit at 62 is $2,000 a month, very unlikely that’s going to change over the core of your lifetime, at least. I look at this as, on a scale of eight to ten, Social Security. Maybe it’s not a ten, but it really is a seven to a nine on that scale.

Mary Beth Franklin [00:19:37]:
Yeah, I think it’s pretty secure. If you’re currently receiving Social Security or you’re near to receiving Social Security, I just arbitrarily pick about 55. I think if you have clients or you individually are 55 or younger and you have a retirement income plan, I’d say, okay, now let’s stress test it. What would happen if my projected Social Security benefits, not my entire retirement income, but just the Social Security portion, was reduced by 25%?

Wes Moss [00:20:08]:
Yeah.

Mary Beth Franklin [00:20:08]:
Could you still survive, or do you need to start doing things now, like saving more in your retirement account or thinking about working a few years longer or thinking about eventually relocating to a lower cost area. I mean, you can’t just close your eyes. You can’t put your head in the sand and say it’s going to go away. Think about what would plan b be if you had to.

Wes Moss [00:20:36]:
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Wes Moss [00:21:24]:
I really want to talk about how we can think through getting the most out of it, maximizing it. But let’s start with what are some of the. I used to call this the spousal switcheroo, or the spouse saves you, where you could take a suspended benefit, take half of your spouses, then jump to a higher level over time. All of that. I don’t know what you called that or what your terminology is for that, but the window for that is gone at this point.

Mary Beth Franklin [00:21:56]:
Effectively, yes. Up until about 2016, from about 2000 to 2016, there were opportunities, particularly for married couples, or in some cases, divorced spouses who had been married at least ten years, to get a little clever with their claiming strategies. Once upon a time, when someone reached their full retirement age, they could file for benefits for the purpose of triggering a benefit for their spouse. And then that same worker could suspend their benefits so they wouldn’t get their own benefit, but the spouse would, and.

Wes Moss [00:22:33]:
Their own benefit file and suspend.

Mary Beth Franklin [00:22:35]:
Yeah, right. So that disappeared in 2016. So take that out of your head for a while. There was another opportunity for people who were born before 1954, and I always stress that because I was born in 1954, so I couldn’t do it. But it said that if one spouse claimed to benefit, then the other who was born before 1954 could say to Social Security, pay me only as a spouse. In other words, give me half of my husband or wife’s full retirement age benefit, while mine continues to grow up until age 70, and then I will switch to my maximum benefit, the last people who could take advantage of what I called a restricted application for spousal benefits. Those last eligible people turn 70 in 2023. So effectively, this has gone away because your maximum Social Security benefit is achieved at age 70.

Mary Beth Franklin [00:23:37]:
So there’s really no point to delaying benefits beyond that. So now we start.

Wes Moss [00:23:44]:
Mary Beth, you called it kind of this clever strategy. It wasn’t that that was the perfect solution for everybody. Right? It didn’t necessarily wasn’t the right thing for everyone, but it was a potential option for people that in some cases might have worked well.

Mary Beth Franklin [00:23:59]:
Yeah. Let me give you an example of my husband and I. As I mentioned, I was born in 1954, so I couldn’t do anything. But my husband is two years older. He was born in 1952. So when I reached my full retirement age of 66 a few years ago, I actually filed for my Social Security benefits for two reasons. One, once I reached my full retirement age, I would get that full benefit that I was promised even if I continued to work, which of course, I was, because any earnings restrictions go away once you reach your full retirement age. And because my husband was older than I, once I claimed my Social Security, he then filed a restricted claim for spousal benefits, collected the equivalent of half of my full retirement age benefits for two years until he turned 70, and then he switched to his maximum benefit.

Mary Beth Franklin [00:24:55]:
Now, as a married couple, his benefit is now bigger than mine because he waited till 70. He’s also two years older. If he happens to die first, his benefit is bigger. I can then step up to a larger survivor benefit, and then my smaller retirement will go away. Now, all that was great for the people who could take advantage of it, but essentially the fancy claiming strategies died at the end of 2023. Except Social Security retirement benefits and Social Security survivor benefits remain two separate pots of money. And if you are entitled to both because you have your own retiree benefit and you are a surviving spouse or ex spouse, you may still be able to claim one type of benefit first and switch to a larger benefit later. And we can talk about that in a little more details.

Mary Beth Franklin [00:25:53]:
Because survivor benefits are worth the maximum amount at your full retirement age, your retirement benefits continue to grow up until age 70.

Wes Moss [00:26:06]:
Going back to that example, the 19 you and your husband, he chose to take, let’s say he was 68, and instead of taking his own social, he took half of yours. And then he did it again the next year, and then he switched to age 70. For some people, let’s say, taking only half of yours versus taking the full amount that he would have gotten at, let’s say, 68, that’s also a decision that people have to make, too. So it’s not a guarantee that strategy was better or particular for some families that may have needed higher income at the time. Is that exactly.

Mary Beth Franklin [00:26:40]:
It’s all about cash flow. And frankly, for people who had the luxury of waiting, it was better in our case for him to take half of my benefit and then to wait for his bigger benefit later.

Wes Moss [00:26:53]:
Which brings me to, and again, you wrote a whole book about this, which is your book is maximizing your Social Security retirement benefits.

Mary Beth Franklin [00:27:04]:
Actually, now it’s called maximizing Social Security benefits. You can just go to maximizingsosecuritybenefits.com to buy a copy of my ebook.

Wes Moss [00:27:14]:
Well, so that’s where we want to start, is really the theme of your ebook is maximizing for folks. And I want to help people think through this because obviously, the next big question is time. And Social Security now, I think, does a better job than they have in the past of showing a chart. It’s a sideways bar chart that says, hey, you can take two grand if you’re 62, or you could take 7% higher than that if you wait till you’re 63 and another seven and a quarter percent if you wait till 64. So it shows you the amount if you delay and delay. But then you’re also foregoing that money for that period of time. So you’re betting on a little longevity. How long does it take me to make up for the year I waited or the two years or five years or up to what? Eight years? Right.

Wes Moss [00:28:02]:
We could take social at 62, or we could delay all the way to age 70. And there’s not a perfect answer there, but let’s talk that through. So let’s start with just a simple, let’s say I’m single. I’m approaching 62. I’m thinking about Social Security. Should I take, and I did the math on this 2000 today or at 62, or wait to take the 28, $42,840 tomorrow or in five years, which, by the way, I calculated that as about an 11.9 year break even. How do you think that through?

Mary Beth Franklin [00:28:44]:
Well, for the single people, it’s pretty straightforward, because your Social Security benefit is based on three factors. Your average lifetime earnings, which they take, your top highest, 35 years, the age when you claim benefits. And the big question is, are you still working? So my number one rule is, because a lot of people don’t understand this, if you continue to have earnings from a job or self employment and you claim Social Security before your full retirement age, you are going to at least temporarily lose some or possibly all of your Social Security benefits, because there’s this earnings cap. And this year, if you make more than about $22,000 a year, Social Security is going to start taking away some benefits. A dollar in benefits for every two over that limit. So to say you make about $60,000 a year or more, don’t do it. Just don’t claim Social Security. You will not get any benefits, however.

Wes Moss [00:29:52]:
Mary Beth, is there a provision where Social Security will add back what you actuarily, but they do it over your lifetime, what you were penalized on? Is there an add back? Yeah. Is there an add back?

Mary Beth Franklin [00:30:09]:
If you claim benefits before your full retirement age and you continue to work and you lose some benefits due to excess earnings. Okay, so let’s say roughly, the earnings cap is $22,000 this year. And you make 42,000. That’s 20 over the limit. And they’re going to withhold one dollars in benefits for every two over the limit. So they’re going to hold back $10,000, and they’re going to do it all up front. So let’s say you were supposed to get $2,000 a month in benefits. They are going to withhold the first five months, so they hold on to all those $10,000 before they start paying you benefits.

Mary Beth Franklin [00:30:49]:
Now, once you get to your full retirement age, they’re going to look at your earnings record and say, hey, John, I see that you claim benefits early at 62. That was five years before. Your full retirement age is 67. And you took a 30% haircut up front because you claimed early. And in addition, we withheld $10,000 a year over those five years because you made too much money. We will readjust your benefits now that you reach full retirement age to reflect the money that you lost due to the excess earnings, but not the money you lost because you claim early, just the money that you gave up due to excess earnings. So, yes, in a sense, you could claim benefits early. You could lose some to the earnings cap.

Mary Beth Franklin [00:31:39]:
Those benefits would be restored, but it.

Wes Moss [00:31:43]:
Takes a long time to get them back counting.

Mary Beth Franklin [00:31:46]:
Nightmare. Because let’s say you claim benefits early and Social Security is going to say, hey, do you plan to keep working? You figure, I won’t say anything. They’ll never notice. Well, they do match your records to your tax records, and it may take several years, but then they might send you a letter that said, oops, look like we overpaid to $30,000. We’d like that back right now to lump sum. You really don’t want to get into that situation, so avoid it in the first place. If you plan to keep working, don’t claim benefits early unless, say, you’re working part time, you’re driving for Uber, and you’re making $20,000 a year. That’s less than the annual earnings cap.

Mary Beth Franklin [00:32:25]:
Okay, you go ahead and do it. Yeah, reduce benefits and not lose any because you’re not making too much.

Wes Moss [00:32:34]:
You look at your Social Security statement, let’s say you’re in your 40s. I’m still hanging on my forty s, and it says, my full retirement age is 66, and it gives me my number that it’s expected to pay. I think the question a lot of folks have, particularly the younger you are, is that there’s a line in there that says, provided you continue to pay in and earn a similar amount of money. Is that extremely relevant or not as relevant? Because by the time you’re in your 40s, usually you’ve gotten your 40 quarters, you’ve already qualified. But how does that work?

Mary Beth Franklin [00:33:12]:
Again, your Social Security benefits are first set to be eligible. And you do that by working for essentially at least ten years, getting the maximum four credits per year to get the full 40 quarters. You need 40 credits to be eligible for a future Social Security benefit. But that doesn’t tell you how much you’re going to get one. It depends on what are your average lifetime earnings. And they look at your top 35 years of earnings.

Wes Moss [00:33:42]:
Maybe you worked 40 years, top 35. Okay.

Mary Beth Franklin [00:33:44]:
Right. They’re going to drop out the bottom five. If you worked in the years you were delivering newspapers, remember those? Or flipping burgers. So they’re going to take your top 35 years and average that out using a formula to calculate your average index monthly earnings. And then they apply a benefits formula to that. But say you stayed home and took care of your kids and you only worked 20 years, they’re still going to divide by 30. 515 of those years are going to be zeros. So when they divide by 35, your average lifetime earnings are going to look lower, and consequently, your benefits are going to be lower.

Mary Beth Franklin [00:34:23]:
But the advantage is any year that you continue to work, regardless of your age, regardless of whether you’re already receiving benefits, that adds to your work history. And if it boosts the formula, then your benefits will automatically increase in the future. I can say that has happened to me over the last few years, even though I’m beyond full retirement age, because my recent earnings had been higher than one of the years dues. In the original 35 years calculation, my benefits automatically increase each year, not just due to the cost of living adjustments, but due to the fact that my average lifetime earnings have increased.

Wes Moss [00:35:05]:
No kid now that I did not know.

Mary Beth Franklin [00:35:08]:
Wow.

Wes Moss [00:35:08]:
So that’s amazing.

Mary Beth Franklin [00:35:12]:
You’ll get a notice, usually around October, that says, based on your recent earnings, we now owe you an extra $25 a month, and we’re going to give you a lump sum for $360 for the first nine months or whatever. And going forward, we’ll add that extra $25 a month so you don’t have to do anything. It’s automatic.

Wes Moss [00:35:36]:
Even if you claim at 66 and your average earnings is 100 grand, and then you work another four years and you make a bunch of money, and now your average earnings is 105,000, they will adjust it higher even though you’ve already left the gates, if you will.

Mary Beth Franklin [00:35:54]:
Right. And here’s another thing to keep that’s really cool.

Wes Moss [00:35:57]:
I did not know that we talked.

Mary Beth Franklin [00:35:59]:
About the maximum taxable wage rate in this year, 2024. It’s 168,600. If I make that amount or less, I’m paying taxes on every dollar I earn. If I make more than that, I’m not paying taxes on the excess.

Wes Moss [00:36:14]:
Okay, you’re right.

Mary Beth Franklin [00:36:16]:
Your benefits are based on how much you earned up to the taxable wage base each year. And remember, way back when that was a lot lower, it might have been 28,000, it might have been 40,000. So it wes how much you earned and paid taxes on up to the taxable wage base each year.

Wes Moss [00:36:37]:
So really, going from 100 or making 80 to making 160 could move the meter going from 150 to a million. Barely does anything right.

Mary Beth Franklin [00:36:48]:
And the other thing to keep in mind is the closer you are to retirement age, the more accurate that Social Security estimated benefit is going to be because they have more years of data to calculate. Yeah. So let’s say I’m going to stop working at 64, but I’m not going to claim my benefits till 67. I’m not working those last three years. It’s probably not going to have a huge impact on my eventual benefit. But if I desire, I am part of the fire movement and I am going to retire at 45. And my estimated benefit statements, assuming I’m making my current earnings through age 67, my future benefit is going to look a lot different.

Wes Moss [00:37:34]:
So really that line, which is, hey, assuming you keep working, that matters. That matters, particularly when you’re young. So your advice here is that, and I wholeheartedly agree with that sentiment, of only work part time up to age 66 and claim Social Security if it’s under the cab, under, let’s say, 20 grand a year. But if you’re still working, typically it’s not a great idea to claim Social Security until you’ve hit 66. So my question then is beyond that, what about just the time? If you’re done working, you’re a teacher, you hit your 30 years at 55, you work part time to seven more years, you get 62 and you’re done. You’re not going to be working much anymore. Then. I think that’s harder for folks to wrap their head around.

Wes Moss [00:38:24]:
Like, okay, I can take this two grand now every month, or I can wait five more years, which is two grand times twelve is 24,000. Times five years is call that 100 and some grand, but then I’m going to make it back by $840. A month. How long does it take? It takes twelve years. Is it just the math is what it is or your health? How do you think through that time recoup?

Mary Beth Franklin [00:38:50]:
I think it’s a very individual situation based on your health because Social Security benefits are actuarily fair. In other words, if I take reduced benefits as early as possible at age 62, if I take my full benefits, let’s say you’re born in 1960 or later, your full retirement age is 67. Or I wait till 70. And the difference between claiming reduced benefits at 62? I’m going to take a 30% haircut immediately. So I’ll get 70% of my promised benefits at 62, I’ll get 100% of my benefits at 67, or I’ll get 124% of my benefits if I wait till 70. The difference between claiming as soon as possible at 62 versus as late as possible at 70 increases my monthly benefits by 76% for the rest of my life. If I can afford to wait now, let’s start.

Wes Moss [00:39:55]:
If I can afford to wait.

Mary Beth Franklin [00:39:57]:
If I can afford to wait. Because if I’m single and I die before claiming, nobody gets my benefits, I don’t have a survivor, it goes back in the pot. So for single people, and I would define that as people who had never been married or people who were married fewer than ten years before they divorced, because in Social Security eyes, you’re single, I would say I get to 62. Definitely don’t claim if you’re still working. It just doesn’t make sense. Now the question is I get to my full retirement age, Wes, I could claim full benefits and that might make sense in my personal situation. And frankly, I’m worried I’m going to get hit by a bus before I claim benefits. So I’m going to take it now.

Mary Beth Franklin [00:40:45]:
And maybe I didn’t even need the money, I could bank it. And if nothing else, it’s going to help pay for my Medicare premiums that are deducted from my Social Security check. I think that works well for many single people. When you get to married people, many of them have the luxury that they can hedge their bets and I usually say have the higher earner, which is traditionally the husband, but it’s gender neutral. Wait till 70 if possible. He’s got the bigger benefit. He’s probably a couple of years older. In the typical american couple, he’s probably going to die first.

Mary Beth Franklin [00:41:25]:
So by waiting until age 70 to collect the biggest retirement benefit possible while both spouses are alive, and if he dies first, his widow would step up to his full benefit as her survivor benefit, assuming she is at least full retirement age when she’s widowed now, we just decided he’s going to wait till 70. In the meantime, if that wife who has her own retirement benefit, maybe she’s not working. She’s 62. You know what? Go ahead and claim those reduced retirement benefits early. Bring some cash flow into the house helps offset some of your other costs. Because if he dies first, which is likely, even though she collected reduced retirement benefits early, and her retirement benefits will be reduced for the rest of her life, of her life has no impact on her survivor benefit. If she is at least full retirement age, when she switches to a survivor benefit, she still gets 100% of what he was collecting, even those extra delayed retirement credits because he waited till 70. So that’s a great way for married couples to hedge their bets.

Mary Beth Franklin [00:42:44]:
And if you had been married at least ten years before divorcing, you might be able to do the same thing because you are an eligible divorced spouse. Now, when you claim retirement benefits, you’re probably just collecting on your own record because you only get a benefit as a spouse if that’s larger than your own retirement benefits, which in many cases.

Wes Moss [00:43:08]:
It’S not, how does it work for two divorces? Can you choose which ex husband or ex wife social you would, or is it the most recent?

Mary Beth Franklin [00:43:18]:
As long as you were married at least ten years before divorcing. And in the case of when you’re both alive, if you’re single, you can collect on your ex’s earnings record if it’s larger than your retirement benefit, and if you were married twice for at least ten years before divorcing, you can claim on the higher of the two.

Wes Moss [00:43:42]:
So think of it this way, the better acts.

Mary Beth Franklin [00:43:45]:
There must be at least a decade between I do and I don’t. If your marriage is falling apart in years eight and nine, string out the paperwork, because the only dates that matter are the date you’re married and the date of your final divorce decree. Now, there are more than 2700 rules that govern your Social Security benefits. And there’s a lot of exceptions, and a lot of the exceptions have to do with divorce. So here’s another one. Basic rule is I must be married at least ten years before divorce him. I must be currently single to be able to collect on my ex’s earning record. If that benefit as a spouse, half of his amount is bigger than my own retirement benefit would be.

Mary Beth Franklin [00:44:30]:
And although currently married couples can’t do this, I can actually collect on my ex even if he has not yet collected because I am an independently entitled divorced spouse and I’ve got to be single to do all this stuff. But if I wait till age 60 or remarry to remarry and my ex dies, I can collect survivor benefits on my ex even if I’m married to somebody else at the time. So those are the two roles. There must be at least a decade between I do and I don’t. And if you’re going to take a second trip down the aisle, wait till 60 to do it.

Wes Moss [00:45:10]:
2700. That’s it. More than 2700 rules. I call this the Wally and Pat rule and really just named after two friends of mine that were shocked at the fact that after they were 70, because they’re still working even in their 70s, let’s say because they had teenage kids, they started getting checks because of their teenage children. Again, it’s not as common to have a twelve year old when you’re 70, but it certainly happens. What do we call that rule? And maybe explain that for folks that have younger kids but they are in Social Security age?

Mary Beth Franklin [00:45:52]:
Well, actually it happens more than you would think. I used to call this the Viagra College fund rule because I saw so many older men remarrying for a second time and having a new second younger family. And it was not that unusual to have a 66 year old dad with two year old twins. And that really affects your claiming strategy because once the parent claims Social Security, if you have minor dependent children in your household, defined as 18 or younger, or if they’re still in high school up until age 19, well, they each will get a dependent benefit. A dependent benefit is worth 50% of the parent’s full retirement age benefit amount regardless of when the parent claims. So in that case, if, for example, dad retired at 62, I would have said claim Social Security at 62 to trigger benefits for those two year old twins because their benefits will end when they turn 18. And don’t you want them to get as many years as possible? Same thing. Maybe mom’s not working, but it doesn’t go up.

Wes Moss [00:47:06]:
So it doesn’t go up with you waiting for your larger payment.

Mary Beth Franklin [00:47:10]:
No, it’s 50% of the parents full retirement age benefit regardless of when the parent could claim it. 62, 66, 70. But the kids will still get a flat 50% of that parent’s full retirement age benefit. So in that sense, the sooner you claim, the better because your kids will get a dependent benefit for a longer period of time. But again, the key is if you are still working your benefits and those of your dependents are subject to the earnings restrictions. So it probably doesn’t make sense. If you’re still working, it’s going to wipe out all those benefits. But if you’re not making a lot.

Wes Moss [00:47:50]:
Even for your dependents dependent payments, again, they can get wiped out too, right?

Mary Beth Franklin [00:48:01]:
Because you would just look at the total amount of benefits that are coming into the family, and then they’re going to take away one dollars in benefits for every two over the earnings limit. This year, it’s roughly $22,000 a year. It could feasibly wipe out all those benefits. Okay, so in that case, if dad is full retirement age and still working, go ahead and claim, because earnings restrictions go away at full retirement age and it would not affect his benefits or the kids.

Wes Moss [00:48:32]:
So almost certainly you’d want to do that at 66. That makes sense. Okay.

Mary Beth Franklin [00:48:37]:
Right.

Wes Moss [00:48:37]:
If you’ve got kids under age seven.

Mary Beth Franklin [00:48:40]:
Underage, who is eligible, it’s your biological child, it’s your adopted child, it’s your stepchild, and in rare cases, your grandchild, if the child’s parents is deceased or disabled, and that child is living with you and is a tax dependent. So there are some cases where grandchildren could get this benefit.

Wes Moss [00:49:04]:
I remember reading. So the genesis of this Viagra college fund rule, did that have something to do with kind of post war America in the 40s? Was it something to do with.

Mary Beth Franklin [00:49:17]:
The whole idea was when a family. Let’s back up. Social Security was created in 1935. The typical american family looked a lot different. You had one breadwinner, usually the dad, usually the stay at home mom, and a whole lot of kids, and not a big retirement system in place. So the idea was when a family lost the wage earner, either due to death, retirement, or disability, Social Security created some replacement income. That was the point of it.

Wes Moss [00:49:49]:
But this one is for somebody who’s.

Mary Beth Franklin [00:49:51]:
Living, right, technically retired. So the idea is retiring, losing that ongoing wages, and you’re still supporting a family. So that’s why a dependent under that description would be entitled to a benefit until they got through high school. Now, if that parent died and you still have minor dependent children in your household, they’re now entitled to a survivor benefit. And the survivor benefit is 75% of the parents benefit and would continue until the child turned 18. Or in the case, if you have a permanently disabled adult child who was disabled before they turn 22, those children get dependent benefits while their parents are alive, survivor benefits after the parent dies, and those benefits last for the rest of the child’s life.

Wes Moss [00:50:46]:
Oh, I know why you’re calling this the Viagra college fund? If you do the math. If you have a child at 66 and your social is 3000, they’re getting $1,500 a month for 18 years.

Mary Beth Franklin [00:50:58]:
But that at a 529 plan, and you just paid for Harvard.

Wes Moss [00:51:02]:
Wow. That’s why I got it. I’ve never heard it called that. It’s very easy to remember.

Mary Beth Franklin [00:51:08]:
Apparently I messed up a lot of people’s spam filters that they were not able to access my website. Once I said something about the Viagra college fund.

Wes Moss [00:51:18]:
Oh, wait, it wes, right? Oh, my goodness. All of a sudden. Anything coming from Marybeth Franklin? Because it had. That’s great. All right, let’s talk about Cola. Let’s talk about cost of living inflation. Major issue in the United States, major issue for retirees. I think it’s like, as an investor, it’s kind of this perennial issue that we’re solving for.

Wes Moss [00:51:39]:
We’ve got to outpace inflation. We’ve got to protect our purchasing power. It laid dormant, though, for many years. It was almost as though inflation, if it were Godzilla, it’s roaming the earth. We’re all worried about it. We’re all fighting against it. And then Godzilla got frozen in a glacier for about a decade. So it was, there’s no, there’s no Godzilla.

Wes Moss [00:51:59]:
And then we had the tidal wave of money from the pandemic. It melted the iceberg and Godzilla roams the earth again. Target number one for retirees, inflation. Last year the cola was 8%. The cost of living. Just for such acute, it was like over 8%. This year, I think it’s 3.2. The question I have will be, does that, first of all, that shows up right away in the new year on the very first check, January.

Mary Beth Franklin [00:52:26]:
Yes, you’re correct. This year, 2024, the cost of living adjustment was 3.2%. And while that’s less than half of the previous year’s cola, which was 8.7%, that was the largest increase in more than 40 years.

Wes Moss [00:52:41]:
87. Yeah.

Mary Beth Franklin [00:52:42]:
One of the great value of Social Security is not only does it last the rest of your life, but it is cost of living adjusted. So any year that there is inflation as measured by a specific Social Security formula, then your benefit check will automatically go up starting that following January. So with your first check in January, you will get that 3.2% increase. Now, a lot of people think, oh, this is political. They’re manipulating the numbers. No, they’re not. It’s a very straightforward calculation. They look at the average consumer price index for the third quarter of the previous year compared to the third quarter of the current year.

Mary Beth Franklin [00:53:26]:
And if it increases, that’s the amount that the benefits will increase the following year.

Wes Moss [00:53:33]:
A lot of financial planning software will ask you to input almost all financial planning long range will look at inflation rate. Of course, that’s kind of variable, one of the biggest variables you can solve for. But then there’s typically another column that will say, are you increasing XYZ income stream for inflation, or is it going to stay flat? Are you going to increase your Social Security for inflation at 100%, or is it going to be only half of that? Has there ever been an issue or a time when Social said, we’re only going to give you partial cola increase?

Mary Beth Franklin [00:54:14]:
Prior to 1975, there was no automatic cost of living adjustment. It had to be legislated every year by Congress. And even then, that was a very tricky vote. It became automatic in 75. And this formula was created, the third quarter average of the CPI one year over the other. And that would create the cost of living adjustment. There’s been three or four times over the past 20 some years where there was no measurable inflation and consequently there was no cost of living adjustment. When you look back over the past 20 years, the average cost of living adjustment was about two and a half percent.

Mary Beth Franklin [00:54:57]:
And I think that’s a fairly safe number projecting forward that if I’m using X amount as my client’s estimated Social Security benefit, you could probably inflate that at about two and a half percent and be consistent with the historical average. The bigger issue for retirees tends to be health core costs, which tend to inflate at a much higher rate. And I think most advisors would be safe doing it at about 5% a year for health care costs.

Wes Moss [00:55:27]:
All right, we’re going to find Marybeth franklin@marybethfranklin.com. Of course, maximizingsocuritybenefits.com and every once in a while right here on the retire sooner podcast.

Mary Beth Franklin [00:55:41]:
Thank you, Wes. Happy New Year and thanks to all your listeners who tuned in.

Mallory Boggs [00:55:46]:
Hey y’all, this is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@wesmoss.com. That’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s disclosure. This information is provided to you as a resource for informational purposes only.

Mallory Boggs [00:56:11]:
And is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment return, yield or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative of future results.

Mallory Boggs [00:56:47]:
When considering any investment vehicle, this information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any invest decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.