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Announcer: It’s time now on KROS for Financial Focus brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offer through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice.
Now here’s today’s Financial Focus program.
Nate Kreinbrink: Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate. James joined me again on this, another beautiful February winter morning. I was in with a client yesterday and obviously, we were talking about the weather and the incoming weather and I think they hit it on the head that someone had the extended forecast and they keep repeating the same forecast over and over and over again.
James Nelson: Yeah.
Nate Kreinbrink: Hopefully we can just scrap this one and get to something different.
James Nelson: Yeah. No kidding. More of the freezing rain out there right now. I mean that’s worse than the snow.
Nate Kreinbrink: Yeah.
James Nelson: I think we lucked out. I don’t think we got as much snow as they were calling for, but this freezing rain I think’s worse and looks like that’s going to continue for a while.
Nate Kreinbrink: Yeah. Makes it difficult to try to schedule things. I know, I think Clinton’s schools are in session on schedule. Some of the rural school, I know, have canceled. I know my boys and Ashley are at home with another school closing day off, or whatever, today. Which I think, by this point, I think they’re ready just to get in school so they don’t have to continue trying to make these up and then actually get out at a decent time sometime this summer, June, July, whenever the heck it may be at this point.
James Nelson: Yeah. No kidding. It’s cutting into that summer break. They, they’re not going to have much of a break this year.
Nate Kreinbrink: Definitely been a crazy one but I keep saying every day is another day closer to Spring. It will be here sooner or later. I know pitchers and catchers, spring training is in session. It’s nice to turn on the TV and see the green grass. That on television, just hoping that it gets our way sooner rather than later.
James Nelson: Yeah. Yeah. Exactly. It’d be nice to see an extended forecast, you know, even in the forties would be nice.
Nate Kreinbrink: That would be definitely a heatwave coming through.
James Nelson: Yeah. Yeah.
Nate Kreinbrink: For today’s session, I know James and I, the last couple of weeks, last week we talked kind of rollovers, lump sum rollovers with pensions and things like that. We wanted to circle back today and talk a little social security.
I know social security is a topic that’s in the headlines a lot but it still remains one of the main questions and the main talking points that we have with individuals when we meet with them, as far as when they’re look, thinking about making that retirement decision, looking at their retirement income and how the social security benefit plays in to all of that.
When I usually start with them is I usually have them bring in their social security statement. Those aren’t mailed out as often as what they used to but usually starting at age 60 they are mailed out on a regular basis again. But I challenge people that when you do get that statement, to open it up to the inside cover and look about midway through down through the page. It’ll show, tell you exactly how much you paid into the social security system and how much your employer paid into the social security system on your behalf.
And when we add those up and we look cumulatively over just an average lifetime of what an individual will get in benefits, I think that’s an eye opening number that they look at. And it’s a great point when we start the discussion as far as when we should claim benefits. Because oftentimes when you add the number, the amount that you paid into social security, the amount that your employer paid into social security, and the amount that you would get over your lifetime, you’re going to get back roughly two to three times more in benefits than what you and your employer paid into it.
So that old argument that, “I need to take it at 62 to start getting my money back.” doesn’t really hold up when you actually start looking at the numbers. I mean people are living longer. So, again, we need to start planning for that. We need to start coordinating benefits, especially when you’re married. We need to coordinate those benefits between husband and wife.
Now am I saying that both of you need to take it at age 70? Absolutely not. But we need to take a good look at that and coordinate when the one spouse is taking it versus the other spouse.
James Nelson: Well and that’s a great point regarding the total benefits paid in between an employee and their employer. Hence, the reason that social security’s in the trouble that it’s in. Right?
Nate Kreinbrink: Right.
James Nelson: I mean people are living too long and their drawing out two, three times the amount that they actually paid in. And their employer paid in. So that’s a, that’s obviously an issue. And, you know, we’ve seen with a lot of these campaigns starting the last couple of weeks, candidates are starting to roll out their plans on how they’re going to save social security and Medicare. And its been the news a lot, so I think it’s a really relevant topic and a topic that applies to almost everybody. We’re starting to see candidates talking about it.
The big item that I took away from seeing some of these proposals is raising that income cap. It’s at roughly $130,000, anybody who makes more than that, that income is not subject to social security tax. Several candidates want to move that hundred and thirty threshold up to two fifty or even three hundred thousand dollars. And claim that that would add an additional 50 years of solvency to social security. I haven’t done that math. I haven’t looked at it that closely.
But it’s interesting that this has really been at the forefront and I think it’s going to be talked about a whole heck of a lot here the next couple of years.
Nate Kreinbrink: Right. And I think there’s a lot of things being thrown around that, the income limit is the big one that I think really has some traction to it. Another one that I think is, has really started to gain with, there’s an article that I read about a proposal that they’re looking at raising the amount of tax that you pay into it.
So I think roughly, right now, you and your employer both pay in roughly, I think it’s 6.2% in to the social security/medicaid system. Slowly raising that amount that you’re paying into it. Again, more tax coming in. Build that pot up continuing those benefits.
Another one, raising the full retirement age. We’ll see how that kind of goes. Will it be kind of a hard thing? No. I think what’ll end up happening is it’ll be a kind of a collaboration of a bunch of these different ones.
James Nelson: Mm-hmm (affirmative)
Nate Kreinbrink: And then obviously it’s not going to happen overnight. It’s going to be a five year process or a ten year process, where they’re going to slowly start easing some of these in. The ones that are currently taking benefits, as they have with almost any other change that they made, will be grandfathered in to what they’re usually getting.
So again, this isn’t something that’s going to happen overnight. But again, at least talks are starting to come into effect because, again, you look at the social security system, you have more people pulling out of the system than workers paying into it. That, in and of itself, is an issue. You have people that are living longer in retirement than necessarily what they paid into the social security system. That’s an issue.
So, again, there’s all these different things that are coming into it that are creating the issues that we have. It’s just now what are we going to do to resolve those and make it feasible to continue on. Because, honestly, I hear people say all the time, “Well, I’m not even going to plan on social security because it’s not going to be there when I’m going to draw it.”
James Nelson: Right.
Nate Kreinbrink: That can’t be farther from the truth. It will be modified but it cannot go away. The percentage of Americans that the social security income is the only income that they have in retirement, for their lifetime, is so high that if you take that away our poverty level goes skyrocketing through the roof. Our homelessness, our economy crashes just because there’s not those funds that are getting pushed into it. So again, social security cannot just go away.
It will need to be modified. Absolutely. But it cannot just go away.
James Nelson: And that’s a great point because the average middle class family, when they get to retirement, about 70% of their retirement income is social security benefits.
Nate Kreinbrink: Right.
James Nelson: So, yeah, that’s a huge number and that’s an average, clearly, like you mentioned, Nate. Several people are solely dependent on that so the idea of that going away is, it’s not going to happen.
And I think that plays into, kind of, my next point is just the amount of misinformation out there.
Nate Kreinbrink: Exactly.
James Nelson: You know we talk about it all the time in the office where a client comes in and says, “I read this article and, you know, I should take it at 62 because this article says so.” And a lot of times those articles are built around a specific situation. It doesn’t necessarily mean your situation’s the same. There might be a big discrepancy between ages, between you and your spouse. There’s just a lot of things that really play into making that decision on when to claim social security.
And you know for people, you read an article or see something online and try to make a determination from there that, “This article says this, so I’m going to do that.” probably isn’t a great idea. Because there are a lot of variables that play into drawing that benefit.
Nate Kreinbrink: Exactly. And again, when you take your benefits, again like I said, needs to be a coordination of you and the spouse if you’re married. But again it needs to be coordinated with the other assets and the other income that you have coming in.
A lot of times what we’ll end up seeing with people when they come in, they’ve done a great job of saving in their 401K, those assets though are tax deferred for the most part usually. Meaning that they got the tax deduction when they put the money in, whenever they take the money out they’ve got to pay taxes at that point in time. If you don’t take anything out, when you turn 70 and a half, you have to start taking your required minimum distribution, your RMD. And that, what you’d take out of there, those assets are taxable to you.
So what we try to do is once you retire, obviously your income drastically decreases, so what we want to maybe look to do is delay our social security benefit, take some assets out of those tax deferred accounts in those years when you have a little bit lower income in a lower tax bracket.
Again, the simple question that we ask people, “Would you rather pay more in taxes or would you rather pay less in taxes?” And obviously that answer is pretty simple. So again, if we can delay our social security benefit by taking a few assets out of our tax deferred accounts to kind of bridge that gap, it’s kind of a win-win. And again, this is where the planning thing comes into play. And we always say, “It’s not what you have, it’s what you keep.” So if we can keep more in your pocket versus more being paid to taxes, things like that, it’s a win-win for everybody.
James Nelson: Yeah. I think the bottom line is people are zeroing in on retirement, getting closer to drawing social security. Please give us a call, sit down, we’ve got great software that can map out 100 different situations and help you determine what the best situation is.
Nate Kreinbrink: As we always say, “When you retire and when you take benefits, need to be two separate decisions.”
James Nelson: Right.
Nate Kreinbrink: Not saying they can’t be the same year in some situations but most of the time they’re not. But they need to be made in two separate decisions.
James Nelson: Right.
Nate Kreinbrink: Again, like James said, questions? Give us a call. We’d be happy to sit down and go over it with you. I did want to mention, real quick before we run out of time, that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of February will be donated to the Clinton Fire Department and the families of Lieutenant Eric Hosette and firefighter Adam Cain.
James, I appreciate you joining me today.
James: Absolutely.
Nate Kreinbrink: Again, this is Nate and James with NelsonCorp Wealth Management bringing you this week’s Financial Focus.
Thanks again for tuning in. Stay safe out there and have a great rest of your week.
Announcer: Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offer through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice.
For more information, visit our website at www.nelsoncorp.com.
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