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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mike (00:05):
Welcome to How to Retire On Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial advisor andfiduciary. And with me in the
studio today is my colleague,David Franson, who will be
reading your retirementquestions. As always, you can
submit those questions to (913)363-1234.
Again, that's (913) 363-1234.David, what do we have for
(00:26):
today?
David (00:28):
Hey, Mike. When does it make sense to file for Social
Security early so you can takethe benefits and reinvest them?
Mike (00:36):
Yeah. This is a common misnomer that if Social Security
is allegedly going away, whichit's not, or if you're not gonna
use it, you already have enoughassets for elsewhere, you might
as well just take it andreinvest it in the market. So
let me see if I can explain thisby several trains of thought.
The reason why people ask thisquestion is because they'll say
(00:56):
something like, well, I couldjust buy a couple of annuities,
turn on the income stream, andthen I have the income that I
want. What do I do with thisleftover benefit Social
Security?
Maybe you don't need the SocialSecurity benefit. Maybe you have
a pension. K? And you're gonnalive off the pension. You don't
need Social Security.
So what do you do with theleftovers? Do you see how it's
(01:16):
it's Social Security is thoughtas it's an afterthought.
David (01:19):
The
Mike (01:20):
problem I see with this is from a tax planning standpoint
and a benefit planningstandpoint. So let's run through
a couple of scenarios. If youplan to keep working because you
enjoy your work, then I don'tsee it making sense to file for
Social Security before fullretirement age 67 years old
because you're going to getdeducted your benefits based on
(01:41):
your earnings or your w two orten ninety nine income. In other
words, if you make more than 20some thousand dollars a year,
you start losing your benefits.And there's a clause in that.
That's if you file before fullretirement age. Now if you file
afterwards, then who cares? It'syour benefit at that point.
Okay. So that's the first thingis if you if you wanna keep
working, if you intend to keepworking, whatever that reason
(02:02):
is, it doesn't make sense tofile early and invest it because
you're going to have yourbenefit, first off, taken at a
reduction.
And then second off, you'regonna have it basically deducted
or reduced because of yourearnings.
David (02:14):
Okay.
Mike (02:15):
K? So that's the first part. But let's say you are
retired and all of your incomeis coming from pensions and
other places, what do you dowith the income? I would first
ask, what are you doing withyour portfolio? So let's say you
have million dollars in AprilIRA assets.
You can either take income fromthose assets and grow your
(02:36):
Social Security benefit. You cando IRA to Roth conversions and
take your income so that there'snot an RMD issue later on in
retirement. That's the momentbefore you file Social Security
that you can get things inalignment. That makes sense? If
you did IRA or Roth conversions,and you took income from your
portfolio, and you took onSocial Security to reinvest it,
(02:58):
you're creating additional taxissues.
You're bumping yourself up intoa higher tax bracket. It's a lot
of income. Social Security is atax efficient income stream,
because up to 85% of it is taxedbased on your income. K? Based
on income taxes, the brackets.
Right? If that's true, why wouldyou want to start taking your
(03:18):
Social Security early if you'realso taking income from other
sources, or you're doing IRA toRoth conversions, or you're
doing these other things?Because you're gonna get taxed a
100% from your IRA assets. Theideal situation, in my opinion,
is that you've done the majorityof your tax planning, your
adjustments each year. You'renot kicking yourself into Irma,
so you didn't do too egregiousof an IRA to Roth conversion.
(03:41):
You've kind of settled things upso that when you turn on Social
Security, you're also taxefficient in your other
portfolio income streams.
David (03:49):
Yeah. It sounds like what you're saying is that we have to
be careful when you have allthese different income streams,
Social Security being one ofthem. And if you have too much
income because you're taking itfrom all these places, then
you're not tax efficient. Youmight have to pay higher for
Medicare through the IRMAsurcharge, as you mentioned.
Mike (04:04):
And you got RMDs and all sorts of other things to be
concerned about. Now there'sanother layer of complexity to
this.
David (04:11):
Okay.
Mike (04:11):
There are a lot of people out there that are basically
saying Social Security is goingaway, so you might as well just
invest it and put it in themarket. Maybe you don't need the
income. Right. Why would youturn on Social Security for the
sole purpose of reinvestment?When you take Social Security
benefits, you put it into then abrokerage account that then will
(04:33):
grow.
And if you actively trade it,you're creating short term
capital gains, which creates atax issue. Or you put it in long
term, and then you've got longterm capital gains. So when you
touch it, you're also gonnacreate a taxable issue. And if
you've got dividends beingreinvested, you're creating
income tax, which is anothertaxable issue. Instead, why
wouldn't you just get a largerbenefit later on and do more
(04:54):
deliberate taxation later on?
And then you might say, well, Idon't really need my IRA assets
or these other assets. Okay.Fine. What happens when RMD's
required minimum distributionsstart? How does it line up?
We did a plan recently forsomeone. I mean, basically, what
we were trying to accomplish ishow much do we take from their
IRA assets? How much do we takefrom their brokerage account?
(05:16):
Because they had one company inparticular. That was the company
they worked for for their wholecareer.
A lot of stock with a very lowbasis. So how do we take income
out of that? And then how do weline up Social Security? The
provisional income, which iswhat determines your Social
Security taxes, it doesn'tinclude standard deductions. So
that's an issue.
But what we did figure out ishow much we could take from
(05:37):
their IRA assets, utilizing thestandard deduction. Let's say
IRA is about $4,050,000. They'remarried, so standard deduction
takes out 30,000, so they'rebeing taxed on 20,000.
David (05:47):
Okay. I got it.
Mike (05:48):
You're within the 10 to 12% tax bracket, and then we
take a little bit out of theirnonqualified assets, that single
stock. That is a steady Eddiestock. It's not a volatile
stock. It's pretty predictable.K?
I won't say the stock, but justthink of like a Coca Cola like
company. And we're taking someassets out of that as well, and
we're kind of doing this for thefirst part of their retirement
while kicking back SocialSecurity. What did we just do?
(06:11):
What we did is we allowed theSocial Security benefit to
increase over time while we havedrained tax efficiently their
stock under the 0% capital gainstax bracket while also utilizing
the best we can within thelowest tax bracket, their IRA
assets, so that when they turn70, they don't have too much
(06:33):
invested in one stock. Theydon't have too much in their
IRAs, and then the balance thatthey have within their IRA
assets, the remainder of thebrokerage account, and their
Social Security became a verytax efficient retirement plan
from that point on.
David (06:46):
Okay.
Mike (06:47):
So do you see how we line things up so that when Social
Security started, it was verytax efficient? These are the
kinds of nuances that manypeople miss, and they panic by
saying, well, I want tax freeSocial Security, so I'm going to
and this is extremely popularonline. They'll say, well, I'm
just gonna max out the 24% taxbracket and just convert over
and forget about Irma and forgetabout this forget about that,
(07:09):
and I'm gonna save taxes onSocial Security. I don't see how
that really makes sense. And thereason is, and I can prove this,
I can run that scenario in oursoftware, our proprietary
software that we built to runscenarios like this.
And I can look at, okay, moreaggressive IRA to Roth
conversions. You get therefaster, but at what cost? And
then look at their net worth.This is where people miss. Look
(07:32):
at the net worth when they're80, 90, and a 100 years old,
just for three differentlandmarks.
And watch how their net worth isless by six figures, multiple
six figures. When you moreaggressively convert IRA assets
to Roth assets, what you'redoing is you're paying a higher
premium on your taxes just toget to a tax free bet, and
(07:53):
you're forgetting the principalamount of your your assets, the
the dollar amount in yourassets. That is a tax
inefficiency. So even though youmight move quicker into a tax
free retirement, you have to askyourself at what cost? And this
is the part that's almost alwaysmissed by people that come to
our office.
We have to explain to them andjust show them the numbers.
They'll think, well, I'm smartbecause I have a smaller tax
(08:16):
bill. That's the wrong questionto ask. That's the wrong metric
to seek. Because the real metricis how much money are you
keeping.
And those who slowly create asystematic IRA to Roth
conversions, they fit effectivetax rates that they've targeted
for a longer term period oftime. Keep more of their money.
So even though and this soundscounterintuitive. Even though
(08:38):
they have paid more in taxesthroughout their lifetime,
they've kept more of theirmoney, which means more income
for them and more income orassets to pass to their
beneficiaries. It seems socounterintuitive, and people
right now are probably saying,Mike, you're full of it.
Just read the comments. Oh, thisisn't true, and they'll
rationalize how they hate thegovernment, how they're gonna
pay the government less money.Forget about the government. How
(09:01):
much are you really costingyourself to get to this place?
And you could say, well, no oneknows the future of taxes, and
will taxes are expected to go upin the future?
They're expected to go up in thefuture, but they might not. No
one knows.
David (09:13):
Yeah. That's a real kicker. Nobody knows. So
Mike (09:16):
what are you really solving? Is it to pay the
government the least amount ofmoney, or is it to maximize your
portfolio so that you keep moreof your money while taking a tax
efficient income. There's a lotof layers here when it comes to
optimizing your assets, yourincome streams, and so on that
have to be able to dynamicallychange as your plan evolves to
(09:38):
be able to capitalize on taxefficiency. It is extremely
complex. It is extremelytechnical.
But once it's laid out, it'sextremely simple to comprehend.
You just have to know the rightquestions to ask and the right
strategies to implement atcertain times to get there.
David (09:55):
So did we answer the question? Does it ever make
sense to file for SocialSecurity early and take
benefits?
Mike (10:02):
Yeah. If you need to live off of Social Security, chances
are you wanna work as long asyou can and file at 70 to have
the most benefit possible. Ifyou're looking to reinvest
Social Security, I wouldquestion the tax efficiency of
that, and how it couldcompromise other parts of your
portfolio. It may work. It maynot.
But most times when I hearpeople say, I wanna file early
because and it's investment orSocial Security is going away,
(10:25):
the numbers typically don't workout in their favor. They're just
using isolated thought processesof, well, this is Social
Security. This is how I'm gonnatreat this siloed strategy, and
then here's my siloed strategyfor income, and here are my
siloed strategy for taxes.Anything you do affects
everything else that you do.You've gotta look at it from a
comprehensive standpoint.
(10:46):
It's not just isolated socialsecurity optimization. It's a
collaborative effort. That's allthe time we've got for the show
today. If you enjoyed the show,consider subscribing to it
wherever you get your podcast.Just search for how to retire on
time.
Discover if your portfolio isbuilt to weather cycles or if
you're missing tax minimizationopportunities that you may not
(11:08):
even know exist. Explorestrategies that may be able to
help you lower your overall riskwhile potentially increasing
your overall growth andlifestyle flexibility. This is
not your ordinary financialanalysis. Learn more about Your
Wealth Analysis and what itcould do for you regardless of
your age, asset, or targetretirement date, go to
ww.yourwealthanalysis.com todayto learn more and get started.
Welcome to How to Retire On Time, a show that answers
your retirement questions. Myname is Mike Decker. I'm a
licensed financial advisor andfiduciary. And with me in the
studio today is my colleague,David Franson, who will be
reading your retirementquestions. As always, you can
submit those questions to (913)363-1234.
Again, that's (913) 363-1234.David, what do we have for
(00:26):
today?
David (00:28):
Hey, Mike. When does it make sense to file for Social
Security early so you can takethe benefits and reinvest them?
Mike (00:36):
Yeah. This is a common misnomer that if Social Security
is allegedly going away, whichit's not, or if you're not gonna
use it, you already have enoughassets for elsewhere, you might
as well just take it andreinvest it in the market. So
let me see if I can explain thisby several trains of thought.
The reason why people ask thisquestion is because they'll say
(00:56):
something like, well, I couldjust buy a couple of annuities,
turn on the income stream, andthen I have the income that I
want. What do I do with thisleftover benefit Social
Security?
Maybe you don't need the SocialSecurity benefit. Maybe you have
a pension. K? And you're gonnalive off the pension. You don't
need Social Security.
So what do you do with theleftovers? Do you see how it's
(01:16):
it's Social Security is thoughtas it's an afterthought.
David (01:19):
The
Mike (01:20):
problem I see with this is from a tax planning standpoint
and a benefit planningstandpoint. So let's run through
a couple of scenarios. If youplan to keep working because you
enjoy your work, then I don'tsee it making sense to file for
Social Security before fullretirement age 67 years old
because you're going to getdeducted your benefits based on
(01:41):
your earnings or your w two orten ninety nine income. In other
words, if you make more than 20some thousand dollars a year,
you start losing your benefits.And there's a clause in that.
That's if you file before fullretirement age. Now if you file
afterwards, then who cares? It'syour benefit at that point.
Okay. So that's the first thingis if you if you wanna keep
working, if you intend to keepworking, whatever that reason
(02:02):
is, it doesn't make sense tofile early and invest it because
you're going to have yourbenefit, first off, taken at a
reduction.
And then second off, you'regonna have it basically deducted
or reduced because of yourearnings.
David (02:14):
Okay.
Mike (02:15):
K? So that's the first part. But let's say you are
retired and all of your incomeis coming from pensions and
other places, what do you dowith the income? I would first
ask, what are you doing withyour portfolio? So let's say you
have million dollars in AprilIRA assets.
You can either take income fromthose assets and grow your
(02:36):
Social Security benefit. You cando IRA to Roth conversions and
take your income so that there'snot an RMD issue later on in
retirement. That's the momentbefore you file Social Security
that you can get things inalignment. That makes sense? If
you did IRA or Roth conversions,and you took income from your
portfolio, and you took onSocial Security to reinvest it,
(02:58):
you're creating additional taxissues.
You're bumping yourself up intoa higher tax bracket. It's a lot
of income. Social Security is atax efficient income stream,
because up to 85% of it is taxedbased on your income. K? Based
on income taxes, the brackets.
Right? If that's true, why wouldyou want to start taking your
(03:18):
Social Security early if you'realso taking income from other
sources, or you're doing IRA toRoth conversions, or you're
doing these other things?Because you're gonna get taxed a
100% from your IRA assets. Theideal situation, in my opinion,
is that you've done the majorityof your tax planning, your
adjustments each year. You'renot kicking yourself into Irma,
so you didn't do too egregiousof an IRA to Roth conversion.
(03:41):
You've kind of settled things upso that when you turn on Social
Security, you're also taxefficient in your other
portfolio income streams.
David (03:49):
Yeah. It sounds like what you're saying is that we have to
be careful when you have allthese different income streams,
Social Security being one ofthem. And if you have too much
income because you're taking itfrom all these places, then
you're not tax efficient. Youmight have to pay higher for
Medicare through the IRMAsurcharge, as you mentioned.
Mike (04:04):
And you got RMDs and all sorts of other things to be
concerned about. Now there'sanother layer of complexity to
this.
David (04:11):
Okay.
Mike (04:11):
There are a lot of people out there that are basically
saying Social Security is goingaway, so you might as well just
invest it and put it in themarket. Maybe you don't need the
income. Right. Why would youturn on Social Security for the
sole purpose of reinvestment?When you take Social Security
benefits, you put it into then abrokerage account that then will
(04:33):
grow.
And if you actively trade it,you're creating short term
capital gains, which creates atax issue. Or you put it in long
term, and then you've got longterm capital gains. So when you
touch it, you're also gonnacreate a taxable issue. And if
you've got dividends beingreinvested, you're creating
income tax, which is anothertaxable issue. Instead, why
wouldn't you just get a largerbenefit later on and do more
(04:54):
deliberate taxation later on?
And then you might say, well, Idon't really need my IRA assets
or these other assets. Okay.Fine. What happens when RMD's
required minimum distributionsstart? How does it line up?
We did a plan recently forsomeone. I mean, basically, what
we were trying to accomplish ishow much do we take from their
IRA assets? How much do we takefrom their brokerage account?
(05:16):
Because they had one company inparticular. That was the company
they worked for for their wholecareer.
A lot of stock with a very lowbasis. So how do we take income
out of that? And then how do weline up Social Security? The
provisional income, which iswhat determines your Social
Security taxes, it doesn'tinclude standard deductions. So
that's an issue.
But what we did figure out ishow much we could take from
(05:37):
their IRA assets, utilizing thestandard deduction. Let's say
IRA is about $4,050,000. They'remarried, so standard deduction
takes out 30,000, so they'rebeing taxed on 20,000.
David (05:47):
Okay. I got it.
Mike (05:48):
You're within the 10 to 12% tax bracket, and then we
take a little bit out of theirnonqualified assets, that single
stock. That is a steady Eddiestock. It's not a volatile
stock. It's pretty predictable.K?
I won't say the stock, but justthink of like a Coca Cola like
company. And we're taking someassets out of that as well, and
we're kind of doing this for thefirst part of their retirement
while kicking back SocialSecurity. What did we just do?
(06:11):
What we did is we allowed theSocial Security benefit to
increase over time while we havedrained tax efficiently their
stock under the 0% capital gainstax bracket while also utilizing
the best we can within thelowest tax bracket, their IRA
assets, so that when they turn70, they don't have too much
(06:33):
invested in one stock. Theydon't have too much in their
IRAs, and then the balance thatthey have within their IRA
assets, the remainder of thebrokerage account, and their
Social Security became a verytax efficient retirement plan
from that point on.
David (06:46):
Okay.
Mike (06:47):
So do you see how we line things up so that when Social
Security started, it was verytax efficient? These are the
kinds of nuances that manypeople miss, and they panic by
saying, well, I want tax freeSocial Security, so I'm going to
and this is extremely popularonline. They'll say, well, I'm
just gonna max out the 24% taxbracket and just convert over
and forget about Irma and forgetabout this forget about that,
(07:09):
and I'm gonna save taxes onSocial Security. I don't see how
that really makes sense. And thereason is, and I can prove this,
I can run that scenario in oursoftware, our proprietary
software that we built to runscenarios like this.
And I can look at, okay, moreaggressive IRA to Roth
conversions. You get therefaster, but at what cost? And
then look at their net worth.This is where people miss. Look
(07:32):
at the net worth when they're80, 90, and a 100 years old,
just for three differentlandmarks.
And watch how their net worth isless by six figures, multiple
six figures. When you moreaggressively convert IRA assets
to Roth assets, what you'redoing is you're paying a higher
premium on your taxes just toget to a tax free bet, and
(07:53):
you're forgetting the principalamount of your your assets, the
the dollar amount in yourassets. That is a tax
inefficiency. So even though youmight move quicker into a tax
free retirement, you have to askyourself at what cost? And this
is the part that's almost alwaysmissed by people that come to
our office.
We have to explain to them andjust show them the numbers.
They'll think, well, I'm smartbecause I have a smaller tax
(08:16):
bill. That's the wrong questionto ask. That's the wrong metric
to seek. Because the real metricis how much money are you
keeping.
And those who slowly create asystematic IRA to Roth
conversions, they fit effectivetax rates that they've targeted
for a longer term period oftime. Keep more of their money.
So even though and this soundscounterintuitive. Even though
(08:38):
they have paid more in taxesthroughout their lifetime,
they've kept more of theirmoney, which means more income
for them and more income orassets to pass to their
beneficiaries. It seems socounterintuitive, and people
right now are probably saying,Mike, you're full of it.
Just read the comments. Oh, thisisn't true, and they'll
rationalize how they hate thegovernment, how they're gonna
pay the government less money.Forget about the government. How
(09:01):
much are you really costingyourself to get to this place?
And you could say, well, no oneknows the future of taxes, and
will taxes are expected to go upin the future?
They're expected to go up in thefuture, but they might not. No
one knows.
David (09:13):
Yeah. That's a real kicker. Nobody knows. So
Mike (09:16):
what are you really solving? Is it to pay the
government the least amount ofmoney, or is it to maximize your
portfolio so that you keep moreof your money while taking a tax
efficient income. There's a lotof layers here when it comes to
optimizing your assets, yourincome streams, and so on that
have to be able to dynamicallychange as your plan evolves to
(09:38):
be able to capitalize on taxefficiency. It is extremely
complex. It is extremelytechnical.
But once it's laid out, it'sextremely simple to comprehend.
You just have to know the rightquestions to ask and the right
strategies to implement atcertain times to get there.
David (09:55):
So did we answer the question? Does it ever make
sense to file for SocialSecurity early and take
benefits?
Mike (10:02):
Yeah. If you need to live off of Social Security, chances
are you wanna work as long asyou can and file at 70 to have
the most benefit possible. Ifyou're looking to reinvest
Social Security, I wouldquestion the tax efficiency of
that, and how it couldcompromise other parts of your
portfolio. It may work. It maynot.
But most times when I hearpeople say, I wanna file early
because and it's investment orSocial Security is going away,
(10:25):
the numbers typically don't workout in their favor. They're just
using isolated thought processesof, well, this is Social
Security. This is how I'm gonnatreat this siloed strategy, and
then here's my siloed strategyfor income, and here are my
siloed strategy for taxes.Anything you do affects
everything else that you do.You've gotta look at it from a
comprehensive standpoint.
(10:46):
It's not just isolated socialsecurity optimization. It's a
collaborative effort. That's allthe time we've got for the show
today. If you enjoyed the show,consider subscribing to it
wherever you get your podcast.Just search for how to retire on
time.
Discover if your portfolio isbuilt to weather cycles or if
you're missing tax minimizationopportunities that you may not
(11:08):
even know exist. Explorestrategies that may be able to
help you lower your overall riskwhile potentially increasing
your overall growth andlifestyle flexibility. This is
not your ordinary financialanalysis. Learn more about Your
Wealth Analysis and what itcould do for you regardless of
your age, asset, or targetretirement date, go to
ww.yourwealthanalysis.com todayto learn more and get started.
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