Welcome to How to Money. I'm Joel, and today I'm asking the question can millennials count on Social Security? With Mike Piper. Social security more than music, clothing, or political use. It's potentially the biggest generational divide. Boomers are stoked to finally be receiving their promise checks, while Millennials and gen Z sit on the sidelines, wondering if social Security is even going to exist when the time comes for them
to collect. And while social Security is highly unlikely to disappear entirely to evaporate overnight, it probably won't look exactly the same as it does today either. My guest today is Mike Piper. He's a CFP, he's an author, he's an og blog from two thousand and eight over at his site, The Oblivious Investor, and I couldn't think of anyone better to discuss this tumultuous topic with. So Mike, thank you so much for joining me today.
Very happy to be here.
Quick quick correction note there, I'm a CPA rather than a CFP.
That's what I should us said, CPA, not CFP. All right, So I love making mistakes early on in the podcast. That way, you know, I fall out on my face and hopefully it's all perfect from here on out. First question I ask everyone who comes on the show, Mike, is what do you like to splore? John Kraft Beer one of my you know, main things. I'm willing to spend a lot more than most people would, but it's okay because I'm saving and investing for the future at the same time. What is that for you?
Sure?
My number one hobby for the last fifteen years or so has been rock climbing, and so that involves travel to a different places, especially because I live in Missouri where there aren't a lot of mountains, so travelize you might have badge it, but also various types of gear.
If you ever see movies or people.
Are put in gear into cracks and things like that, all of that gear costs money and you eventually build up a collection of it over time.
Were you were you glued to the screen when Alex Hanald was making his recent ascent in Type A.
Yeah, myself and my wife and a bunch of friends we were all watching it, and you know, we have a group chat on What's app that we're kind of narrating it to each other and then chatting about it.
It was fun as someone who's like into it. I'm like barely in the beginnings of rock climbing with my daughter as someone who's into it. How impressive is that feet.
It's very impressive.
There's the difficulty of it, of course, but completely separate from the difficulty of it is the mental control, right, I mean the difficulty grade. Of course, buildings don't have established climbing grades, but he estimated it's a quote five to eleven D, which is a grade that many many, many people could climb right with rope and so on experienced climbers.
But of course with a rope, not me though, but with.
A rope is very different than without a rope in terms of keeping everything together mentally.
Yeah, no, I mean, yeah, he's a freak. Like you think about people that are just at the furthest extent of what they do in terms of like skill and mental awareness and ability to just to kind of lock in and do the job. He's definitely up there as like one of the most fascinating athletes absolutely currently in existence. Him and Killy and Jordanett are up there for me
on the Mount Rushmore. Let's talk about social security. It's become a polarizing topic, of course, and I feel like we're seeing more headlines, more doom and gloom predictions about Social Security. Why do you think, well, why is that and why do you think people are so like sour on Social Security.
Yeah, there's been headlines, well for a long time now about the trust fund running out of money, and you'll hear it sometimes they're saying that So Security is going broke or Social Security is running out of money, because for many years, the program took in more money than it paid out in benefits each year. Because every year, when we work, the payroll taxes that you're paying, or if you're self employed, the self employment tax you're paying,
most of that is Social Security tax. So the program takes in money every year, and for many years it was taking in more than it was paying out. So over that time it built up a trust fund, an excess pool of capital basically. But now now that baby boomers reached social security age, largely the opposite has happened has been going on, where the trust fund is now dwindling because the program is paying out more every year than it's taking in.
And this is not a surprise.
Obviously, we've known that Baby boomers would eventually reach age sixty two and start collecting social Security right the we had several decades to see this problem coming. And what many people see, though, is this headline that the trust fund is expected to be depleted, and every year the Social Security Trustees put out a new report with the most recent information, and it moves around that the estimated
date a little bit. Twenty thirty two to twenty thirty four somewhere in that window is probably what we're looking at, and it moves around a little bit, but not very much, like it's not going to be twenty forty seven or
something like that. It's not going to happen in twenty twenty eight, because again, we have a pretty good idea of how much the program is going to have to pay out every year, Like we know how many people there are who are sixty one this year, and who are of them, how many you're going to live to be sixty two next year, and so on. We have a very good idea of, you know, all of the estimated costs here. But what a lot of people miss when they see that headline that the trust fund is
going broke. The trust fund is running out of money and it's going to run out. And you know, twenty thirty three, a lot of people think that that means that Social Security is going to go to zero, and that's that's not correct at all, because again, the program takes in money every year. Every time that we earn wages or self employment income, we're paying Social Security tax.
And the trustees of the Social Security Trust Fund that estimate that even if Congress does nothing, so absolutely no changes to improve the funding of the program, the ongoing revenue would be enough to pay for about three quarters seventy six percent of the promised benefits basically indefinitely.
That bigs a lot of questions though, right, so like in particular in twenty thirty three, right, it's it sounds like a long way off, but it's really is coming. Yeah, what happens to current retirees in twenty thirty three our checks and immediately just cut in a quarter of the check that retirees getting, Is it cut?
Right?
That's an open question because it's ultimately going to be up to Congress, Right, what happens on that date if they don't do anything between now and then. And you know, fifteen years ago when I started writing about this, topic. Kind of the conventional wisdom, frankly, was that Congress would would have done something already by this point to do you know, whether it's increasing taxes or reducing benefits or some combination thereof most likely to improve the funding of
the program. And that hasn't happened yet. So here we are with that date coming up, and what actually does happen on that date will be up to Congress. I in the last few years have heard more people proposing a scenario where Congress basically just says, Okay, we'll just
fund that gap out of just general tax revenue. Whereas the way the program is set up right now, benefits are always specifically paid from the trust fund and from incoming revenue social Security tax specifically every year, whereas it could be changed so that, you know, any shortfall is paid out of the there's just general you know, federal income tax revenue.
This is one of those things that would have been easier to fix when you first started writing about it. But does it mean that the fixes need to be more substantial because we've waited so long to address it.
Yes, exactly.
The fact that we've waited means that the you know, because for instance, if the fix was entirely done by increasing taxes, well, if we would have done it ten years ago, we would have been able to do it by a smaller tax increase, right, because we've had more years to pull in that extra revenue. The longer we wait, the more drastic the chaines have to be.
Absolutely, from a return standpoint, I think, especially how to money listeners tend to skew towards millennial gen z. From a return standpoint, does social Security provide a good return
for the average person? Because I know there are a lot of people who listen to the show and they're trying to be intelligent with their money, and they're like, my goodness, I feel like I could do a lot better if I had that money in my hands, right, And I understand why the Social Security system exists, and it's to prevent you know, a white swath of Americans who don't do smart things with their money from being
destitute and retirement. But what would you say, how would you help somebody understand what the returns are, Like we're investing in their four O one K versus what they get from Social Security and what they paid in and what they get out.
Yeah, It's a very interesting question, but one that's actually fairly tricky to answer because social security has other components than just retirement benefits. Right when we pay Social Security tax, there's also social Security disability benefits. There's also survivor benefits. So, for instance, if somebody dies and they have minor children, those minor children will in many cases be able to receive a Social Security benefit until a certain age, things of that nature.
And so.
The tax revenue that you're paying, some portion of it is going to those retirement benefits, but another chunk is going to these other social safety net protection programs essentially, And so if you ignore those things and only look at you know, assume that every dollar is going towards retirement benefits, and you look at how much you put in and how much you're expected to get out, the
rate of return is modest. It's not atrocious, but it's you know, it would be modest, of course, and that depends on how long you ultimately live and so on to collect benefits. But the key thing is that a significant part of the money that we're putting in every year goes to pay for other protections. So you could model it as saying Okay, I'm paying x amount every year, and I can think of that as buying a disability policy and that would cost them dollars, and buying a
life insurance policy and that would cost them dollars. And then what's left is what's actually going into this retirement program.
And exactly how to model it.
You know, there's a lot of different ways, a lot of differ assumptions you would need to make. But that's I think a lot of people when they look at the modest rate of return, they're just missing a couple of key components of what the program does.
Yeah, and if you are one of those people, right who does become disabled and qualifies for those disability benefits like your ROI, essentially on the money you put into the system skyrockets. But if you're fortunate, right, then your return is doesn't look nearly as enticing.
Precisely, it's a social safety net program and it's a social insurance program. So for the people who need, those who end up needing that insurance essentially who become disabled, yes, the payout is much much higher than for those of us who end up I say us on the assumption that I won't become disabled but of course who knows. Ye, then for anyone who doesn't become disabled and doesn't die and then have young dependents who are receiving benefits.
How do you help, especially with kind of the up in the air reality of how Congress addresses the Social Security Trust Fund running out and potential cutback in benefits or potential just changes to how Social Security gets funded, how do you help younger investors think about the piece of the pie that Social Security will play for them in their retirement years.
I think that a reasonable approach is the assume Congress does nothing plan essentially, so there's no reason to really assume that Social Security is going to disappear, because that would require Congress not doing nothing. That would require Congress doing something. It would require Congress eliminating this program that is, according to many surveys, literally the single most popular program that the federal government.
Has, and the biggest voting block, the most active voting block, like really really annoying those.
People exactly right.
So it's it's not a very politically likely scenario that Congress will just eliminate Social Security. So I do think though it's reasonable to say, well, let's assume they do nothing and so assume that instead of however much my social Security statement when I log in at SSA dot gov, it says I'm going to get this much, maybe use about three quarters of that much instead.
Okay, Yeah, I was like literally about to log in right now as you're speaking and see what it would tell me. I've looked it up in recent months, and yeah, it's it's not one of those things you want to take with a grain of salt. You don't want it to be It's not completely inaccurate, but you would say, temper your expectations and maybe don't no factor in the full amount that SSI dot Gov is telling you you're going to get into your spending plans for retirement.
Yes, exactly.
Okay, So yeah, do you think that social security pessimism is leading some young people to oversave, maybe maybe causing them to spend too little right now? Because I do, I mean, I do think there is a prevailing attitude that doesn't have that like tempered expectation. It's like, screw it.
I'm just I'm just totally gonna figure this out on my own because I don't trust that this is going to be around for my future, and especially like in those years where you have good health, you have more freedom. It's it's really tough to think, like I've got to go at one hundred percent on my own if there are let's say, thousands of dollars waiting for you in your sixties when you do retire, to not factor that in would essentially mean you have to forego more enjoyment
of those dollars. Now do you do you see that as like an overreaction and as a common reaction.
Emphatically, yes to everything you just said. That's exactly right. That it's I really don't think it's necessary to assume zero dollars coming from Social Security, even even for you know, the youngest of the workers today. And exactly what you said, The only way to make a plan work when we're using super pessimistic assumptions is to spend much lessons save
much more than we really needed to. Like you could also assume that you're going to live to be one hundred and forty in retirement and that your portfolio is going to earn zero you know, like, yes, that will make your plan very very safe, very conservative, And there's you know, we want to be reasonably conservative, but within a realm of realism.
Yeah right, you could be overly conservative and really hamper some of the other things you want the money to do.
For you, absolutely right.
The way that you achieve conservativism and financial planning is by not spending money, and that's a real sacrifice.
Yeah, okay, So in terms of and you maybe briefly alluded to what it could look like to fix the social Security system so that it is robust right for decades centuries to come, right, especially with like the demographics issues that we face as a country. How do what
are your thoughts for rebuilding the Social Security program? What needs to be done to ensure that it's shored up, especially as older you know, we're seeing an older, aging population and the replacement like just your kids being born.
I think most likely the way that we get from here to there is on both ends of this, right, it's probably a reduction in benefits in some way and an increase in revenues meaning an increase in taxes in some way. Almost certainly not just from a pragmatic point
of view, but from a political point of view. The only way that Congress would agree to this like neither you know, Democrats aren't going to agree to just a whole bunch of benefit cuts, and Republicans are probably not likely to agree to funding everything through increased taxes, So from a political point of view, it's probably going to be a compromise. And the way that benefit cuts could
look the two things I see most frequently discussed. Number one is an increase in full retirement age, which is often misunderstood. You can start receiving Social Security retirement benefits as early as sixty two, where you can wait all the way until age seventy. We're not talking about changing that. We're just talking about changing the what we call full retirement age, which is just an age for most of us.
It's sixty seven that our benefit calculation is pegged to, and basically all the math depends on whether you start taking your benefits before or after full retirement age. And basically, if we bump up a person's full retirement age, that's just another way of saying, at any given age, they will get less dollars. So when we talk about increasing full retirement age, it's a very straightforward, just cut to benefits.
It's not we're not actually changing the age which somebody would start receiving benefits we're just talking about reducing the dollar.
And this has happened in the past, right, Can you talk to me about how that went down?
Yeah?
Absolutely, So this was before my time in terms of, you know, what the discussions in Congress looked like. But full retirement age was it used to be sixty five, and then it was gradually increased to sixty six, and now and then it's been gradually increased to sixty seven, and so it seems very likely that we'll just see eventually full retirement age b age seventy.
Frankly, and in a lot of ways that makes sense too. I mean, when you think about the conception of Social Security when it first started, the people lived didn't live nearly as long, right, So isn't don't we think of Social Security differently in twenty twenty six than kind of what it was intended to be when it was originally launched?
Very much so, the program has very much evolved over the years. It didn't originally include benefits for spouses or survivors. Uh, And then when it did start including benefits for spouse's it you know, we had wife's benefits and then they had husband's benefits.
Later.
It's a very It has definitely grown over the years to be a more a broader social safety net program than how it was originally intended, and even just on the basic retirement benefits side. Just like you said, the expected length of time for which somebody would now receive retirement benefits is longer than it was, you know, almost a century ago.
For sure. Man, so much more to discuss, including well, how do you know when you need to change your social security claiming strategy? Work, health, those things can impact that. We'll talk about that and more. Right after this, I'll talk about Mike Piper. We're talking about social security, the good and the bad of the social security system, and and and where things are headed, especially if things stay on their current track. Let's talk We do have older listeners, Mike,
who listen to How to Money. Let's talk about boomers and people who are kind of or people who are on the cusp let's say, of making that decision about when to claim social security? Can you offer some rules of thumb for when someone should Would it make sense to take social security versus delaying?
Yes.
First thing that I often like to point out is that when people think of the risk side of social security, they often get it exactly backwards. You'll hear people say all the time, I don't know how long I'm going to live, and therefore I'm going to claim Social Security right away to make sure I get at least something right They'll say, you know, it's a bird in the hand,
and that's literally that's precisely backwards. That's exactly incorrect. Because when we talk about retirement planning, the scary scenarios, the financially scary scenarios are not the ones.
Where you die early.
Right If you retire at sixty and then at sixty three you die of a heart attack, you probably did not run out of money in retirement. It's the person who's still alive at one hundred and three and they've been in a nursing home for the last twenty years like that's the person who's more likely more at risk of running out of money. And so the long life scenarios in retirement planning, those are the scary ones. It's
kind of unusual. We don't normally think of living a long time as a bad thing, but when we're talking about retirement planning, that's the financially scary scenario, and delaying benefits makes you safer in those scenarios where you live a long time, So there should already be just from the risk point of view, a significant bias in favor of filing later. And then we can dig into this life expectancy based math and say, okay, well, what's the age that would maximize how much I'm likely to get
over my entire life span? Which filing age that is, would maximize the amount I'm likely to get over my life span, and the way that typically works for an unmarried person. That also points in favor of waiting for the simple reason it's actually exactly what you just brought up a minute ago, Joel, which is that people on average live longer now than they used to, and those longer average life expectancies is a point in favor of waiting to file for benefits.
When we talk.
About a married couple, it gets a little more complicated because now we have to be thinking about survivor benefits.
And the very short summary there is that when the higher earner of the married couple, whichever person is a higher earnings history, whenever that person delays claiming their retirement benefit, it increases the household's income as long as either of the two people is still alive, because it increases that person's own retirement benefit, and it increases their spouse's benefit
as a survivor if the spouse outlives them. So it's just like increasing your own retirement benefit, but for a potentially even longer time because it's increasing this other person's benefit also if they outlive you.
But then the trade off too if someone waits to delay, the instant reaction is like, well, I have to work longer, right if I delay Social Security, but I'm ready to quit working. What would you say to somebody like that, Because that's a real that's a real trade off, especially if someone's doing let's say, difficult, really difficult work that's hard on the body, and they're like, I don't know, man.
I get that I could make more money if I delay taking my take my Social Security check and claiming it, but I don't know that I can keep doing this job.
Absolutely.
Those are independent decisions, though, so when we're talking about when to file for Social Security, if we're saying for this household, it makes sense to wait to file for their benefit, that's not necessarily saying it makes sense to wait to retire. In most cases, When we're doing that analysis, we're taking the retirement age as a given. This person plans to retire at age such and such, and given that,
when should they file for their Social Security benefits? And in many cases, the way the math works out even is that even if you have a plan of retiring earlier and spending more in your early retirement years, which is very common, right, most people, when they think about how they want their retirement to go, they kind of intend to front load the spending a little bit, right, spend more on travel and so on when it's easier to do that. It's hard to take a whole bunch
of really cool locations when you're in your late eighties. True, even if that's the plan, delaying social Security is still often the thing that makes sense, not always, but often, because if you know that at age seventy you're going to have this high, very safe stream of income kicking in that's inflation adjusted, it's going to last the rest of your life on, that can make it safer to spend from your portfolio at a higher rate in the meantime.
So when we talk about like safe withdrawal rates and stuff like that, right that for some people let's say early on in their retirement and they've read, they've seen the four percent safe withdraw rate floating around, and they're like, man, it seems intuitively like I could tap more of that if it allows me to delay social Security so that I'm needing less money in those future years. How do you help people think through what a proper safe withdrawal
rate looks like? If they're delaying social Security, can they tap more of what they've got?
Yeah, that's a great question.
Software is very helpful here rather than like mental math rules of them. And this is kind of a shortcoming of the four percent withdrawal rate concept, Like people will argue about is four percent the right number? You know, maybe it should be three and a half, maybe it should be four point seven, And that's a worthwhile discussion,
But that's not what I'm getting at here. It just has a limitation this concept in terms of actual real life retirement, because most people don't spend the same amount from their portfolio every year, right Because often, especially if you imagine a married couple, often it's spouse a retires, spouse be's still working for a couple of years, and so maybe they're spending a little bit from their portfolio, and then spouse b retires and now they're spending a
lot from their portfolio. And then four years later one of their social security benefits kicks in, and so the spending goes down. And then a few years later the other social security benefit kicks in, and so the spending from the portfolio goes down again, and so the actual spending rate it's not normally nearly as neat and tidy as that the four percent like modeling concept, but it is frequently quite fine, quite okay to have a spending rate in excess of four percent in the pre social
security years. For instance. You know, if let's say you have a let's say you're retiring at sixty five, and you're going to have a seven percent spending rate from your portfolio for five years, and then when social security kicks in, it's going to be you're projecting about a two percent spending rate.
That's fine, yeah, right.
You're gonna you should put something, you should take a chunk of your portfolio and allocate it to something very safe to handle that extra level of spending for those five years. But then just you know, so that you don't have a big problem if during those five years the market goes.
Down really suddenly. But that's okay.
It's okay to spend more than four percent for a short period of time if then for most of your retirement you're going to be spending even less.
So you were talking too about how the higher earning spouse that typically is the person who should delay claiming Social Security longer, Right, what does that say for the other partner and when they should.
Yes, that's exactly you're going the right place with us. It does the exact opposite for the other person. When the spouse with the lower earning history waits to file for benefits, it increases the amount that the household receives as long as both people are still alive, which is a shorter length of time. So that makes it distinctly less advantageous for that person to wait to file for benefits.
Doesn't necessarily mean it's a bad idea, because we still have the longevity risk side of things that points in.
Favor of both people waiting.
But now you've got one factor pointing in favor for a filing earlier and one factor pointing in favor of filing later, And so there's a trade off to be made, Whereas for the higher earning spouse, both factors a point in favor of waiting. So it's a very very clear and obvious decision. For the lower earner, it's a less obvious decision, but it's also usually a less impactful decision because frankly, those two factors often roughly cancel each other out.
And so I mean this varies by household, but it is often the case that anyone filing age is roughly as good as any other filing age for that person.
When should people make a change in their planning strategy, Like, let's say that, like a diagnosis comes along, right, health issues, and your your thought process was you look at the actuarys like, I'm pretty good at health, Like you know, based on my genetics and family history, I could live till not one forty like you mentioned, but maybe like my nineties, right, Like ninety five is not out of
the question. Delaying till seventy makes a lot of sense because I am protecting you know, getting the maximum check for those the next totally twenty five years after that. But then some diagnosis comes along and it completely changes all those assumptions. How do you help people think about making tweaks or big, big old changes to what they were planning to do with Social Security.
Yeah, this is a really important one. The answer is simplest if the person is not married. Right, So, if this unmarried person they were planning on waiting and now they have this very you know, a bad diagnosis with a not a very positive prognosis, then it often makes sense once you have that information, go ahead and file for benefits now. Right, a big change in the math. It means we're now somewhat less worried about those live
a very, very long time scenarios. It changes everything really, so it's a very strong point in favor of filing.
Now.
It's more complicated for the married couple because it gets back to that joint life expectancy idea.
If the higher earner.
Is the one who gets that really bad diagnosis, it still usually makes sense for them to wait until seventy because for the higher earner, what we're concerned with is the couple's second to die joint life expectancy, and that probably hasn't changed all that much. Yeah, because the other
spouse is still in good health. However, if that higher earner gets a bad diagnosis, that is now actually a very strong point in favor of the other person filing early, the person without the diagnosis, the lower earner, because the lower earner when we're talking about when that person should file for benefits, we're concerned with the first to die joint life expectancy for the couple, and this new news about this diagnosis is very relevant in terms of making
that first to die joint life expectancy considerably shorter than we had previously thought it would be. So it's a point in favor of that lower earner filing early. So basically, regardless of who gets the bad diagnosis, it's a point in favor of the lower earner filing earlier, and it's not really a major point in favor of the higher earner filing earlier.
Okay, you mentioned how software can help with this, right, and how some of the rules of thumb can be very helpful, but plugging in your specifics is more can be more revelatory. So and you, I don't know how long this took you, how hard this was, because I am not This was before Claude vibe coding and stuff like this. You created a tool to help people do social security planning to where you could plug in numbers and have a quickly a much better idea of when
claiming social security makes sense. Can you talk to me about that tool?
Sure, it's called open social Security. The website is just OpenSocial security dot com. It's called open because it's open source. You can find all of the code on GitHub, so it's not a black box. Also as an open source project, other people are welcome to use the code for other purposes. And it's free, and it doesn't you know, it's free in the sense that you don't have to put in your email address or anything like that. It's not like free and then we're going to, you know, try to
sell you a premium thing. It's just free to use. And it did take a long time to code. And actually it took me about twenty hours a week for about two and a half years.
Wow.
And it is remarkable having now used cloud code. Like in visual Studio code, it probably would take me about a week or two to build that software.
It's crazy to think about how helpful that has become for people.
Yeah, it's it is crazy.
But anyway, what the program does is fairly straightforward. There's a lot of you know, math details here, but The concept is straightforward.
Basically, it says, we.
Don't know how long you're going to live, we're going to use We're going to use a mortality table of your choosing.
Right.
Actuaries work for insurance companies or the Social Security Administration make these tables that say, if you are this old, you have such and such probability of dying within the next year. And then if you are one year older, now you have such and such slightly higher probability of
dying this year, and so on and so. What the calculator does is basically every year, so it looks at every combination of possible filing ages, and for each of those combinations of filing ages, it then does this math that's basically calculating the probability weighted total lifetime benefit that would be received. And it basically says which filing age for a single person or for a couple, which combination of filing.
Ages would be expected.
Of course, we don't know, because we don't know how long somebody will live, but we can use mortality tables to estimate, so which filing age would be expected to provide the most total benefits over my lifetime or the most total benefits over my lifetime after accounting for the fact that at any dollars that you get sooner are more valuable than dollars that you get later because you can invest them.
Basically, I was gonna say, I've heard some people, even pretty smart people, say tap at sixty two and then invest that money, like you're gonna do better. What would your response be to those people.
Yeah, that has to be a part of the analysis. We have to be looking at the what we call the opportunity cost. If you wait till seventy you didn't just give up eight years of benefits.
You gave up eight years of.
Benefits and whatever investment returns you would have gotten from those eight years of benefits. And just to be clear, everything I've said so far in our discussion today has been taking that as a given that that's a part of the analysis. We're already accounting for that foregone investment
return in everything I've said. A key point when we're thinking about if we're trying to do that analysis where we're looking at what rate of return we should use in our assumptions, we usually want to use a conservative rate of return. The most applicable rate of return is the yield on tips treasury inflation protected securities because they are the investment that is most similar to Social Security because they are backed by the federal government and their
inflation adjusted just like social Security is. And so that is from like a finance textbook, that's the reason that's the most appropriate rate of return from a finance textbook point of view, but even just from a basic nuts and bolts real life financial planning point of view, when we're talking about delaying social Security or claiming early. Most of the time, if we're claiming early, we're not actually
investing the money. We're usually spending it. But it lets more of your portfolio remain invested, and so we're having to think about the rate of return that you still get from those dollars that are still invested, as opposed to having needed to be spent. And when we talk about delaying social Security and the fact that you're going to have to spend from your portfolio at a sum what faster rate over those years, the dollars you want to spend down are usually bonds, fixed income.
As I actually mentioned this.
Earlier when we were talking about how you know someone who is retiring at sixty five and then waiting until seventy and so they're going to have a higher spending rate, a higher ritual rate, but then it'll be lower when social security kicks in. And I was saying, it makes sense to take a part of your portfolio, carve it out, and allocate it to something very safe, like a CD ladder or a bond ladder that lasts for those five
years until social security kicks in. So even just from a real life financial planning point of view, we usually want to have some chunk of the portfolio that is specifically dedicated to this, to the higher rate of spending that will be necessary from the portfolio until social security kicks in, and that chunk of the portfolio should be allocated to something safe like bonds. And so, in a very real sense, a very literal sense, when you delay
social see security, you are spending down your bonds. And so the rate of return you're giving up is bonds because that's what you're spending from. So that's that's the rate of return that we usually want to be using in the analysis.
How does somehow money listeners are keen on retiring early, right, So let's say you're retiring in at age fifty, Right, how does that change the approach to thinking through claiming social security or does it?
Well, if we're thinking about retiring at age fifty and age fifty is still in the future for us, So you know, somebody who hasn't yet retired, then you know, by definition, we're at least twelve years away from this social security decision. Right, sixty two is the earliest at
which you could claim it. And so, frankly, I don't think you really need to be putting a whole ton of time into really digging into exactly when I should file for benefits if it's still that far away, because your life circumstances could change in one or more meaningful ways, the diagnosis that you talked about, for instance, or maybe Congress actually will do something and so the rules will be different than they are now.
We can always yeah, exactly.
So, or just your portfolio is a different size than you expect it to be, or whatever it is, and so I think it. You know, while we're doing financial planning in somebody's thirties or forties, and we're including social security in that, we want to you know, we're including some estimate of how much social security will be I think it makes sense to assume it's going to kick
in at age seventy, and usually probably makes sense. The further way somebody is from age sixty two, the more sense it makes to assume this roughly one quarter cut in benefits. But that's not to say that necessarily when that day comes, when this person is sixty two, they should automatically wait until seventy. At that time, they should base it on all the information they have at that time. You know, we just don't have that information yet.
I got more questions for you, Mike, including the disclaimer you have on your site about why people shouldn't work with you. We'll discuss that and more right after this talking with Mike. Mike, we're talking about social Security, and Mike, I want to ran out of this conversation with just
like a few other questions. And one of the things I appreciate about your blog the way you talk about money is that you don't want to over complicate things for people, and social Security can be very complicated, as we've discussed in their software. That's helpful and it's important to have the kind of a lot of those things on our radar. But what would you say, like in what ways do people tend to over complicate things on the investing and saving up for retirement side of things?
And do you have any kind of favorite simple approaches that are just so much easier year than kind of maybe what people have assumed they need to endure to reach retirement in a healthy manner.
Yeah, the investing side of things, absolutely, people over complicated. When I speak with other financial planners, their portfolios are on average simpler than the portfolios I see from clients, really from new clients who come in, Yes, without a doubt.
People who've been DIY in it, they're just all over the map.
Yes, not everyone.
I mean, certainly, there's there's examples the person who comes in and their portfolio is three funds or a target dight fund or whatever.
But it's super common.
For instance, when a new client comes to me and I see their portfolio for the first time, it's you know, you've got his and hers iras, his and hers four one ks broth IRA's taxable brokerage account and maybe multiples of any of those, you know, at multiple different companies. And in many of those accounts you'll see ten different funds, and then it's another ten funds, different funds, and another one of those accounts. In total, they've got fifty different
mutual funds and then six different individual stocks. And there's no obvious like rhyme or reason to it. Like it sort of looks like it was just like a collection that.
Occurred over time.
You know, they at some point added this one and because you know, maybe there was an article they read about it, or the fund manager or and at some point they added that one because they saw a discussion or they saw it had good performance or whatever it is, and they didn't you know, clean it up at any
point in time and eliminate stuff. So that happens very frequently. Also, I'll see a lot of portfolios where you've got the total stock market index fund and a large cap fund and an S and P five hundred fund like these things, like the overlap is enormous, and so they'll have, you know, and then also a MidCap fund and a small cap fund, and essentially they've between those three funds, they've built the total stock market fund anyway, and they have a total
stock market fund holding, and it's like what why. You know, it's very very common to see portfolios that just have a ton of different holdings when it's not really adding any benefit.
Yeah, and in case of all those different funds, the total stock market fund in and of itself would likely be lower cost than having this hodgepodge of a bunch of different funds, not to mention just the inefficiency and annoyance of looking at the performance of so many funds.
Yeah, it's often lower costs the inefficiency and annoyance. And there's really good research on this topic. Every couple of years, Morning Start puts out a report that they call the mind the Gap Study, and they talk about the gap that is the different between a mutual funds like reported performance. This is how the fund performed, and this is how investors that owned the fund performed. Meaning we're accounting for
cash flows in and out of the fund. So if more people owned the fund over a particular month, that month is weighted somewhat more heavily in the analysis. And there is generally a gap investors somewhat underperformed the funds that they own, and that gap is smallest with like target date funds and balanced funds because people tend to buy those things and then just leave them alone, right,
because that's kind of the whole idea. Yeah, And the gap is largest with sector funds, meaning you know, like a healthcare fund or a technology fund or whatever, because people often buy those at a time right when the fund has just had some really great performance and oh gosh, look at that, I should add that one.
To my portfolio.
And of course it varies, but that's not usually a good strategy to buy something right after it had some really great performance.
And people in the more.
Sliced than dice their portfolio is into all these different subcategory funds, the more likely they are to underperform the funds that they own because they're buying and selling them at the wrong times. Whereas if you just have a very basic portfolio and you just leave it alone, you'll at least earn the performance that your funds themselves earn.
I remember reading a morning Star report, this is probably twelve or fourteen years ago, and when morning Star admitted that the cost of a fund is actually more important than the star rating of a fund, and the fact that one morning Star was willing to say that out loud, that the costs a matter more than how we rate funds, and just it's how indicative of just how important low cost star too, and the average person doesn't quite understand the incredible significance of that.
Yes, exactly.
Most most people, when they, you know, they start a new job, they enroll in the forum and kay, they've got the menu of funds, the most the intuitively most important thing to look at. Well, look at the performance, right, this one has the highest ten year performance. I'm going to pick that one. And that's not a very good way to pick. The expense ratio is the dominant factor.
We want to, you know, pick whatever asset allocation we want, and then within a given category within US stocks, for instance, we just want to pick the lowest cost one.
Yeah. So, so I mentioned in the beginning that your blog, The Oblivious Investor has been around for almost two decades. Do you ever get tired of thinking or writing about money? This is this is a question I get asked to at this point for how long I've been doing this job. I'm curious from your perspective, like, do you get tired of talking about money?
Not in general? Because we were talking about this, you know, before we started recording.
Where people always write in.
With new questions when I discuss a topic on the blog. That spurs people to ask related questions or whatever's on their mind, and it's fun to dig into those new topics. Sometimes, you know, answering the exact same question over and over and over gets a little bit repetitive, and of course, you know, you do something long enough, that's what ends
up happening. But at the same time, it's important to recognize that if people are asking the same question over and over and over, it's because it's an important one, and it's because it's one that matters to a lot of people. And for instance, just the thing that you just brought up about expense ratios, like that's something that every investor really needs to learn that at some point, and if we don't keep talking about it, then the
next generation of investors just won't learn that. Yeah, right, And so you have to kind of keep repeating some of the same themes over and over just to make sure that everyone eventually gets the message.
One of the things I was struck by I went to your personal site where people can hire you for your services, and you quickly at the very top, you list a bunch of reasons why people should not work with you, and I thought it was very refreshing, But why did you do that? And what can folks who want to hire someone to help them with their finances
learn from that? You're just kind of honesty. Hey, this is who I work with, this is who I am, and this is a bunch of people who it just wouldn't make sense to hire me.
Yeah, I put that on there.
It's it was meant kind of in a lighthearted spirit, right, But I very much mean those things. You know, For instance, it just says I don't do anything crypto related. So if that's a big part of your portfolio, I don't have the skills and expertise and interest in dealing with that. Or you know, I don't do tax preparation. I don't. If you're looking for someone who's gonna pick the next
high flying stock or fund, I'm not that guy. And I think it's useful to communicate expectations to anyone who you might end up working with.
But also.
It just saves time, right, Like the number of increes that come in now is much more likely to know those people are much more likely to be a better fit as opposed to wasting their time and wasting my time when the thing they're looking for is something that I that I don't do.
And you specifically say that you specialize in working with people who have di wie kind of the saving and investing side of things, and now they need help as they're getting closer to retirement age. What are That's going to be a lot of people who listen to this show, right who are like, I'm doing the DIY thing on the front end. What are the particular obstacles or issues that people tend to face when they're in that category.
Yeah, the age range that I just personally happen to be working with, just because that's where my deepest area of expertise lies. With social security, for instance, is like my median client age is sixty five. It's rare for me to work with anyone under age fifty, So, just by virtual of the fact that that's who I happen to work with. The primary questions are can we retire or are we on track to retire in three years for instance, or we're already retired, and is the amount
we're spending okay? Or could we afford to bump it up a little or do we need to cut it back a little? The social security question that we've been talking about this whole time. Is there a way to simplify their portfolio or a way to make it more tax efficient. Those are things that we're looking at. Other key questions as you go from the accumulation stage to
the okay, now you're retired stage. All through our accumulation years while we're working, we're always talking about retirement accounts and you in your four one K should you make tax deferred contributions or ROTH contributions? Well, once you retire, you have the exact same question just flipped on its head. Now we're asking which dollars should you spend each year? Should you be spending your ROTH dollars or your tax the third dollars or your taxable brokerage account dollars or
inverting those dollars? Yep, that question also should we be doing ROTH conversions because that becomes more relevant during especially those years after you have retired. So your work income has disappeared, so your income has gone down for this reason, and Social Security and rm ds haven't kicked in yet, so you have like a temporarily low level of income. That's the window of time that ROTH conversions are most
likely to make sense. So those are the most common questions that I'm working with clients on but that is again just due largely to the age range of the people I work with. Right if you're working with people who are primarily in their thirties, we'd be talking about can we afford to buy this house, saving for kids college, or paying off their own student loans, you know, all of those questions. Navigating employee benefits would be a big big deal, you know, getting the most out of the
benefits that your employer offers. So a different set of questions for people at a different age.
Mike, I really appreciate the time. Thank you for joining me. Where can how do money listeners find out more about you? Obviously your blog and the Social Security website Open social Security? What else do you want folks to know?
I think, Oblivious Investor the blog is probably the best resources there's, you know, more than a thousand articles there in a post every week.
Man, it's a lot of money riding over the years, and it's it's a great site. And we'll link to that stuff in the show notes as well. So, Mike, thank you for taking.
The time, Thank you for inviting me.
As always a great conversation man, So fortunate to have very interesting intelligent, thoughtful, well spoken guests here on how to money, and Mike is no exception, and man, it's just so helpful. I think the big takeaway from this is, Hey, social Security is still intact, folks, And yeah, Congress sits on their hands most of the time. They have kind of abdicated abdicated their jobs for the most part. And yes, there is a ticking time bomb of sorts headed our way.
The you know, twenty thirty three time time frame is when we're likely to see benefit cuts if Congress does nothing. But then again, there's the political necessity, the clamoring for a fix that I gotta imagine it's the Winston Churchill quote. I guess you can always count on Americans to do the right thing after they've tried everything else. And my guess is this will be something somewhat similar in how we react to and fix what's going on with the
Social Security system as the demographics change. But I also love and appreciate Mike's just lack of alarmism. When you read the headlines, it's really easy to make hard pivots and assume that Social Security is a non entity for you, especially for people who are in their twenties, thirties and forties. I think there's just this more and more of an assumption that they've got to go it alone. And I
think Mike's insight a lot. So much of the work he's done has has been too focus on social security where things are heading, and Mike knows more about Mike's forgotten more about soci security than I ever learned about it. And so to get to hear from him from the horse's mouth essentially that the young people should not for sake counting on social Security. They should just be thoughtful
about how much they're likely to get. So I'm on the Social Security website, I'm looking at my own projections as I speak to you, and it is just really interesting to see this laid out. Okay, my estimated monthly benefit at full retirement age, what if I early, what if I delay it? That's that's helpful information. But then also kind of what Mike said is well, trimming that by a quarter is probably the best conservative assumption to make.
And you can also go to his calculator OpenSocial security dot com, which is a really helpful tool, especially if you're trying to plan for near term claiming and it's it's free. There are a lot of Social Security calculators that will make you pay, and Mike's is excellent and free,
which is wonderful. So I hope you enjoyed this episode, and I hope, I hope if you are worried about the existence of Social Security, this was at least a little bit of relief that it's not one hundred percent on your shoulders to fund your own retirement, although I guess when it comes down to it, we're paying into the system. We're funding it just through regular paychecks. But you don't necessarily need to go above and beyond in terms of, uh putting more pressure on yourself to maximize
every single retirement account available to you. But I'll put links to Mike's Mike's website, his blog the Social Security Calculator that is available for free all up on the website at holptmoney dot com. Until next time, Best Friend Out.