Hey James , what if Social Security gets reduced ? Can I not retire ? And also , by the way , what if returns are way lower and I might live to like 120 because I'm like super healthy and also I don't know ? But what if tax brackets go up ? Does that mean I can't retire ? There's like so much going on in my head . I just want a simple yes or no .
This is another episode of Ready for Retirement .
I'm your host , james Canole and I'm here to teach you how to get the most out of life with your money . And now on to the episode . I know the last episode . We were going through a really simple example and it was just so easy .
Why is it people make this retirement stuff so complicated ? Gosh , even as you say that I'm like deer in the headlights oh man , I was doing you it gets complex really quickly , and I think that one inherent part of planning is that we are planning for so many things that are out of our control by the nature of what it is .
One of those things is social security , which we're going to talk about today .
Yeah , I don't know if it's analysis , paralysis or paralysis analysis , but either way , what we're going to be going through today is helping your brain go . What if social security does get reduced ? Would I still be okay ?
Because a lot of you go yeah , I've got a million bucks or 2 million or I'm going to have that amount , but there's still a million things that could happen . So maybe I don't retire . And you know why you're doing that ? Because it's easier , because you're a human .
And there becomes a point where James and I have to say hey , I know you're going to keep working , I know you could have more , but what about time with family ? What about prioritizing your health ? So we don't love provisional income policies and we don't love legislation .
We love that if you can use numbers wisely and plan efficiently , you get more time with your family and you know , and on the golf course or doing whatever it is you wanna do . So we're gonna be walking you guys through a case study today .
This was prompted by an awesome comment , so please leave comments below as to what you want us to make more videos on . This is how we actually create the content . So this was left by . You could see , wayne Brissette hopefully I'm saying that correctly 9459 , who says the hardest part of all this planning .
I'm 60 , my wife is 56 , is trying to forecast what the US government will do with social security . The noise is they may need to reduce payments . None of that is factored in a Monte Carlo . It's why I keep struggling with retiring next year or later . And I'm reading this comment , james , going , of course , like how could you not feel anxiety about this ?
But what you shouldn't do is that goalpost planning of yep one more month , then I'll retire One more bonus six more months . So when people come to you going , hey , james , social security like how do I even think through this ? How do you normally approach that ?
Well , here's what we're not going to do . I think the temptation is to go in and read the and you've got to be careful how you say this . I can read so many reports that talk about how social security is so underfunded .
And I can read so many reports about how changes are coming and taxes are increasing and ages are being pushed back and benefits are being reduced . And I can read so many reports about what they've done in the past to extend it . Great . But at some point , realize this you're just spinning your wheels .
There's going to come a time when they make changes to social security . I don't mathematically know how they wouldn't do that , but that's not where the focus should be . The focus should be let's go back to the drawing board . Let's go back to your financial plan and model out what would this look like under the assumption that social security is reduced .
That's the only thing in our control . We can't control what Congress does . We can't control how much is raised in tax revenue to fund social security , medicare . What we can control is decisions we make around when we retire , how much we spend , how much we save , and we can do that . And , by the way , to this comment specific point .
We can model that in Monte Carlo . It's just modeling that out . In someone's plan of let's run a plan based case , social security is cut by 25 to 30% or whatever it might be . That is fully within our control . The last thing I'll say on that this is no different than anything else we do . Let's run a plan assuming less than average long we do .
Let's run a plan assuming less than average long-term returns . Let's run a plan with higher than average long-term tax rates . Let's run a plan with higher inflation , more longevity , more healthcare expenses . It's really the same thing across all those things , which is we can't predict with future or with any degree of certainty , any of these things .
But we can plan for it . We can have contingencies in place so that , not even if , but when some of these things happen , we know what that means for us personally and how we can rectify the situation , what we need to do to ensure we're still on track to meet our goals . So let's go through an exercise like that .
Let's do it . And I use a phrase often in videos where I'll talk about retirement comfort , which is what for some people . They might go look , yeah , social Security might get reduced , but that doesn't really bother me because people have been saying that for years and if it gets reduced , I'll adjust my lifestyle .
Other people go no , no , no , I'd really , I'd be OK , but my spouse I could just tell you they wouldn't be okay Because of that . That means I got to work two more years because you tell me that would kind of negate any potential impacts of that . I could see why I don't need to , but I'm just going to sleep better doing it .
It's like the person that pays off the mortgage . Even if they quote unquote , shouldn't , because they could invest and maybe do better , they don't really care , care and they sleep better and they throw a party with their friends .
So , as we're going to go through this example , don't think oh , I know they're doing this and the math works and I see why they're confident , but for some reason my feeling still not confident . You're a human , you're not a robot . Let's go through this .
So this person here , just fictional couple , john and Jane lots of John and Janes on the Root Talks show both age 60 . And they say they want to spend $100,000 a year and they've got $2 million Loose . Okay , we don't really know and some of you are going . That's unrealistic .
Most people have a Roth and a brokerage account and we're just keeping it simple here . So just assume $2 million and a 401k , no superhero accounts or anything like that . $100,000 a year is what they want to spend in retirement . But Jane's worried . Jane's like hey , james , what if Social Security gets reduced by 50% ? Does that mean I'm eating Top Ramen again ?
No , yeah , good question . Let's see , and I will say this before we go into it Part of this comes down to how dependent upon it , upon Social Security , are you ? So what we're going to want to look at , john and Jane , is you really have two sources of income in retirement . One is your portfolio , one is Social Security .
Now , there's his and her Social Security , maybe his and hers portfolio , but let's take a look at that . So let's start with Social Security . Let's take a look at that . So let's start with Social Security . Let's assume , ari , that they're going to have that 50% reduction and let's assume that their starting benefit is what number do you want ?
To say 50,000 a year ? Okay , great , john and Jane have 50,000 per year coming in from Social Security . They want to be able to spend $100,000 per year . So that first example nothing changes if Social Security is fully there . 50% or 50,000 will come from Social Security , 50,000 will come from their portfolio . But we're not going to assume that .
We're going to assume not just a reduction , a pretty big reduction , a bigger reduction than even people would project is coming with Social Security if nothing changes with the current system . Well , if their benefits get cut by half , what is their new benefit , ari . 25,000 a year . 25,000 a year , that's a big hit . They just lost over $2,000 a month .
That's a quarter of the total desired income . They wanted 100,000 per year . A quarter of that just got wiped out . Does that mean that they've got to cut their expenses by 25% ?
No , and there's a lot more we don't know yet . But that 25,000 , that's a scary number . It's like that's not 25,000 ones , that's like for the rest of their life . That we're , that's not us just cutting that once .
That's pretty significant . What we want to do and I think this is where people maybe don't make the connection properly sometimes is that is dramatic , that would be scary to say you're retired , you don't have the ability to create income anymore . That's dramatic . That would be scary to say you're retired , you don't have the ability to create income anymore .
You could , but maybe you don't want to go work at a job that you might be able to work at in your 60s , 70s and beyond . You have two things you have social security and you have your portfolio . One of those things just got cut by over $2,000 per month . What is that other thing though , your portfolio ?
How much income could that create for you is what we want to look at next .
If we're just using basic withdrawal rates and I know a lot of you are going , hey , you guys talk about different rules out there . But keep it simple If we're just using the 4% rule , their $2 million could create $80,000 a year . So $80,000 a year plus we're once again putting a 50% slash on that .
50,000 a year social security benefits puts us at 80,000 a year plus 25,000 , which is $105,000 . Now do you remember what they wanted to spend at the beginning , james ? They wanted 100,000 .
So here they are and we'd be delivering news that if they're doing everything properly and there's taxes and state taxes and more to come with this , but that right off the bat it looks like they might still be okay .
I think so . And now this is obviously a cherry-picked example where we design the numbers to show and illustrate the point that we want to make . Let's assume they have a million dollars , and I don't even know where this math is going to go . I'm just kind of going on a whim here .
They have a million dollars , okay , and let's assume that they are using the 4% rule . That's fine . But they're actually using a more guardrails-based approach and they can create actually 50,000 per year that million dollars . So 5% withdrawal rate . Well , if they go to that , that million dollars creates 50,000 per year .
Social security is still just at 25,000 per year , still not enough . That's 75,000 per year combined . But we have to go back to the drawing board . Okay , so that social security is out of your control .
I don't care how many letters you write to Congress , I don't care how many letters you write to the IRS , they're not going to increase your social security benefit unless you delay collecting benefits . Now , this isn't ideal . For most people this shouldn't be like the optimal plan .
But maybe they say you know what we do need to delay benefits and instead of collecting $25,000 per year in combined benefits at age 67 , they instead I don't know what the math on this would be , but 24% higher of that . Say that number goes to $35,000 . It wouldn't go that high based on delayed retirement credits . But say that's $35,000 .
Okay , well , if you wait until 70 , now you have $35,000 coming in , but you're still not quite there because your million dollar portfolio at full retirement age can only create $50,000 per year . Again back to the drawing board . If you continue working from 67 to 68 to 69 to 70 , hopefully that portfolio is growing a little bit .
Hopefully that portfolio you may be adding some contributions to it . Maybe it's 1.5 million by the time that you retire . 1.5 million can now generate $75,000 per year of income for you using a 5% withdrawal rate income for you using a 5% withdrawal rate . And , by the way , the older you are , the more you can start taking from your portfolio .
Here's an extreme example If you're 90 years old , I'm not going to tell you to limit your spending to 4% of your portfolio . That's designed to last for 30 plus years . At 90 years old you're probably not going to last for 30 more years and so the older you are , the more you can actually spend .
But in that example , you're 70 , you have 75,000 now coming from your portfolio 35,000 . Now coming from social security , which is still a 50% reduction , you're back to 105,000 . So what we've done there is that's not ideal to have to work three more years , but neither is social security getting slashed by 50% .
So I think what good planning does is it doesn't try to control for the uncontrollable . It doesn't try to say well , we got to read the right blogs that tell us the news we want to hear about what's going to happen to social security . It means we have a plan that our goal is to retire at full retirement age and be totally fine .
But if changes happen , here's how much longer we need to work , here's how much more we need to save , or here's how much we would need to cut spending in retirement to still be on track to be okay .
Yeah , let's assume that's a perfect example , because I'd want to go to that couple and say , hey guys , look at the planning we just did . Did that make sense ? And people go , yeah , james , that makes sense . I followed the math and it makes sense . I say , how does that sound ?
And they might be like I mean , I get the math and the social security reduction but I really don't want to work anymore . I said , great , there's another option . You could spend 80,000 a year instead of 100,000 . You could stop right now with that social security reduction . And they might go oh , that sounds a little better .
I mean I'm not spending 100,000 , but I still feel like 80 is more than plenty . Well , great , it's like the example I'll share when I personally play soccer , love playing soccer , and it is not fun for me . When I get injured . I am hangry apparently my fiance says hungry and angry for those that don't know until I get my MRI . And then I go got it .
When I have an MRI , oddly it brings me comfort because I go look , I'm going to find out the severity of the injury , what's my financial plan . And then I get my physical therapy and they give me an option . They say , look , if you were to do physical therapy at this rate , here's how quick you could get back on the field .
Now the risk is , no matter what , we told you you shouldn't get back on that field for a month , I get to go . Yeah , I know that's the risk , but I did my physical therapy so well , I don't care , I want to be back on that field . Like this couple could say look , I don't care , I want to stop working tomorrow , I'm over this , or they could go .
You know what ? Yeah , I use in the physical therapy example . They tell me I should do six to eight weeks before I get back on the field . I could do all the best physical therapy in the world . I could hope markets go up right before I retire , but that is out of my control . It's a time thing at this point .
So we need you to ask yourselves what do you care about most , which , by the way , is way harder than all the math we just did .
Exactly , and there's not just one answer is a thing Do you want to downsize your home and use the equity from that to your portfolio and maybe minimize property taxes ? Do you want to move out of state which reduces taxes and allows you to keep more in your pocket ?
Do you want to not just think of spending a thousand , a hundred thousand per year or 80,000 per year , but separating that into maybe your go-go years , the slow go years , and no-go years , to say , how do we account for changing spending patterns over the course of your lifetime ?
Do one of you want to pick up a part-time job at the local golf shop because you love golfing and it gives you a few extra thousand bucks a year and , by the way , now golf is free because you're doing that ?
There's all these different things that you can talk about doing , and the goal of a good advisor is to understand the financial side what trade-offs carry the most leverage in terms of their ability to get you closer to where you want to go but also understand you at a very deep personal level , to understand which of those trade-offs are not just acceptable to you
but are going to be the most aligned with what you value , with what you enjoy , with what you want to do , so that your plan is constantly evolving in the state or in the face of all these things that are out of our control .
Specifically social security , like we're talking about today , but the changing tax landscape , the changing what's going to happen with market , what's going to happen in politics , what's going to ?
There's all these things , and we're picking on social security here because that's a massive one on top of a lot of people's minds , but recognize that's kind of universal when it comes to planning .
Yeah , let's talk if you don't mind , james . What are just so many mistakes that I don't blame people . How could they know everything about social security ? That's our job . What are some of the most common mistakes ?
And I'll just tell you one and I'm sure you've got a list of 10 more that I see all the time , which is a couple comes in and they're like look , it's so great If , and they're like look , it's so great If something happens to me , I get to collect whichever benefits higher , whether it's mine or my spouse's , I say that's pretty cool , and then they go .
You know what's even better If I were to just , for example , be the breadwinner and then my fiancee , alice , even though I know I look like I'm getting there , what is going to happen is Alice is going to be like I get half of that benefit . That's so cool , but what's wrong ?
with that insurance amount . So in this example , if Alice were to collect a spousal , or even if you wait until age 70 , her spousal benefit is based upon half of what you would have been eligible for at age 67 . So that's part of it . Another mistake people make is technically , a spousal benefit , isn't you know ?
In that instance , alice's spousal benefit isn't half of your 67 . Her spousal benefit is . And what's the right way to explain this ? It's almost like If you would have earned $3,000 at age 67 , she'd say okay , my spousal benefit is $1,500 .
Well , if her own earnings record makes her eligible for $1,000 a month at that time , technically the spousal is the $500 supplement on top of that Seems like it's semantics . Why does that matter if $1,000 of that is her own benefit ? $500 is spousal ?
Well , because you can't collect a spousal benefit on a worker until they are already collecting their own benefit . 500 is spousal Well , because you can't collect a spousal benefit on a worker until they are already collecting their own benefit . So let's assume for a second you're the exact same age to the day .
Well , she's not going to collect her spousal benefit until you turn age 70 because she thinks okay , well , I can't collect a spousal benefit until Ari has collected . Well , she can collect her own benefit at age 67 . So she could be collecting that thousand dollars a month from 67 until 70 and then turn on spousal . So there's .
There's all these little nuances and all these little things . Another one I had a client one time . She came in and she was getting ready to collect her own benefit . She had just retired at the age of 65 . She had been divorced for a long time and she was retired self-sufficient . She had her assets and her social security .
I said do not collect your own benefit . Here's what we're going to do . Instead , you're going to collect a spousal benefit until you turn 70 . And then you're going to collect your full maxed out benefit at the age of 70 . She said , well , I'm not married . I said , well , were you married for 10 years ?
And she said , yes , well , because you were married for 10 years or more , you can still collect a spousal benefit on your ex-spouse's earnings record , and what she's able to do is , from 65 to 70 , collect that , and now , at age 70 , she's turning on her own benefit , which is significantly greater than otherwise would have been .
So there's all these spousal benefits , survivor benefits , primary insurance amount reductions , delayed retirement credits , all these things that need to be known , which extend well beyond . Is social security going to be cut or not ?
Well , these principles are still probably really important to understand , because those cuts would just be proportional if and when they happen , regardless of how you're collecting .
Amazing and I see I saw this a few weeks ago where someone said I don't want to collect Social Security too early because I saw my parents who wish that they had delayed . I said that's cool . Then they said but I also want to make sure I don't collect too late because I've been paying into this thing for a while . And so I said what's your plan ?
And they said well , I'm thinking full retirement age , but I don't really know . And I said okay , why then ? They said well , just kind of sounds like it would align well based off of you know . And I said it doesn't align well with your plan .
And what I find is people want an answer like oh , this is the exact date I should collect , but what happens is , as soon as you turn on that social security , that's more income . It's not a bad thing . Who doesn't like income ? But what if that interrupts your healthcare subsidies or your Roth conversion strategy or something else ? And people start to go oh .
So then there's like taxes , but then like what about , do I need insurance ?
And so there's this phrase that I'll call vacuum planning , which is you can make a great social security decision , but in a vacuum it's an awful tax decision and you can make an awesome Roth conversion strategy , but from a purpose side it's not going to let you travel to the degree that you want .
So we want to make sure we're not looking at things just in a vacuum .
Yeah , the last thing I'll say this because this ties into both that as well as this concern of what a social security benefits are reduced . Who knows ? We obviously can't predict the future , but one thing you'll hear a lot of people say is oh , you better collect at 62 and get it while you can , because the benefit's going away .
I've got to think , and again , anything could happen . That's not the mindset I would take . That might lock you into a really low benefit and you might suffer unnecessarily long-term by doing so . If and when changes come , they're almost certainly not going to make it at least as dramatically to the people who are already collecting benefits .
I'm not going to go on record and say what's going to happen , because I have no idea . But it's not unlikely to think okay , payroll taxes are raised and anyone that's under the age of 55 , the ages , that which they can push social or collect social security are pushed back .
It's hard to imagine any politician coming out and saying , hey , I'm going to go change social security and the amounts current eligible retirees are collecting without alienating their entire voting base and not just their voting base . But I think anyone could see how that would be a challenge to people already on it . So it's more than likely going to be .
If you're under certain age , benefits are going to be impacted for you . So that mindset I think a lot of times it's justifying .
But people helping themselves to justify a bad financial decision because of either a lack of patience or lack of discipline to do the right thing when it's so much easier just to say I'm going to get mine while I can to do the right thing when it's so much easier just to say I'm gonna get mine while I can .
Good luck when you're 80 and that benefit's not going as far as it wants to if you spent down your assets , that might not be the best decision in retrospect .
I agree and if I had to be , or if I got to be the advisor for the person that left this comment ? Sometimes I get to tell people they retire and you're in a great spot to do so , and they retire and you're in a great spot to do so , and that's fun .
Other times I'm not as fun or as joyful to be around because I would tell this person I would say you're cheating yourself , you're saying right now it's you're worried about social security getting reduced , but in reality I feel there's something else there and they might say , yep , it turns out I don't know what it's like to be around my wife I haven't been
home for many years , or you know what . I really just don't know what I'm going to do around purpose when I do retire , whatever it is . So I would say don't cheat yourself . And it's hard to hear , but it's the same people that say I don't want to retire early because I don't know where healthcare is going to come from .
It's a cost and if you plan for it , you still might be able to retire early . So don't let that be the reason you don't retire early . And if you can hate me on this podcast or YouTube video or James for bringing it up , hate us and then send us an email a month later and go .
You guys called me out on it and now I'm retired , so keep us updated in the comments , whether you're the person that doesn't like us or the person that goes . Yeah , I kind of needed to hear it and now I'm taking steps . I just didn't know how to think through it .
Yeah , Redirect all mean comments .
Ari's way and give me the nice stuff . There you go . We'll do it that way . Where can people find you , ari , outside of the podcast and this YouTube channel ? Yeah , they can find me writing those emails to Social Security , hoping to not get that reduced on early retirement . Ari , on Instagram and then on LinkedIn .
Ari Taublieb , t-a-u-b-l-i-e-b , you can tell I've never had to say that before . And , james , where can they find you ?
Same Instagram James Canole , linkedin , james Canole and who knows , in the future . I think we're always talking about where's the best place to do stuff to impact as many people as possible . So , again , if you have thoughts on that , leave it in the comments . Where would you like to see us ?
What social platforms , what media solutions , whatever that might be , but keep up with what's going on there and that is it for today . Thanks everyone . Bye . The information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities , investments or investment strategies .
Investments involve risk and are not guaranteed . Any mention of rates of return are historical and illustrative in nature and are not a guarantee of future returns . Past performance does not guarantee future performance .
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Hey everyone , it's me again for the disclaimer . Please be smart about this . Before doing anything , please be sure to consult with your tax planner or financial planner . Nothing in this podcast should be construed as investment , tax , legal or other financial advice . It is for informational purposes only .
Thank you for listening to another episode of the Ready for Retirement podcast . If you want to see how Root Financial can help you implement the techniques I discussed in this podcast , then go to rootfinancialpartnerscom and click start here , where you can schedule a call with one of our advisors .
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