96% of people make this mistake with Social Security

A new retirement study shows us that 96% of retirees elect Social Security at a sub-optimal time. This is causing up to $2.1 trillion in wealth to be left on the table, and over $3.4 trillion of retirement income to be left on the table. And if you’re a wealthy, a high asset level retiree — this is generally defined as over $1 million in net worth investable assets — [then,] 99% of the time, you’re electing Social Security at the wrong time.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), host of the Retirement Income Show and author of the upcoming book, Core Four.

Most advisors, pundits and articles on the internet all give the same advice when it comes to Social security. They’re telling you to do one thing, [but] we’re telling you to elect Social Security a different way.
So, one of the things that really bothers me is when I click on CNN Money, or Yahoo Finance or The Wall Street Journal, and I read an article that says you should defer Social Security as long as you possibly can. So, this is blanket advice that we hear all the time. And it may be the right solution for you, but there’s a very good chance that it may not be the right solution for you.
So, I’m going to go through different considerations that you need to take into account before you elect Social Security. And one of the biggest things you can do is talk to a retirement professional, somebody who does this every single day, helping families decide when to take Social Security.

Use the information you’re gonna learn in this video to have a conversation with your advisor, your retirement planner or whomever it is that you work with for retirement.

When it comes to Social Security, longevity and health, of course, is an important factor. But we need to take into consideration also our total assets. If we don’t have many assets, then we need to defer Social security as long as possible. But if we do have a large amount of assets, over a million dollars let’s say, longevity and health isn’t as big of a determinant as far as delaying Social Security as it is if you have less assets. But this is absolutely a consideration when it comes to electing Social Security — your longevity and health — but versus your total pool of assets.
Risk tolerance. I don’t hear this discussed too often when it comes to electing Social Security and it’s a big decision. If you’re comfortable with the stock market, historically, the market returns anywhere from 8% to 11% annually, depending on which time frame you go back and look at. So, if you’re comfortable having money in the stock market, your risk tolerance is a big determinant of when you should take Social Security.
If you’re comfortable, then you can leave more money in your portfolio to grow and possibly take Social Security sooner. If you’re not comfortable with the stock market and you have CDs and cash, well your risk tolerance is low, therefore, you should defer Social Security longer, because you’re going to get a bigger return on those dollars by delaying Social Security because your cash and your investments are earning very, very small returns.
Your overall income needs: Now, your overall income needs — this may sound obvious, and it is for many people. If you retire and you don’t have a lot of assets and you need income, you take Social Security, that’s just the situation that you’re in. But if you have relatively small income needs compared to your overall assets, your total assets, [than] there are a lot of other considerations that come into this decision.

Your overall distribution strategy: Now, this is one of the biggest mistakes that advisors make — financial advisors, accumulation phase advisors. It’s one of the biggest mistakes that self-directors — people who manage their own money make. And your overall distribution strategy is from which accounts –your IRA, your non-IRA, your Roth — from which accounts, and also from which investments are you taking income and how much income are you taking from those respective places.
So, one of the biggest mistakes with retirement planning is presuming that all we need is an investment strategy [of] 60% stocks, 40% bonds or some mix thereof. But equally as important, if not more important, is your distribution strategy in retirement as compared to your investment allocation and your investment mix.

So your distribution strategy in retirement — where you’re taking income from, your IRAs, your non IRAs — has a large impact on when you should take Social Security. Under the same theme of overall distribution strategy is: What is [your] ratio of IRA dollars versus non-IRA dollars? And conceptually — you have to think about this for a second, but if all of your money is inside of IRAs and 401(k)s — well, taxes are on sale right now. It may behoove you to delay Social Security longer and take some distributions from your retirement accounts and take advantage of the sale that we have on income taxes today.
If you have a good mix of IRA versus non-IRA, well, then we — if you’re a client of ours — we’re going to talk to you about implementing a Roth conversion strategy, an incremental Roth conversion strategy, where over a series of years, we’re converting IRA dollars to tax-free dollars.

Look, the tax train is coming. Your IRA, your 401(k), is a tax infested nightmare. A good retirement income plan is going to look at a Roth conversion strategy and — depending on how much your particular Roth conversion strategy [says] each year should be converted — that’s going to help us decide when is the optimal time for you to take Social Security. Because, remember, all of this income goes on your tax return. Social Security can be taxed up to 85% of your benefits that you are receiving subject to income taxes, but it’s phased in. So, if we’re doing IRA conversions to Roth, this is going to increase your taxable income for that year, but potentially reduce the taxes you’ll pay over the course of your retirement.

So, when to elect Social Security plays into your tax strategy in retirement, because we’re not just trying to optimize taxes for any given year in retirement, we’re trying to optimize taxes over the course of your entire retirement. And the Social Security decision: A large part of that has to do with the amount of IRA versus non-IRA dollars you have and if you’re embarking upon a Roth conversion strategy.
Taxes, big one here: So taxes When you look at your distribution strategy, your Roth conversion strategy can play a huge part of electing Social Security. And all of these factors, if you’re starting to see that they all play into one another, it’s that none of these factors in retirement are isolated, none of them are in a vacuum. They all need to be discussed and planned and worked through with a retirement planner, somebody who does this every single day, because they all interact with each other.

One decision in retirement impacts the amount of wealth that you’ll have over the course of your life, and how long your money will last. Every. Single. Decision. We. Make.

This is very important when you look at people who do have longevity and health in their family and also legacy concerns. Taxes, we believe are going to be much higher in the future. So, by having an intelligent Social Security strategy along with a tax strategy, we can enhance how long our money will last, how much income we’ll have later in life, and also how much money we’ll have to pass on as a legacy.
So, if legacy — which is passing money on to kids and grandkids — if that’s important to you, then possibly taking Social Security earlier may behoove you, because when you take Social Security, that means you get to leave money inside your investment accounts and allow it to invest and to compound and to grow. Taking Social Security later requires you to pull more money out of your assets. That means you have less later in life to pass on to the next generation.
And this one ties in, of course, with estimated future medical expenses. Believe it or not, the healthier you are, the more medical expenses you’re probably going to have in retirement. Also, the more likelihood you’re going to incur long-term care expenses, the healthier you are — because we’re going to live longer. That longevity from our health today means we’re going to spend more money on future medical costs. So the question becomes: Do you want $500 or $600 a month in extra income? Or do you want hundreds of 1000s of dollars, potentially, in more assets to pay for these future medical needs?

Now, let’s break that down. So, let’s say your Social Security is $30,000 a year and you take it at 66. $30,000 a year times four years until age 70 is $120,000 a year. So, if you take Social Security Excuse me, if you defer Social Security until age 70, [then] that means you’re gonna have to take out about $120,000 from your assets from age 66 to 70. That $120,000, if we would have taken social security at $66k, we wouldn’t have had to take that $120,000 out of the nest egg. 10 years later at 76, if we compound that money at 7%, that $120,000 can turn into $240,000. 20 years later, or 10 years later at 86, that $240,000, at 7%, could turn into $480,000.

So, having the right Social Security decision with respect to your health, your legacy needs, taxes, Roth conversion, all of these things play in together. And the most important thing you can do is work with a retirement planner for your particular situation, but [one with] understanding how these different components that go into making the correct Social Security decision interact together, and then how the decision needs to be customized to your particular situation, your family’s, not only objective facts, data analysis and information, but also the subjective component: the feelings, the what you want, your goals.

And then, finally, do you own other annuities? Annuities are one of the most misunderstood tools in the retirement planner s toolkit. Same thing as social security. You often read articles, you hear pundits, you hear people on the radio saying one thing about annuities, but they don’t clarify which type of annuity they’re talking about. So, if you own other annuities: Annuities are designed for two things.
Fixed annuities and fixed indexed annuities are designed for accumulation of principle in a safe manner, but also a guaranteed lifetime income. So, if you own other annuities, determining how these different sets of annuities that you own, should be activated to provide income with respect to Social Security, can increase your longevity, increase the amount of time your portfolio lasts, and also increase the amount of income you have in retirement.
So, the same people who tell you annuities are bad and [that] annuities should never be owned in retirement, are oftentimes the same people who tell you [to] defer social security as long as you can so you have a higher guaranteed lifetime income. That makes no sense to me. Social Security is nothing but an annuity. So, on [the] one hand, for people to say defer Social Security as long as you can so you have a higher guaranteed lifetime income, but then [say] annuities are bad, you should never own an annuity. Those two don’t mix well, because Social Security is an annuity.
If you own other annuities, [then] having a proper activation strategy (when do I take guaranteed lifetime income from each of my tools) along with Social Security — with respect to all these other factors that we’ve covered in this video — can help you make the best decision when it comes to electing Social Security.

If you found the information in this video helpful, please share it with a friend or family member. If you know someone who’s about to take Social Security or maybe they’re about to retire and you know they’re thinking about it because they’re 64, or 66, or 68, pass this video along to them. Let’s help more people get more connected to their money.

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