Retirement Plan: The impact of Social Security Decisions on Your Retirement in 2022

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Mark: Welcome back to The Retirement Income Show. I’m Mark Elliot alongside the CEO and founder of Oak Harvest Financial Group, Troy Sharpe. You can find out more on the website oakharvestfinancialgroup.com. We always want to remind you, you can always search for Troy’s over 100 videos that are on YouTube. Just search for Troy Sharpe and Oak Harvest. No subscription fee, you can subscribe, there’s no cost to that as well. Of course, we have questions at 800-822-6434. 800-822-6434.

Today we’re really talking about retirement decisions that will be upcoming in the year 2022. How do we make some of those decisions? Well, certainly it’s about the information and where we get our information from. As you said earlier, social security is guaranteed but we’ve heard for the last decade or so, they said 2035, 2036 social security is going to run out of money, you’re going to get 78, 79 cents on the dollar. Then the pandemic hit, now they’ve moved that all the way to 2033 if nothing changes. Social security and pensions are they similar?

Troy: Yes. One, the taxation of both of those is different. Also, the guarantees are different as well. Pensions are guaranteed by the Pension Benefit Guaranty Corporation. They guarantee pensions last I checked I think it’s around 55,000 to 60,000. I think their inflation adjusted. One of the challenges and this is sad because many of the municipalities across the country, Chicago, New Jersey, places out in California, Kentucky is one of the worst or most or least solvent pensions in the country.

They have promised so many benefits and collectively bargained for such high pensions and such high incomes in retirement that the management of those funds have not been such as to support those future payments. When you combine that with the fact that people are living longer, it’s a very, very sad reality that many of these pensions, and this is already happening. There was a union up in New York. God, I want to say was 808, one of the Firefighters’ Unions or something along those lines. I’m not in New York, I’m not familiar locally, I just remember reading the article.

Mark: There are a lot of challenges with the dockworkers in New York as well.

Troy: Yes. A lot of these pensions have been negotiated to such high amounts, the fund itself does not have the money to support those pensions. The sad reality is many people, millions of people in this country, are dependent on their city or state pensions and there are going to be tremendous challenges moving forward as far as funding them. One thing you can do, look it up, what is my city pension or state pensions solvency ratio?

It should be publicly available, you may have to do a little digging, but what you want to see is 80% funded. That means they don’t have 100% of the money, but when they’re taking into account future cash flows into the fund and growth as far as the invested monies are concerned, 80% is considered a fully funded pension.

If you do the research and you find that your pension is 12% funded or 22% or 46% or 71%, that is an underfunded pension. There are some concerns there. I would definitely be planning some alternative options. We need to make sure that you have enough income to make it through retirement. It’s one of the big purposes, if not the sole purpose for many of you of retirement income planning.

Getting back to the difference here, so pensions guaranteed by the pension benefit corporation, I don’t have the solvency on the pension benefit corporation as far as let’s say a trillion dollars of pensions they need to fund. I doubt they have that type of money, but social security is guaranteed by the federal government. The United States Treasury has an unlimited ability to essentially write checks. Federal Reserve prints the money and then obviously politicians approve it and the checks get issued. A little bit different scenario there, but the main thing I want to focus on is the taxation.

We’re doing an analysis and one of these YouTube videos recently and we get great comments. I mean some of the comments are hilarious. This one guy called me a very stupid man recently. [laughs] One of the videos was, I have $800,000 can I spend $6,000 a month in retirement, I’m 65 years old or something like that. I think he was definitely international and he called me a very stupid man, of course, you can retire with $800,000.

One of the comments when we were going through this tax analysis, I showed a tax ledger and I was comparing two scenarios. Let’s say you take social security sooner versus someone who takes social security later. In the later scenario, if both husband and wife are working, it’s not uncommon for both spouses to have a social security of somewhere between 2,500 to 4,000 per month if you deferred until age 70. It’s based on your highest 35 years of working history, you can go to social security ssa.gov and do your own social security calculation or get your statement.

Someone who’s worked a decent middle-class job their entire career, you’re going to have close to 2,800 to 3,100 per month at 67 right now for social security. If you defer that out to 70, you have an 8% interest, it’s simple interest off your full retirement age benefit at 67 and you can easily get to to 36, 37, 38, 4,000 per month. We were doing this comparative analysis and also we were looking at a different income strategy and investment portfolio to really contrast some of the decisions that you have to make in retirement but the one who deferred it, they had about $80,000 of social security income and we had a Roth conversion strategy that happened in their 60s.

They were paying absolutely zero in income taxes. One of the comments was, “Troy they have $80,000 of social security income. That means their provisional income is 40,000. How come there’s no income taxes in that analysis?” It’s a great comment. Obviously, this man or woman understands a decent amount about retirement planning but what they don’t understand is the complexity of how social security is taxed.

When you read articles, you’ll see if you’re married filing jointly and you have provisional income which is essentially one-half of your social security income plus any tax-free interest from your muni bonds added with any other income. That is your provisional income. If you fall between 32,000 and 44,000, up to 50% of your social security can be tax. These people had a provisional income in this example of $40,000.

He said, “How come the tax liability is zero? The standard deduction for them is about 27,000 that should leave about 13,000 of taxable income.” What they didn’t understand was that it says up to 50% of your social security will be taxed if you’re in between that 32 to 44 provisional income number. It’s a phasing in. If you have 80,000 of social security, husband and wife, your provisional income is 40,000 but you are not up to 50% of that being taxed.

That scenario, only $4,000 of that income was taxable which leads to a 0% tax rate. I know that may have been complicated to follow but my point here, my main takeaway for you is social security is a very powerful income source. If we don’t have other sources of guaranteed income from either a pension or maybe you’ve invested in an annuity, deferring social security can provide a lot of peace of mind but on top of that, it can also provide tax benefits.

If you had a 40,000 pension and 40,000 social security, your provisional income is about 60,000. You’re above that, up to 85% will be taxed. You’re paying a whole different range of taxes in that scenario. All guaranteed lifetime incomes aren’t treated equally.

Just understand that depending on your assets, depending on your beliefs, deferring social security can be a very powerful tool because I’ve never had a single client in my entire career who has deferred social security or has a pension or has some type of lifetime income from an annuity, come to me and say, “You know what Troy, I’m really, really really tired of this money being deposited every month. It just shows up every month on the first and I’m just getting tired of it.” No one says that.

The older we get, the more secure we feel when we have that type of income but also keep in mind, deferring Social Security does have tax benefits. Now, if we pair that with an investment strategy, and also a tax strategy, as far as doing conversions on those tax infested IRAs, 401(k)s. Now we could have $100,000, $120,000, $140,000 of income because all of that Roth income later in life is not part of your modified adjusted gross income. It doesn’t count towards a provisional income.

You could have $100,000, $120,000 of income, whatever your needs are, and pay absolutely zero taxes, and we build those plans out all the time for clients here at Oak Harvest. 1-800-822-6434. 1-800-822-6434. Visit the website. Go to the YouTube channel. We have tons of these videos out there for you to learn on your own time. Just search Oak Harvest on YouTube. Watch the videos late at night, on the weekends, after work, learn. Understand you have options and every decision you make in retirement does impact other parts of retirement so you want all that blended together.

That’s what our Oak Harvest Retirement Process process is. We blend it all together. We have a relationship. We require a relationship. We require you come to your reviews and we look at that plan and we adjust the plan as needed. It’s an absolute requirement here. If you don’t have the Retirement Process plan, if you don’t have all the pieces working together, I encourage you give us a call 1-800-822-6434. Let’s see if we’re a good fit. Let’s have a conversation and go from there.

Mark: We’re going to talk about some of the retirement decisions ahead in 2022. Stay with us. This is The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group.
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Summary
Retirement Plan: The impact of Social Security Decisions on Your Retirement in 2022
Title
Retirement Plan: The impact of Social Security Decisions on Your Retirement in 2022
Description

Retirement Planning at 60s. Social Security and Pensions are ways that you can receive income while in retirement. It's important to understand the decisions you make and how they can impact your taxes in retirement.