Dismantling 5 Top Social Security Myths in 2023

Welcome in to Mr. Stillman's Opus. I'm Ben George along with John Stillman over at Rosewood Wealth Management. Got a good show for you today. Social Security is on our radar today, John. Got to dispel some myths.

Maybe not always just myths, maybe just misinformation or common assumptions that aren't necessarily accurate. Oh, there are plenty of those, so we could probably get multiple episodes out of this, but we will only force you into one, Ben. Okay. I appreciate that. We're going to go through five.

I guess we've got five different assumptions, misinformation, myths, whatever you want to call them today that we want to address to make sure you better understand Social Security and clear up some things that maybe you've had questions about or been curious about as well. So it should be a good show, John. What's going on with you recently? I've just been kind of waiting in my office here, waiting for our next recording session after our previous one. That's it, huh? Just waiting for you to show back up.

Well, I'm here today and ready to rock and roll with another great podcast. If you have questions for John, as always, you can call or text 800-545-2991 or you can find them online, rosewoodwealthmanagement.com. All right, let's begin then with the Social Security Administration. They are very helpful in terms of helping you get everything set up, making sure you filled out their correct forms, make sure you got all the paperwork you need. But the common myth here is that they're also going to help you make the best decision about when you should actually start your benefit. Yeah, so they're not there to provide guidance and advice for you.

When you're ready to flip the switch, they will help you execute the flipping of the switch. And you've probably experienced a similar dynamic if you have a 401k at work because usually the person who's helping you get your contributions set up and everything with the 401k and explaining the rules to you is not somebody who can give you advice on how to invest inside of the 401k. In fact, they usually bend over backwards to say, hey, I'm not a financial advisor. I can't tell you how to invest in the 401k. They come asking me investment questions, but if you want to know how to change your contribution from 6% to 4%, I can help you do that.

But if you want me to tell you what funds to invest in, I can't do that. Well, similar dynamic with Social Security, right? If you want to start your benefit in July, they can help you do that. If you want to find out, well, should I really be starting it at 67 or should I wait until 70?

That's not the kind of question that they're going to answer. And honestly, based on the feedback I've gotten from folks about the intelligence level of some of the people they've dealt with at the Social Security Administration, you probably would not want them advising you on that kind of stuff anyway. Now, we have had a few folks in the last couple of years who have said, well, you know, I called to get my Social Security started at, let's say, age 67, and they told me that I could backdate it and they could send me a lump sum now as if I'd started it at, say, 65. So they'd just send me like $18,000 and pretend like I'd started it at 65. And then I'll just start getting my checks moving forward, which I realize on its face, if you don't think too deeply about it, seems like, oh, they're really trying to help me out here.

Yeah. But that's not what they're doing. They're providing a suggestion, which really would help the system, not you, because what they're trying to do is force you into a lower monthly benefit. So let's say you were going to get $2,000 a month if you started at 67. They're trying to say, well, let's pretend like you started it at 65, and we'll give you, you know, $17,000 now, but now your monthly benefit moving forward is only going to be 1600 instead of the 2000. They're trying to whittle down their future liabilities by giving you this lump sum up front.

So that's the game they're trying to play there. So it's not that they're giving you advice and trying to come up with the solution that's best for you. They just know, all right, we've been told that we're supposed to maybe try to talk people into taking this lump sum and backdating their starting age. So we'll try to push that on some folks. And then, you know, there might be cases where that is the best thing for you to do. Maybe you should have started it earlier and didn't for whatever reason.

But more often than not, that's not going to be the way you want to go. So you're saying that that happened to a client recently? We've had several people actually. Is that common for the SSA to do that? It seems like it's something that's just started within the last, I would say three or four years. I don't remember ever having that reported to me that that had been offered to them before. But yeah, we've had several people mention that before to the point that I've I've started telling people when they go to start their Social Security, hey, you know, you might have this pitch to you, but that's not what we want you to do.

And I feel like we could talk about that for a while. So many questions like what if you were working the previous couple of years, will they actually factor that into the benefits that you would have received? They ask this question only to people that they know haven't been like could have claimed the regular benefits at that time.

Like I've got so many questions. Or, hey, I need I got an emergency. I need to get some quick money. I haven't claimed Social Security yet. Can I go back and backdate it two years and get that big lump sum payment and help pay for stuff? Yeah. So that's one thing I'm not sure about. Like if you ask them, can I backdate and get a lump sum? I don't know. I mean, maybe. I guess if they're offering it to people, then theoretically it's on the table for others who ask about it themselves.

I don't know. Very interesting. OK, that's a good one to start with. So myth number one. All right. Myth number two, you won't get any Social Security if you were a stay at home mom.

So what are the details on this, John? Well, that would be true if your husband was also a stay at home dad and neither of you had any income. So, yes, I think everybody understands that your Social Security benefit is based on your earnings over the years. But that doesn't mean that if you've been out of the workforce for too long or didn't have enough credits. And when I say enough credits, you essentially have to work 10 years to be able to qualify for a benefit period. So 40 quarters, they call it. So it's not 10 consecutive years. You could have had a job in the summer every year in high school and college. Well, there's probably, you know, eight quarters right there.

So there's a couple of years. And then if you worked another eight years after college before dropping out of the workforce to have a kid, you have your own benefit. Now, if you did, let's say, drop out by age 30 and became a stay at home mom, you might be entitled to something like four hundred and fifty dollars a month as your benefit because you just don't have that many years of paying into the system. But if you're married to someone who let's say he's going to get twenty five hundred a month. Well, guess what? You are entitled to a spousal benefit equal to half of his benefit.

So that would be half of twenty five hundred is twelve fifty. Now, understand you're not taking anything away from his benefit. It's just that you're entitled to a greater benefit than what you would get on your own. I don't want to call it free money because obviously in most of those cases, I think the idea here behind this rule is that wife staying at home, running the household was greasing the wheels for a husband to go out and probably make more and earn a bigger benefit. So I don't want to call it free money, but it is free money from the standpoint of, well, if you have a choice of four hundred dollars a month of your own or you could get a thousand dollars a month by claiming a spousal benefit, there's absolutely no reason in the world you wouldn't claim a spousal benefit.

So a lot of people know that's out there. But I come across a lot of folks that assume they're going to get their three or four hundred dollars a month. And it's quite a pleasant surprise to them when they find out, oh, I'm actually going to get a thousand or more.

Let me tie this back into the first myth we talked about. Would the administration, Social Security Administration, help you with this if you were to walk in and claim your benefit for yourself? So they say, oh, actually, John, you actually have a better spousal benefit if you go that direction. It seems like usually, yes, they will let you know that there's a spousal benefit available.

Although I will tell you, there are times I've seen where I've met with folks who, you know, it's kind of what I'm saying. Husbands getting two thousand a month and wife is getting four hundred. And I'm asking, why didn't you take the spousal benefit?

And they act like they didn't know it was the thing that existed. So clearly there are times where the SSA does not mention it to them. One more question. Then if if you come across someone like that and they've already made that claim, can they go back and take the spousal benefit after they've already started claiming? So this is a great example of a question.

If you ask Social Security about it, like if you call the Social Security office, you could call three different times and get three different answers to that question, which is one of the most frustrating things in dealing with the SSA is just the lack of consistency in information that you get from them. Really, it just boils down to let's make sure that we have all of our ducks in a row up front and we make the best decision we can, because can we fix it later? Maybe, but it seems like it depends on the mood and the level of knowledge of person that we end up talking to about it. So let's not take that risk. I get that. All right. Fair enough. Want to have your plan in place, of course, which is why we're discussing Social Security right now and things you need to be aware of.

Myth number three. To be fair, I will say that over the last probably five or six years, I think the competence level at the Social Security Administration has really gotten quite a bit better. So there has been less inconsistency and just a little more general competence I've seen over the last half a decade or so. All right. That's a positive development that I can appreciate. So thanks for sharing that observation.

All right. Myth three, then taxes. We pay taxes all of our life. We are paying into the system constantly on money we've been taxed on and which gets many people thinking that, hey, once I reach retirement and I start claiming these benefits, I'm not going to taxes on this. I've already been paying money on this my whole life, but not the case.

Right. Well, so here's the way it works. Now, there are people who don't pay taxes on their Social Security because their total income is low enough that they don't pay taxes on it. But for most people, at least part of their Social Security is going to be taxed at the highest end. Eighty five percent of your Social Security is taxable income. Now, notice I didn't say they're taking 85 percent of your Social Security.

No. I said 85 percent of it counts as taxable income. So if you're getting, let's say, two thousand a month to make the math easy, that means what? We're going to have seventeen hundred a month that counts as taxable income. The other three hundred is not taxed. So the idea here is that that money that you're being taxed on represents the growth on the money that you paid in over the years. So you're getting three hundred dollars back. That's equivalent to money that you paid in. The seventeen hundred dollars that's being taxed represents your growth. You know, I think that math is maybe a little bit fuzzy in terms of how much money you get out of the system relative to what you paid in. But that is the story we're told. OK. Good to know specifics there. Again, not going to be for everybody necessarily, but need to be aware that your Social Security is not guaranteed to be tax free.

Number four here, John. And this is the big one for everybody, especially people around our age that are thinking ahead to retirement and wondering whether or not there will be any benefits there to claim once we get there. So that's the myth we want to try to dispel here.

I'm hoping you will for for my sake, at least. It's a big, big question a lot of people have. They've heard that the Social Security system is running out of money and just assume that it's not going to be there for them when they retire. Which is it true that Social Security has some demographic problems that need fixing?

Absolutely yes. But understand how Social Security is funded. It's not like FDR put a few trillion dollars in a pot 100 years ago, almost 90 years ago. He didn't put this money in a pot and say, all right, well, let's pay our retirees from this pot for however long it lasts. That's not how Social Security is funded. Baby boomers who are currently receiving Social Security, well, that's being funded by Gen Xers and millennials and now Gen Zers that are paying money into the system. Money is being deducted from their paycheck and immediately paid out to people that are retired.

So it's not this like water tower that we're just draining and eventually it's going to be out of water. Now, there is this thing called the Social Security Trust Fund. The way that has worked is all of these years up until the last couple of years, what we were doing was there was more money being paid into the system than there was money coming out of the system. So all these paychecks that were coming in paid out to retirees and then the excess they put into the Social Security Trust Fund.

And that fund built up and built up and built up until it was $3 trillion a couple of years ago. Well, the last couple of years, just because of sheer demographics, i.e. so many baby boomers retired and collecting these paychecks, now there's not enough money being paid into the system to actually cover the checks that have to be sent out on the back end. And again, it's just sheer demographics. The baby boomer population is a lot of people. We had a very low fertility rate in the late 70s. So people that are now in their 50s and early 60s, their prime earning years, there's just not that many of them compared to how many baby boomers they are.

How many baby boomers there are. So that's why we have this problem of more money going out than coming in. Which means, what do we have to do? We have to go over to that $3 trillion Social Security Trust Fund and start supplementing from there. So the last couple of years is the first time we've started dipping into the trust fund. And now they're saying the trust fund will be empty by 2032. Again, that doesn't mean that Social Security is blown up and it's gone.

It simply means we've got to find a new way to start filling the trust fund back up or somewhere along the way make some changes to the system so that we don't have to supplement the money coming in and out every month. So that's what's going on there. It's a problem that has to be addressed. I'm pretty certain that a group of smart, honest politicians could sit in a room for an hour and 45 minutes and solve the problem pretty quickly. Of course, nobody's going to do that because they all want to have it as a campaign thing.

They want to have it as something to campaign on. And so they're not going to solve the problem until they absolutely have to. So I can pretty well assume that we're going to be talking about this problem until the late 2020s, maybe even 2030. And magically, right before the trust fund gets emptied out, I bet you they'll find a solution. Can't wait for those campaign discussions over the next decade.

Should be a lot of fun to tune into, I'm sure. But that's good to know. Good details on the backstory and kind of how this has kind of gotten to the point where it is now. All right. Last one for you, John. When Social Security, when you're thinking about it and trying to figure out your benefits, oftentimes many people think, hey, well, your Social Security benefits are based on your last job salary.

Yeah. And a lot of people, I think, maybe have this mindset because if you have a pension, usually that is the case. Like it might be based on your last five years of salary. Like, let's say, if you're a state employee, doesn't matter what you made in 1987. It's really going to be based on your last few years of earnings. Not the case with Social Security. It's actually based on thirty five years of work. So it's going to be your highest thirty five years of earnings.

So think about this. If you're sixty five and you're about to retire, that means the only Social Security that's been assuming you've been working continuously your whole life. We're only talking about ages 30 through 65 that are going into the average. So anything that you made in your 20s is not part of the calculation, which means that. And let's also assume, by the way, that every year you make a little bit more than you made the year before.

Obviously, it's not that linear for everybody, but in a lot of cases, you're always kind of gradually progressing. So let's assume that you're making substantially more in your 60s than you were in your 30s. Well, for every year that you work from this point forward, what are you doing?

You're now knocking out another low number from the average. So making one hundred thousand dollars now and you made thirty thousand dollars a year. Thirty five years ago, you're going to add every year you work at one hundred thousand dollars. You're putting another hundred in the average and you're kicking out a 30, which makes the total benefit go up that much more.

So kind of understanding how that works is helpful. And you can see the power in some cases of maybe working a couple of extra years if you're making a whole lot more now than you were back at the beginning of your average, if that makes sense. So all of this to say Social Security can be a little complex. And frankly, the more money that you have, the more the Social Security decision matters in terms of when you should start your benefit. Because if you don't really have any money, it's a pretty easy decision. Work as long as you can, retire as late as possible and get the highest benefit you can possibly get.

That's basically the case for everybody and hope that your help holds out long enough for you to be able to do that. But if you have other assets, now we have all these questions of, well, should we draw down on this account over here? Let that be our income the first years of retirement and start Social Security later? Or should we start Social Security early on and not have to touch our own money nearly as much?

It's not the same answer for everybody. That's why we have to make sure that we've got a plan that works for you and that we fit your Social Security into your overall picture instead of just looking at it in a silo. Where we say, all right, well, statistically, how am I most likely to get the most money out of Social Security? Well, this computer system says 68, so that's when I'll start it.

Well, we don't know. We don't know if that fits into your tax plan. There's so many other elements to a good retirement plan other than just simply how do I get the most money out of the system statistically? So let's make sure we have the proper plan that works for you. Very good information. As always, John, appreciate your insight into Social Security. If you have questions for John, again, 800-545-2991, call or text that number and get in touch with him over at Rosewood Wealth Management. Good stuff. Hopefully this opens up some eyes and get some people thinking a little bit more about Social Security and paying closer attention to the benefit before they claim. So, John, thanks for the time. Always a pleasure. Talk to you soon.