Peter, good to see you. This topic is so important to so many people. Social security is in trouble.
We have four tips to maximize your benefit. By 2034, it's projected that Social Security will only be able to pay about 78% of scheduled benefits if no changes are made to the system, which is why we need to start preparing for those changes now. 30% of people claim as soon as they're eligible. They're concerned that Social Security will run out. So first question is, do you see Social Security running out anytime soon?
Well, the Social Security Administration Trust Fund has an annual report and that report last year not only brought this a little closer but reduced the benefits even further. This is a train that has been heading at us for quite some time. You could see the headlight coming at you in the tunnel and they have not done anything to avert this crisis. And it will be a crisis for the American retired public if Social Security benefits are reduced.
Now that doesn't mean it's going away. That doesn't mean that you won't have Social Security, but it will become a pay-as-you-go system. And so we do need to look at the potential solutions. And unfortunately for the American public that relies on Social Security, the government likes to continue to kick the can down the road on actually addressing issues. And the further they kick it down the road, the worse the potential solutions become. The least favorable solutions become the only solutions that we have left. So I wish that they would be proactive about this, but it doesn't look like that's going to be the case. As with government, they're going to wait till 1201 after the day that things come to a head and come to some kumbaya moment where they say, oh, we all finally agreed on a way to save the system, but it's going to be to the detriment of the American public.
OK, so now let's get into those tips. Claiming as soon as you're eligible means a lifetime of reduced benefits, which is why our first tip is to maximize when you claim Social Security. Imagine why waiting is often the best financial decision. Well, if you claim early, right, that reduces your benefit not just for one month or one year, but for your lifetime into the future. This is decades of monthly payments that have been reduced. And then if the Social Security system does have to reduce benefits across the board, not just for you specifically, then those benefits are further reduced. So if you claim it at 62 rather than full retirement age, you've already reduced your benefit by about 75 percent of what it could have been had you waited till full retirement age. And then if the system as a whole, not for just one individual, but for everyone, has to reduce benefits further to about 75 percent, then that is a double whammy in the wrong direction. So you really need to look at if the system is going to have problems intrinsically as a whole. Well, how do I put myself in the best situation within the problems that the system is going to have?
And that is often by waiting and delaying. If instead of claiming early, we wait till full retirement age, now we've got 100 percent of our benefit. And if you delay further past that all the way till age 70, your benefit increases by about 8 percent per year. So at age 70, you'd have about 124 percent of your full retirement age benefit. Then if Social Security as a whole, as a system does have to face reductions, your benefit would be reduced back to approximately what your full retirement age benefit would have been anyway. So it's not across the board for everyone that waiting all the way until 70 is the best solution.
If you run the numbers in the online tools and calculators, usually that's what they say is that, hey, you you wait until 70. That's going to give you the maximum lifetime benefit because the break even point is within average life expectancy. But you've got to factor that into your total financial picture. You've got to coordinate that with withdrawals that you may be making from personal assets, because if you've got an emergency or an additional expense, you can't reach into Social Security and pull out extra dollars. Or if you pass away early, the rest of your Social Security does not pass on generationally to children or next generation beneficiaries. That's what your personal assets do. So you've got to factor in the withdrawals that you would make on your personal assets. What if you didn't have to make those withdrawals and what kind of rate of return can you make on your personal assets when looking at when that break even point is. But yeah, claiming at 62 versus full retirement age for 70, this has a big, big implication in the total amount of lifetime benefits that you would receive. Oftentimes several hundreds of thousands of dollars of a difference in swing that either comes from Social Security, you have to pull from your personal assets or just isn't there at all.
And I know of the three which one I would prefer. Right. Changes to Social Security are almost guaranteed, which is why you need a retirement income plan that doesn't rely exclusively on Social Security. So tip number two, diversify your retirement income.
Yeah. And unfortunately, about 40 percent of the American retired public Social Security is their only source of retirement income, no assets to speak of. We need to do a better job in being proactive and working and saving. Yes, we've got this system that is designed to prevent poverty in the senior population, but it really just keeps you floating just above the poverty line, if that even any more. And so we've got to do a better job of diversifying and getting some saving and investing done so that the American retired public has something besides Social Security to fall back on, something besides this system that is designed up as is designed as a mandatory kind of forced compulsory insurance plan for seniors. We've got to do above and beyond that and get something go and use those IRAs, use those 401ks, use those opportunities to budget and to make sure that every paycheck along the way we are investing and paying ourselves for retirement security and support. So speaking of income, tip number three, work now to create tax free income in retirement.
Yeah. You know, it's a lot easier to pay a bill while you have a paycheck to pay it with, rather than it is to figure out how to pay that bill out of the finite amount of money you have the day after you retire. And so for the last generation, for about 40 years, really since ERISA in the 1970s, the American public has more and more been saving in a way that is tax deferred.
Well, that does not mean that it is tax free. That means that you have kicked the can down the road of when to pay the taxes. And the IRS never is going to forget that. And so when we retire with those 401ks and those IRAs and those tax deferred accounts, that's when the bill comes due, when we start making withdrawals or when the IRS begins to force us to take income from those accounts, they want to collect and will collect those deferred tax dollars, those deferred tax bills. So if we've got that nest egg for us when we retire and then start making withdrawals, it's not what we have there. It's what we get to keep out of it, what we get to spend from it. And taxes are generally the biggest bill standing between what we have and what we get to keep and spend. And so planning along the way to be tax efficient is vitally important.
And being efficient with taxes, Aaron, is as effective as shooting for higher returns, but generally with far less risk involved. So we really need to do a good job in being proactive and planning and preparing for taxes, because I think that one of the changes that they'll probably end up proposing and enacting with Social Security is Social Security used to be 100 percent completely tax free. And in 1983, under the Reagan administration, they put a tier of income in that up to 50 percent of your Social Security is going to be taxable if you make over this amount of income. And then in 1993, under the Clinton administration, they put in a second tier where if you make over this amount, 85 percent of your Social Security income is included in your taxable income. At some point in time, they're going to put another tier in that says 100 percent of your Social Security is going to be taxable. And the 50 percent one I could understand because the employer portion you never personally paid tax on, you know, your employer matches your contributions into Social Security.
And so you paid tax on yours, but the employer didn't. So the 50 percent sort of was, hey, let's tax that other half. But at a certain point in time, they're going to say changes are needed for saving and fixing this system. And I think they'll put in another tier of tax ability. I think they will probably raise the full retirement age and maybe make it so that 62 isn't the age that you can claim early.
Maybe that moves up as well. And I also think that they'll lift the cap at a certain point in time. Somebody making one hundred and sixty eight thousand six hundred dollars in twenty twenty four. That's when they stop paying into Social Security. So somebody making that much pays in on one hundred percent, whereas somebody making sixteen million dollars only pays in on one percent of their income. At some point in time, they're probably going to address that as well. And, you know, some solutions are better than others, I think, with Social Security.
But the longer they delay addressing any of them, the more they have to sort of consider a everything that's on the table approach to these solutions and the least favorable they become. And so let's just circle back, even though you've said this already, you really need to be concerned more about the taxes that you're going to be paying overall in retirement than the fiscal health of Social Security. So you need to have a plan for taxes.
Yeah, absolutely. And the taxes on Social Security itself is one thing. But for the proactive saving and investing American public who has decided that they are not going to completely rely on just Social Security to support them in retirement, because, by the way, Social Security doesn't provide for most people's true lifestyle expenses.
So we need to have that. But for those people being as efficient as possible with taxation is going to be critical and key to keeping as much of our money and having that lifestyle as confident as possible and having not only that income plan in place, but some discretionary growth assets in place. Yes, being tax efficient with both of those. But the income plan, Social Security plus pensions, plus a distribution plan from the investments, plus some growth assets over here, that sets the foundation and then the growth assets fill in the cracks over time. So we need both sides of that to be as efficient as possible. And yes, we need to be as tax efficient as possible as well. So much goes into this, Peter, but it can be one of the most important financial decisions you make in retirement.
So if somebody would like to talk through all these claiming strategies with you, what's the best way to reach you? Well, we try to optimize our client's retirement plan. We call it the optimized retirement plan, looking at income, investments, taxes, health care and legacy. Social Security falls squarely into that first one income.
Everybody needs to have an income plan for retirement and an optimized plan for the rest of those factors. Give us a call if you'd like a complimentary strategy session to look over your situation, talk about your goals and construct that optimized retirement plan for your financial future. 919-300-5886, 919-300-5886. You can email me Peter at Rashaan planning dot com.
Go online to the website. It looks like rich on planning dot com Rashaan planning dot com. You can find great information and of course, set a time on my calendar for a quick phone call or a complimentary review and strategy session. OK, Peter, thank you. Thank you, Aaron.
Hey, folks, Peter Rashaan here with Rashaan planning, so glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at nine one nine retired dot com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401K or IRA, this is the website.
This is the resource where you can go. You can plug in your own numbers, your information. You can slide the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant saving.
So if you have not yet, go to the website nine one nine retired dot com. Run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to take investment tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management, a registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation. Peter Rashan and Rashan planning are not affiliated with nor endorsed by the Social Security Administration or any other government agency.
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