Mullooly Asset Management
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Mullooly Asset Management
Discussing the Social Security Break Even Podcast 475
Unlock the secrets to maximizing your Social Security benefits with the guidance of JP Morgan's treasure trove of insights! Brendan and I dissect the Social Security Breakeven Point Chart in a way that will forever change how you think about your golden years. From the earliest claim at age 62 to the strategic patience of waiting until 70, we examine the complex dance between monthly payouts, longevity, and the broader picture of your financial portfolio. Whether you're pondering the best age to claim benefits for maximum financial security, or you're concerned about preserving wealth for your heirs, this episode promises to equip you with the knowledge to make an informed decision that resonates with your personal financial landscape.
As we navigate the sophisticated world of Social Security, we also tackle the often-overlooked tax implications of your claiming strategy. With Brendan's expertise, we dissect the nuances of marginal versus effective tax rates, the ramifications of required minimum distributions starting at age 73, and the critical importance of understanding how these factors intertwine with your benefit claim timing. This isn't just a conversation—it's a roadmap to leveraging Social Security to protect your investment portfolio and ensure a future that shines as brightly as your past. Tune in to this pivotal episode, and make the irreversible decision to start your Social Security benefits one you'll look back on with confidence.
Hello and welcome back to the Malooly Asset Podcast. This is episode 475 and I'm your host for today, casey Malooly, I've got Tom and Brendan here. Guys, it's been a while since we've all been around the Conference Table Recording Podcast, so thanks for joining me.
Speaker 2:You are welcome. Let's dig in. Let's do it. We're united.
Speaker 1:And it feels so good. Yes, so we are going to be referencing the JP Morgan Guide to the Markets. They release this quarterly. It's kind of they do. They summarize what's been going, what they're seeing, the trends in the markets and in the retirement landscape. They put together some really great charts, so we're going to walk through a couple of them here.
Speaker 1:The first one that I want to touch on is the Social Security Breakeven Point Chart. So this shows three different scenarios of claiming Social Security Claiming at age 62, which is the earliest you can claim, claiming at full retirement age and then claiming at age 70. If you wait until age 70, that is when you're going to get the highest payout per month. You're going to get the highest payout per month, but the trade-off is you have to wait seven or eight years until you have that income. So the chart shows that the break-even point for claiming at full retirement age versus claiming at age 62 is at age 77, you would break even. Claiming a full retirement age, you'd get about $3,800. Or, in this example, you get $3,800 a month. Claiming at 62, you get $2,680 per month. So the break even is at age 77. And then when you claim at age 70 versus claiming at full retirement age. The break even point is at age 81.
Speaker 2:What do they mean by break even point? That's the point in time where you have more money for having waited versus collected sooner. Sooner. It's where that higher benefit has been enough for long enough to have gotten ahead of where you might have been taking the lower amount and collecting it sooner.
Speaker 1:Unfortunately, it's hard to make this decision because it is based on longevity. It's based on how long you live and you don't know that going into it. But I think that we can pretty safely say in most cases, at least referring to the averages, if you're a married couple that at least one of you is going to make it into your 80s.
Speaker 2:Yeah, the odds are really good of that. I think surface level analysis almost always begins with this break even, and then saying surface level analysis almost always begins with this break even, and then saying I don't know how long I'm going to live, so why? Like? Why, why would I bother waiting? And like that is definitely one aspect of this decision.
Speaker 2:Um, you know, on the other hand, you've got to consider what other factors play into your situation. I know there was there was another chart there that was kind of like a flow chart of the way that maybe you want to think through a decision like this. That I thought was super helpful because you can do the break-even thing in a vacuum, and I just don't think that that's how you want to make this choice, because there are other aspects of it I understand, not knowing how long you have left, but I think for a lot of folks, if you just look at the pure dollars in this example, $2,680 a month if you turn it on at age 62, you get $3,800 if you take it at full retirement age, but man, oh man, if you can hang in there until age 70, you're talking about $4,748 a month. That is significantly higher. I mean, that's $2,000 a month more just on one person, let alone. You know, if you're married, you're collecting two checks per month. Depends on what you're doing in the interim, though.
Speaker 1:Right, Like you know and do you have the assets Right? Can can?
Speaker 2:you afford to do it and then, if you can, you know do you want to? I mean, some people will suggest you know as a reason for taking it sooner that you know, despite what you just laid out, social security is not something that you can leave to somebody aside from your spouse.
Speaker 2:And even that is like a kind of because, if you have the higher benefit and your spouse outlives you then they can get their benefits stepped up to what yours was, but they're not getting yours in the sense of inheriting it alongside their own. So there's a step up there, but not the full amount. And some people will say you know, I'd rather grab this money that I've paid into and comes from you know a combination of that and a promise from the government and preserve assets through in terms of what assets you're willing to use and when, and people have different priorities. Sure, Sometimes half a loaf is better than none.
Speaker 3:Yeah, I mean taking it at 62.
Speaker 1:required rate of return standpoint too, because I think you know those numbers. If you boil them down, every year, you wait, you're getting 8% more, uh, 8% higher payout every year between age 62 and 70. So when you compare that if you wanted to, if you could compare that to an investment return, I think long-term averages, I think anyone would take 8% per year guaranteed. That's a pretty smooth and a pretty nice rate of return. So you have to balance that with what kind of risk you're taking in an investment portfolio to generate 8% per year returns and whether that risk is worth taking or not. But let's jump over to the flowchart. I know, brenda, you mentioned it and I thought it did a really good job of simplifying and making this Social Security decision seem probably easier than it is for a lot of folks. So the first question that they ask us to consider is are you working? If you are, you should delay claiming your Social Security, particularly if you're subject to the earnings test.
Speaker 2:Brendan chime in on this one.
Speaker 2:How many people have we talked to who have said, while they're still working next year I'm turning 62 and I'm going to start collecting social security and we're like whoa, whoa, whoa, whoa.
Speaker 2:Wait a second, do you realize what you're doing? Yeah, you know, and, assuming I that what they're collecting from employment is sufficient to support their lifestyle and there's not a need, and that there's some other reason for them wanting to take it that soon, you'd probably want to rethink that. Just because the earnings test is basically you have some of your Social Security benefits held back until you're past your full retirement age for dollars that you earn above the threshold that earnings test is alluding to, which is around $18,000, $19,000, $20,000 per year. So if you're earning sufficient income from employment that's above that threshold and you want to collect, you're not going to get the amount that's on your statement because they're going to take some of that back and it will adjust in the future after you hit your full retirement age. But the reduced benefit of it's a reduction of your already reduced benefit and I struggled to think of a situation where that would make good sense to do from a financial standpoint.
Speaker 1:The next question in the flow chart here is do you have other sources of income? If you don't, you should consider claiming your benefit If you do. There is another question of do you prefer receiving a smaller benefit earlier versus waiting for a larger benefit? I think we touched on the benefits of delaying versus claiming at 62. Do you guys agree with? It does seem pretty straightforward If you don't have any other sources of income, you're not working, you don't have any assets to draw on, that you should claim Social Security at age 62.
Speaker 2:I mean, if you're what else are you doing Exactly, yeah?
Speaker 1:exactly. You're not working, so you're kind of forced into that decision there. So this other question of do you prefer receiving a smaller benefit earlier versus waiting for a larger benefit? If you do want to claim your benefit, you should understand what you're leaving on the table at an older age, which I think we covered that. And then if you answer no to that question, then the next question in the flowchart is do you want to claim your benefit to preserve your investment portfolio?
Speaker 2:So basically take social security instead of tapping into a 401k or an IRA, something like that.
Speaker 1:Exactly.
Speaker 2:I think, a consideration there that this is where I think you've left the realm of hey, I have a financial need and I'm going to claim, which is, of course. I think that that makes fine sense. I think all the stops along the line after this are thinking of ways to maximize what is probably already a pretty good financial situation. If you're asking these questions, you're in better shape than a lot of people, and so taking the time to consider what's going to make the most financial sense from here kind of gets into the weeds, and the first stop is what we already talked about, which is a breakeven calculation. That's like the first thing that everybody does, and then, beyond that, I think what you want to begin to consider with this stage is things like your tax situation in the future.
Speaker 2:Obviously, you got to do a little bit of estimating to get there, but if you're making a decision like this question asks in terms of do you want to preserve your investment assets by taking it sooner, you should be also thinking along the lines of the tax ramifications of making that choice. What I mean by that is, in particular, if you have pre-tax retirement accounts that you don't want to begin collecting from in your 60s and you'd rather take your social security. That's fine, but I think by doing that, you may be giving yourself a higher tax rate in the future than you might have otherwise had, and that's where you need to start making some reasonable estimates. And that's the sort of thing that we help folks think through, because I think it's a little bit beyond just the basic math of breakeven which
Speaker 1:basically anyone can do?
Speaker 2:That's not difficult to figure out.
Speaker 1:So the higher tax bill is because they're going to be required to take the money from their pre-tax account. They're going to be required to take minimum distributions from those accounts, starting at age 73. Right?
Speaker 2:Yeah. So you run into a situation where, on one hand, congress is doing people a favor by saying we're going to move. The goalpost for required minimum distributions used to be 70 and a half. Up to last year it was 72. Now it's 73. At a later date, in about nine years, it'll be 75. The problem is that folks who are turning 73 and need to take their first required minimum distribution now have shorter life expectancy and they may have had three, four or five more years of additional compounding, and so their required minimum distribution may be larger than they expect, which would mean more taxable income.
Speaker 1:Yeah, and they're not going to have control over that either. So I think that's kind of the point of going through that exercise. Is that's kind of the point of going through that exercise is deciding, you know, do you want to control your tax bill now or have no control over it later, after you're required to start taking this money out?
Speaker 2:Difference may be nominal, but I think you need to do the math and say, hey, if I need $40,000 a year, I can get it from Social Security now. But what is leaving my IRA alone for the next eight years look like in terms of my expected RMD in the future, versus if I took that 40k for some of these years. Now I'm gonna I'm gonna have a little bit less in the future in terms of what it turns into my RMD assuming like the same rate of growth.
Speaker 2:you know you can run both scenarios out and and see how much it might reduce your future RMD. To begin collecting now from your IRA versus from Social Security, because there's taxes with Social Security too, right.
Speaker 2:So, you know. At least running the numbers to see what the difference would be could help you decide whether it's enough that it moves the needle for you and helps you make that decision, or if it isn't, and you're going to make it based on you know other other factors that are out there. But I think doing the numbers is a helpful way to flush that out. Yeah, I also think that, um, when we get into these kind of conversations, it's always a good reminder to just talk about the difference between the marginal tax rate and the effective tax rate. I mean, I know this is a topic for another podcast and we've already done episodes on that, but I think a lot of people just lose sight of. You know the next dollar that you take out of a retirement plan is going to. It's going to be taxed at whatever your marginal tax rate is. If that's 35%, that's a significant chunk.
Speaker 1:You know, one of the things that we talk about when helping folks make this social security decision is social security turning it on is a one-way door. You can't go back through it. So once you turn it on, you're locked in for that amount. And I think you know one of the benefits besides the dollars and cents benefit of delaying social security is that it keeps your options open and allows you to explore different avenues, so you're not locked into a tax path for, you know, the rest of the rest of your time. So just to wrap up this flow chart, the next, the next couple of questions are do you expect to live beyond age 77? If you don't, you should take social security at age 62. Uh, if you do expect to live beyond age 77, do you expect to live beyond age 81? If you don't, you should take at full retirement age. If you do, you should wait until age 70. So that goes back to the break-even analysis that we first started talking about in the beginning of this episode.
Speaker 2:So the idea is, if you don't think you're going to make it much beyond 77, then if you turn it on at 62, you've got 14, 15 years of income coming in. If you don't think you're going to make it beyond 81 and you turn it on at full retirement age, at say, 67, now you've got 13, 14 years at a minimum of collecting Social Security. Same way with if you think that you're going to live beyond 81 and all of us want to, now we're talking about, you know, 11, 12 years of collecting Social Security if you turn it on at 70.
Speaker 2:Yeah, I think a way to consider social security that is maybe counter to the break-even calculations is thinking of it as old age or longevity insurance in the sense of, you know, nobody can really answer those questions of how long they expect to live, barring, you know, health circumstances like right now in the present that give us a better idea than the average person of what might go on. So you can't answer those questions with 100% certainty. It's a guess, and I think you can look at base rates. But short of that, especially if we're talking about a married couple, we know what the base rates are of somebody, of the married couple making it into their 80s and even, you know, approaching and into their 90s, and thinking of at least one of you delaying as long as possible as a hedge against living that long and what it might mean financially for you as a married couple. I think is an interesting reframe of a decision that often isn't viewed in that way.
Speaker 2:Lots of speculation about future changes to social security. We have to work with the information that we have now and presume that it's going to be status quo going forward, but things change. Same way with estate planning. You know we have to work under the current set of circumstances. There's a possibility that things may change in the future.
Speaker 1:So that is the Social Security discussion for this week. Guys, it was good to be back doing this with you. Guys, it was good to be back doing this with you. We are recording this a day before Major League Baseball opening day.
Speaker 2:Opening day eve.
Speaker 1:Opening day eve For all those who celebrate, and a little tradition we have here in the office is we like to make win total predictions for our beloved Mets. Total predictions for our beloved Mets. Last year we were all probably way over due to the very disappointing season that they had, but hit me with your win total predictions this year for 2024. I think Tim came in first before we turned on the mics. Tim came in first and said he is going for 85 wins and the third and a wild card spot, which seems to be a pretty safe consensus play. What do you guys have to say?
Speaker 2:I do not have sp500 price target, but I'm gonna guess how many games the mets will win, because I think they're both about uh as as useful um I think the mets are gonna win 79 games and it's not going to be a fun year, oh man 91 wins in Queens Surprising 91.
Speaker 1:So they make the playoffs with that?
Speaker 2:Yes, they do so, I think they finish ahead of the Phillies too.
Speaker 1:Okay, so second place in the NL East Right.
Speaker 2:Behind Atlanta.
Speaker 1:Okay, so in one of the three wildcard East, right Behind.
Speaker 3:Atlanta. Okay, so in one of the three wildcard spots.
Speaker 1:Yeah, okay, so you think no playoffs, nah? Not with this pitch 79 wins would probably put them third, maybe behind Atlanta and Philly, in the division. Yeah, okay.
Speaker 2:Missing the playoffs.
Speaker 1:Hmm, what do I think? I think I am going to go with uh, 88, 88 wins a little bit better than anticipated. Uh, I think some of these young guys are going to come up and produce specifically the pitchers. I've got a good crop of young pitchers coming up. They're going to surprise everyone and contribute more to the Mets this year than we thought they would. So that is going to lock them into second place in the NL East and put them for the second wild card in the NL, so they would have a matchup against one of the division winners. But I like our odds.
Speaker 2:You know what? I don't think they were as good as 101 win team in 2022. I don't think they were as bad as they were last year 79 wins.
Speaker 1:I think that's right.
Speaker 2:So just regression to the middle 91. See you in September.
Speaker 1:We'll check back in October. I think that's right, so just regression to the middle.
Speaker 2:Yeah, 91.
Speaker 1:All right, see you in September. We'll check back in October. Now I think, but we'll check back then, and thanks for listening to this episode of the podcast.
Speaker 3:We'll see you on the next one. Tom Malooly is an investment advisor representative with Malooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Malooly Asset Management may maintain positions and securities discussed in this podcast.