Welcome. This video will walk you

0:09

through a tutorial of the Social

0:11

Security Optimizer inside Income Lab.

0:14

First, to get to the Social Security

0:16

Optimizer, select a household from your

0:18

main households page.

0:23

If you're already in a household or once

0:24

you get to that household, you'll find

0:26

the decision lab icon on the left side

0:28

navigation

0:30

menu. And then you can click social

0:32

security to open the social security

0:35

optimizer. Next, you can click to get

0:38

started or you can click skip to expert

0:40

mode if you've already preset your

0:42

social security in the plan. But for

0:44

this tutorial, we will go ahead and

0:46

click get started. If you do have your

0:48

information already set up, you'll get a

0:50

highle view of the client's name, the

0:53

estimation method you're using, and then

0:54

the amount you are using to estimate

0:56

their social security. You can click

0:58

edit values if you'd like to quickly

1:00

make a change to that information, and

1:02

then hit next. Once you're ready, you

1:04

can click explore options, but this

1:06

section will give you a great overview

1:07

of some of the features and things

1:09

you'll see on the next page. So, as a

1:11

first-time user, I would recommend just

1:12

getting a quick overview here before

1:14

clicking explore options. Once you click

1:17

explore options, the software here will

1:19

quickly find the optimal claiming

1:22

strategy for your clients to maximize

1:24

their lifetime social security benefits.

1:26

So right away you will see that

1:27

selection here, which for us is Chris

1:30

taking it at 69 and Carla taking it at

1:32

68. You'll also see this section here to

1:35

view the trade-offs. So this is a great

1:37

place as you're playing with different

1:38

scenarios to really highlight the

1:40

trade-offs of taking social security at

1:42

this specific time frame. So in this

1:44

example we can see that our break even

1:46

point is 9 years from now at which Chris

1:49

will be 80 and Carlo will be 78. That

1:52

will happen in December of

1:54

2044. And we can also see that they have

1:57

about 8 years from now before Chris

1:59

starts taking his social security in

2:00

which we'll be receiving partial

2:02

benefits of

2:04

$3,520 per month. And then about 9.7

2:07

years from now, they'll both have their

2:09

social security turned on in which we're

2:11

getting total

2:13

$5,160 per month at that point. Now, the

2:16

cool thing here is that as you have this

2:18

heat map, you can hover and select any

2:20

combination or any time frame here to

2:22

see the calculations or you can use the

2:25

slider on the left. So let's say if we

2:26

want to model both of them taking it as

2:28

early as possible, we can quickly move

2:30

the slider and now we'll see both of

2:31

them claiming social security at 62. In

2:34

the opposite example, if we wanted to

2:36

see them both waiting until 70, we can

2:38

move the slider and do so here and we

2:40

will see it referenced on the heat map.

2:42

Same thing if we're doing the full

2:44

retirement age or any month along the

2:46

way. Now, one of the other features here

2:48

is the smart tools. And inside the smart

2:51

tools, you'll really be able to

2:52

facilitate a better conversation and

2:54

address some of the concerns your

2:55

clients have around social security and

2:57

when they may decide to claim it. So,

3:00

first you'll see the life expectancy.

3:01

Here's where you can quickly change the

3:03

life expectancy of one or both of your

3:05

clients and see how that impacts their

3:07

social security claiming optimal date.

3:09

So here, let's say if Chris maybe we

3:11

want to decrease his life expectancy to

3:13

80, we could quickly do that here by

3:15

either clicking the up and down arrow or

3:18

using the calendar icon here to select

3:19

the year. Next is the social security

3:22

stress test section. You may have

3:24

clients who are concerned about social

3:25

security being reduced later in their

3:28

retirement. So here you can turn on this

3:30

toggle and actually stress test that

3:32

type of scenario. So here you'll set

3:33

that feature reduction date on when you

3:35

believe social security will be reduced

3:37

and then the amount you believe it will

3:39

be reduced by. And then the last smart

3:41

tool here you'll see is the opportunity

3:43

cost. As we all know a dollar today is

3:45

more valuable than a dollar tomorrow. So

3:47

this really allows you to weigh how much

3:49

value you want to give in your social

3:51

security calculations. Here we can turn

3:53

on the toggle and then enter that rate.

3:55

And then once you're done you can click

3:57

apply changes and the software will

3:59

recalculate your new scenario based off

4:01

of your settings. So here you can see by

4:04

factoring in the decreased life

4:06

expectancy, the social security

4:07

reduction, and the opportunity cost, we

4:09

see here that we have Chris taking

4:11

social security at 66 and Carla taking

4:14

hers at 62. The next view that you'll

4:16

have on this section is your cash flow

4:18

view here. So if you click view more,

4:20

we'll be able to go into this next

4:21

section. The first page here that we'll

4:24

see is a great cash flow view of just

4:25

the social security benefits in this

4:27

scenario. So here we'll see a timeline.

4:29

And as we hover, we can see the benefits

4:31

for each member of the household,

4:34

including when their spousal benefit or

4:36

even survivor benefits kick in later in

4:38

the plan. We've got a great table view

4:40

here that you can open below and see

4:42

this information presented in more of a

4:44

table

4:46

format. We can also open up the break

4:48

even section here to give a great break

4:52

even analysis. So the three scenarios

4:54

we'll see here on the break even chart

4:56

is being able to compare claiming

4:58

earliest as

5:00

possible claiming based off of our

5:02

selected dates or claiming at 70. And

5:05

you'll see here that the software will

5:07

even highlight that break even date

5:08

right here on the chart for you. You can

5:11

click into each of these sections. So if

5:13

you only wanted to look at two of the

5:14

scenarios or just look at one of the

5:16

scenarios, you can click the labels at

5:18

the top and pick and choose what's

5:20

visible on the screen. At the top of

5:22

this section, you'll also see a great

5:24

timeline here where you'll highlight

5:26

specific times like when they both hit

5:29

62, when they hit their full retirement

5:32

age, when they hit 70, and even when

5:35

we've run into our break even point. We

5:37

can then click back to the hate map

5:39

view. And then the last section here in

5:40

the Social Security Optimizer is the

5:42

retirement paycheck section. So, as

5:44

you're modeling these scenarios, clients

5:47

may also wonder, well, how does this

5:49

impact my overall retirement paycheck?

5:52

And so, here you can go to the

5:53

retirement paycheck screen. The software

5:55

is going to run every scenario here on

5:57

the screen. So, you will just want to

5:59

have it load before you start analyzing

6:00

the results. Once it's loaded, the first

6:03

thing you want to do is go to the slider

6:05

here at the bottom. So, in this section,

6:07

we want to set the target spending level

6:09

that our clients are desiring in

6:11

retirement. So, let's say these clients

6:12

aren't necessarily designing 6,400. We

6:15

can maybe go down and get right to

6:17

6,000. And you'll see as you set that

6:20

target amount, the heat map will adjust.

6:23

So, here if the clients are desiring

6:25

$6,000, we can find that this

6:28

combination. So, Chris taking it at 64

6:31

and Carla taking it at 69 would allow

6:34

them to hit that specific retirement

6:36

spending amount that they're desiring.

6:38

This may be good news for some clients

6:40

because they may see that hey, if you're

6:41

not desiring an high income throughout

6:44

retirement, well, that might actually

6:45

allow you in many cases to take social

6:47

security before 70 or even at a much

6:50

earlier date. If we go back and let's

6:52

say our clients are designing that

6:53

optimal, we can quickly slide the slider

6:55

back. You'll see the heat map adjust.

6:57

And again, the darkest color here will

6:59

reference that optimal time in which

7:01

we're able to hit that target retirement

7:03

paycheck amount. If at any point you'd

7:05

like to go back and change your edits,

7:07

you can click the pencil icon here at

7:08

the top right of the screen and get

7:10

right back to your edits. And then you

7:11

can either cancel and close or click

7:13

explore options to get back to the

7:16

Social Security Optimizer. The last

7:18

thing we'll show in the tutorial video

7:20

here is the icon here at the top right

7:23

with your three sliders. If you open

7:25

that section here, you can quickly

7:26

choose to have the values in the social

7:28

security optimizer here either rounded

7:31

and then you can also set a target range

7:32

highlighting the results that are within

7:35

1% of your desired target range. This is

7:38

a really great option here as you're

7:39

maybe helping clients understand that

7:41

well, you know, while we've got these

7:43

trade-offs, if they're still trying to

7:45

stay, let's say, within 90 1% here, so

7:47

we can get to 99% of our maximum amount,

7:50

well, that might actually allow them to

7:52

take it earlier or have a different

7:54

combination here where they're maybe not

7:55

getting 100% of that maximum. We can

7:58

highlight the options here that are

8:00

within that 1% range that we're

8:02

targeting. That's it. Thank you for

8:04

viewing this video. Please reach out to

8:06

our team if you have any questions.

 

All right. Hello everyone. Welcome. Give everybody a chance to join the webinar

0:12

before we get going here. Thank you very much for joining us. We got a huge

0:18

uh list of people signed up today. So, it's going to take a while to to get everybody in, but welcome to the first

0:24

of our master class series on social security. It's going to be a five-part series uh and we will be announcing uh

0:32

next week's topic um today at the end of the class, but we'll have three other sessions as well. All of them really

0:39

full of amazing content. We're going to be talking about um the psychology of social security, taxation,

0:47

um you know, claiming for uh spousal benefits, survivor benefits, divorce situations. There's all sorts of stuff

0:53

going on in this master class. So, I hope you can continue taking part as we

0:59

uh as we uh as we go through the next about two months. So, um just as

1:06

everybody is getting into the class, some housekeeping items. So, um as I said, this is session one of a five-part

1:14

master class on social security. Um this session is available for one hour of

1:20

CFPCE credit. Uh, you do have to attend at least 50 minutes live. And no, it

1:28

doesn't count if your AI notetaker is on here, but you're not. Um,

1:33

uh, you will get a post-weinar survey so that we have your CFP number. Um, and we

1:39

will send out a survey in 24 hours. Um, that you can also give us your your

1:46

information there. Um and and and we'll be sending out some of the content from this session and others uh in the

1:53

future. Um also, if you've been on our webinars before, you know, we get tons and tons of questions. I'm going to try

1:58

to leave time at the end um for some Q&A. We do have a ton to get through

2:03

today, though. So, you know, I apologize if we don't have time for everybody's questions. What you can do to help me

2:08

out is upvote. And well, first of all, put the questions in the Q&A, not in the chat. You're welcome to use the chat,

2:14

but I won't be monitoring that. our team won't be monitoring that, you know, necessarily. Although, actually, the

2:21

team will probably monitor the the chat, but um use the Q&A for questions and

2:26

then upvote them if you want to see them answered. That really helps us out because it's really almost impossible to

2:32

follow the uh the chat. So, with that, got a lot to get through today. So, um

2:39

we will just take off. So, all right. So today's session is the

2:46

first of our master class and so I want to start with kind of the the most obvious the most central question to um

2:54

social security claiming and social security planning which is just obviously when do I claim? It turns out

3:00

the social security system in the United States it gives you the option to begin benefits anywhere between age 62 and 70.

3:08

So the kind of the core question is um when do I claim? It's core because

3:13

social security is incredibly important to people. For a lot of people, it's the foundation of their financial plan and

3:20

retirement. And even for those who have maybe more resources outside of social security, it can still be foundational.

3:27

So, it's a really big deal. Um, but we're going to go beyond today some of the the basics of how people think about

3:35

this question and really focus on what I'm calling the underappreciated risks

3:41

related to claiming decisions. So, these are things that maybe are a little less

3:46

uh commonly thought about or at least explored in the way that we're going to explore them today. And that's longevity

3:51

and mortality risk, opportunity cost and sequence of return risk, and funding risk. and we'll don't worry we'll go

3:57

over exactly what all those are. All right.

4:06

So first of all the core question when to claim.

4:12

So social security claiming as I said because you can any one person can claim

4:18

between age 62 and 70 it actually presents us this classic time preference

4:25

problem. So it's it's the sort of thing that uh that economists love to study, right? It's it's basically a hey um is

4:33

it worth it to give up something today or you know in this case at 62 if you're

4:39

if you're younger than that um in exchange for something more but further down the road, right? Like what do I how

4:47

do I consider my options when I'm when I'm uh faced with this question of two different things at two different times?

4:55

Um, so again, this is this is the kind of thing that you can do lots and lots of experiments on, right? Um, it's it's

5:02

kind of part of what's behind things like interest rates in the world, right? Why would someone um be willing to, you

5:09

know, give the bank some money uh in exchange for for, you know, more money in the future, right? This is just a

5:15

classic part of economics and that's at the core of the social security claiming

5:21

question because um if I claim at 62 and I'm getting $1,000, I also have many

5:27

other options. In fact, um you can claim at any month between 62 and 70. So I I'm

5:33

only showing, you know, the nine ages on the screen here, but there are many many more options in between. And for a

5:41

couple, they both have these options. So you end up with more than 9,000 possible combinations and it can get even more

5:48

complex in other situations. So it's it's a massive uh uh set of possible

5:55

choices. But you can see there's a pretty big difference between the amount I would get at age 70 and the amount I'd

6:02

get at 62. It's a little over 77% more benefit at 70 than at 62. But of course,

6:09

in order to get that 77% more, I have to wait all the way to age 70 and get

6:14

nothing beforehand, right? So this is although that seems like a lot of money, that's uh that's a very big difference.

6:22

So how do people approach this claiming decision? Well, there's an approach that I'm calling the just the math approach,

6:30

which just focuses on what I just showed you. Essentially, just think about what are the benefit amounts in each at each

6:36

claiming point. How long might I live? Figure out total lifetime benefits. And

6:42

that's how you would uh make your decision. Just choose the highest option. That might be a little bit of a

6:47

character of some of what you've seen out uh kind of in, you know, uh articles

6:53

and things on the internet, but it's it's a decent uh summary of how people sometimes approach this question. What

7:00

I'm going to be arguing for here is that actually social security claiming is much more complicated. So we should

7:07

consider of course projected lifetime benefits right the amounts that we would receive depending on our choice but we

7:13

also need to think about risks and uncertainties preferences and the place of social security in the broader

7:19

retirement plan. In other words, the social security claiming decision is not going to be just a straightforward thing

7:25

that we can just focus on with blinders on or you know put under a microscope just look at social security and you

7:32

know choose the one with the highest number. Um this is actually just like

7:37

other things in financial planning which is there's a complex set of risks and

7:43

preferences involved and interplay with other parts of a financial plan. And so

7:48

although it can be helpful to just focus on one small part, it it is actually to

7:54

to get a good plan, we need to think about things outside of it and just recognize things are complicated.

8:01

Um but to step back and give kind of a just the math example um one way we can

8:08

think about making a social security claiming choice is uh just looking at something called

8:14

break even age. So, this would say, all right, if I'm going to delay social security, how long would I have to live

8:22

so that the total benefits I've received are equal to or greater than how much I

8:28

would have received if I started as soon as I could. Because starting as soon as I could is is typically that's that's

8:33

often our preference, right? If I say, "Hey, I'll give you 20 bucks today or in a year I'll give you, you know, 21," you

8:40

you probably just take the 20 bucks today, right? So, so most people um kind of prefer,

8:47

you know, money today, right? So, if I do that using no discount rate, meaning

8:52

I'm I'm valuing a dollar at 90 the same as I value a dollar at 82 or or at 62.

8:58

And we'll come back to that assumption, but um then I would have to live, for example, past 80 and a half to make

9:06

waiting till 70 uh a a decision that got me the same amount of money as um as as

9:12

claiming at 62. So this is the sort of thing you'll often see if you kind of search the internet for commentary on

9:20

you know when should I claim social security. Okay. So let's go beyond that though.

9:26

Let's go to the underappreciated risks of uh that to consider in the claiming

9:34

decision. And we're going to start with mortality and longevity risk.

9:45

Um, these risks are are kind of two sides of the same coin. They're, you know, the the the risk of

9:52

living a long time and the risk of not living a long time. Um, and I've written some on this uh in the Kitsus blog on

10:00

mortality risk as kind of an underappreciated risk in um financial

10:05

planning in general. And um at Income Lab um in our software, I think we're

10:10

the I think we're still the only software that actually takes mortality risk into account in the overall plan,

10:16

which is a really big deal. So in the case of social security, it's an especially big deal because if you're

10:22

planning for uh a joint household, so there are two social securities. If

10:28

someone dies, one of those goes away. Uh, and so mortality risk is a really big deal in overall financial planning,

10:33

especially in those um that have social security in them. Um, but the way I'm

10:39

referring to mortality and longevity risk today is more about um how people

10:45

think about their possible lifespan considering whether to claim social

10:50

security early or late. And those who tend to want to claim early, their, you know, internal

10:57

monologue or what they would might say to a an adviser might be something like, "Well, I'm worried that if I delay

11:03

claiming, I might die earlier than I'd hoped and I'll end up getting less than I'd hoped, a lot less maybe." Um,

11:10

so that person is concerned more about mortality risk, right? The chances of dying. And they're more concerned about

11:17

optimizing income at younger ages. Those who think about this and it leads

11:24

to them to claim late might be thinking I'm worried that I'll live a long time and that in my old age old age my

11:31

benefits won't be as high as they could have been therefore

11:36

I might have less right uh they're more concerned about longevity risk and they're more concerned about what income

11:42

looks like at older ages so that's the the opposition I want to put in place

11:47

here um in terms of longevity and mortality risk Um, so now let's think about what if

11:53

these risks go wrong, right? What if what if a choice that someone makes about claiming turns out to have been a

12:00

bad choice? And I want to set up a framing of this to so that we can understand how people think about these

12:05

risks. And it's a framing I've set up before in in other webinars and in some of my my talks at at um conferences. And

12:14

it comes from a book by Peter Sandman uh in 2012 called Responding to Community

12:20

Outrage: Strategies for Effective Risk Communication. And one thing Sandman does is he sets up this equation where

12:28

he says risk equals hazard plus outrage. What does he mean by that? He means that

12:34

the risk that that we perceive in the world is a combination of the hazard which is the thing that might happen,

12:41

how bad it would be if it happens and the tr chances it might happen and this other thing called outrage which is

12:48

basically how we feel about it. Um and he finds that there's this opposition

12:54

between things that make us more outraged about particular risks and

13:00

things that make us less outraged. Um, and I think if you, you know, consider yourself, um, you'll find he's right. So

13:07

things that are more outrageous and therefore feel riskier, um, are catastrophic. They're dreaded, they're

13:13

memorable, they're coerced, they're unfair, versus things that are less outrageous, that are chronic, not

13:19

dreaded, not memorable, voluntary. Let's take catastrophic versus chronic. This is why people might be more afraid of,

13:26

you know, a plane crash than high cholesterol.

13:32

It's why people might be more um alarmed and upset about a market crash than

13:39

about inflation. Both of those things are risks. Uh they actually both can affect your retirement

13:45

plan in the case of market crash and inflation. But you know, you get a lot more phone calls at during a market

13:51

crash than in a case where inflation ticks up a bit. So using this structure

13:57

of this is how people perceive risk. And by the way, just because you know we're talking about outrage as a separate

14:02

thing and it's about perception doesn't mean it's not real. I mean this is this is very much real. Even knowing about it

14:08

doesn't change our our feelings and we're talking about perception of risk here.

14:14

Okay. So, let's look at social security claiming and think about where in what

14:20

situations could things go quote unquote wrong, right? When did we uh make a bad

14:25

decision if we're just thinking about claiming? Well, there's two of them. It's a case where we have a mismatch.

14:31

So, we could either have a short life, but we claimed late or we're planning to claim late or we have a long life and we

14:38

claimed early. Well, let's put ourselves in this situation. Let's say uh we decided to

14:44

claim late. Yep. I read all the articles and I'm convinced that uh claiming at

14:49

70, you know, 77% more benefit. That sounds great. And then at, you know, 68

14:57

um I'm diagnosed with uh terminal cancer. Um we've all we probably all

15:02

know people maybe some of your clients have been in this situation, right? It's a thing that I can imagine. It feels

15:08

catastrophic because the the situation where I die younger is often um that

15:14

kind of a thing where it's sort of a sudden um catastrophic change in life. It's memorable meaning I can imagine

15:20

what it's like right in my in my brain and it feels a little bit unfair because

15:26

well I could have claimed earlier and now I'm not going to get you know my benefits that I put uh so much of my

15:32

payroll taxes in you know over uh decades of my working years. It just feels unfair. And so that's a more

15:39

outrageous situation and it feels riskier according to Sandman's approach to risk.

15:46

Let's think about the other mismatch. Long life, but I claimed early. So I claimed at 62, let's say, and now I hit

15:53

85, 90, and I look back on that decision and think, huh, you know, I actually

15:59

could have claimed later and probably that would have been worth it to me and I would have been getting more now.

16:06

How risky or how outrageous does that situation feel? Even imagining it ahead of time. Okay. Well, you're living a

16:13

long life. That's not a negative. Um, this happened slowly over time. So, it's on the chronic, not catastrophic side.

16:19

It's not really dreaded. I I can't imagine thinking, "Oh, no, that's terrible." It was voluntary. I made the

16:26

choice. And it's fair. You know, I took it early. I was getting my money uh from 62. Okay, I get a little less now. So

16:32

just imagining how people perceive these two mismatches, they're very different. The short life but claimed late feels

16:39

much more risky to people. And because of that, those who worry

16:45

even a little bit about mortality risk um will perceive a higher risk to

16:52

claiming late and will be motivated to claiming earlier.

16:57

So let's look at ways that you can explore uh mortality risk and that

17:02

decision-making process. Um this is just a set of um longevity curves or

17:09

survivorship curves for people um to give us a feel for you know what sorts of age ranges might be reasonable. Um so

17:16

social security actually puts the life expectancy of a 62year-old man at 81.7 and and a woman at 84.5. But

17:26

often um for example in income lab software we use society of actuaries um

17:31

numbers for um retirement plan participants that basically says you know people with more assets more

17:38

resources do tend to live longer. That's a well-known proc um set of data. So you

17:44

know this gives you kind of a feel for all right we're kind of looking in the 80s is is a a good takeaway here. So,

17:50

I'm going to switch over and and when we send these slides out, we'll you'll have slides for these, but I want to use um

17:57

the uh the income lab um decision lab social security optimizer to to

18:03

demonstrate what this looks like. So, here I have a a heat map showing in this

18:10

case, you know, all 9,000 plus uh possible times that uh you know, John

18:15

and Mary can claim here. Both John and Mary are before age 62. So they have all of their choices are ahead of them. And

18:22

if their financial plan puts them at, you know, goes through, let's say, 20 59

18:28

and so they're in their mid 90s, um, and they really do live that long, um, then

18:34

then yeah, claiming at age 70 looks really good. Um, one thing that's interesting here that you'll see, I've

18:40

turned on highlighting. That's this green line that shows me every claiming

18:46

option that's within 1 and a.5% of the of the most. Um, so, you know, here I'm

18:51

projecting, you know, 1.6 million in total lifetime benefits for the two of them if they live as long as this. Uh,

18:59

but, you know, down here I could claim a four years earlier for Mary and I'd only be giving up $23,700

19:06

over their entire lifetime, right? So, um, often one thing I think that people,

19:11

um, want to know is, yeah, okay, I I see that that's, you know, the quote unquote optimal, but, you know, how much worse

19:17

is claiming at a slightly early age, earlier age? And, and so that's what this um, this green line is meant to

19:24

show because I think we should recognize most people actually would prefer to claim as early as possible and then they

19:31

need to be convinced to claim later for for some reason. All right, so let's explore some ages. Let's put um

19:39

let's put John and Mary more into the uh you know more the average um life

19:44

expectancy range and just apply the changes. And boom, we can see already we've gone from 70 and

19:51

70 to 68 and 66. And our close enough

19:57

range would allow us to claim as early as 62 for Mary. Um, I guess I should

20:02

have said I I purposely set uh John and Mary up where so that they would have a a a spousal benefit and survivor

20:10

benefits and things. Um, so John's um primary insurance amount, meaning the amount he would receive at full

20:17

retirement age, uh, which for both of them is age 67. Uh, his is 3,000 and

20:23

Mary's is 1,000. Um so in other words, if we went back to the that uh graph

20:29

that we had earlier, um

20:35

at 67, the amount that you see on this graph at 67, so in this case, 1429,

20:42

that's what's called primary insurance amount. And age 67 for them is what's called full retirement age. That matters

20:48

for a bunch of other things. We're not going to go into those definitions right now. It has to do with things like what

20:54

if you earn income before while while you're taking social security um and so on. But the only thing we need to know

21:00

now is that kind of age 67 is sort of a special a special age.

21:06

Okay, let's go back to the uh uh and that explains why Mary can take a

21:14

little bit earlier um in this in this case. But you already see just by moving

21:19

um life expectancy more toward an average um we understandably move the

21:26

optimal claiming date a lot earlier. Um and you can see even if you know the difference between optimal of 927,000

21:35

and you know close enough here it's only 13,700 over an entire lifetime right

21:41

over you know between now it's 62 and you know for example 64 so or 84 so

21:48

you know we're talking 22 years so it's a big deal. Um but often what people

21:53

want to explore is well let's let's look at other situations. Look, you know, maybe I have somebody in my family who,

21:59

you know, died in their 70s. Maybe, you know, no, no man ever made it past, you know, 75, right? Um, these are very

22:06

common situations that people worry about. And as soon as I do that, my optimal shifts remarkably. Am I close

22:12

enough as well? So, it's this is one of those situations where yes, maybe the

22:19

financial plan in general plans into the '9s because we're worried about longevity risk. we're worried about. Um,

22:25

hey, let's just make sure that if we do happen to live a long time, we'll have the assets, the resources to still fund

22:32

our lifestyle. But the fact is that's not particularly likely. It's okay to plan for it. Um, but when when thinking

22:39

about optimizing social security, um, often people do want to at least explore

22:45

average life expectancy type numbers and then also explore some extremes just to really get a feel for it and to and to

22:52

look at what they're really giving up. what's at stake, right? Um, and in this case, what's at stake is actually often

22:58

not very much um if they're choosing some quote unquote less optimal um

23:06

options. All right, the next risk that we want to

23:12

look at is sequence of return risk. And I think this one is really not

23:17

appreciated in the commentary on social security claiming. So, we'll spend a

23:22

decent amount of time on this. And it again has to do with that concept I mentioned earlier about, hey, a dollar

23:29

today is worth more than a dollar tomorrow, right? It's this this whole

23:34

should I should I delay thing? Why why do we feel that way? Well, it's a preference for current consumption over

23:40

delayed gratification. It's a preference for a sure thing over something uncertain. Why would social security be

23:47

uncertain? Well, lots of reasons, but one of the most obvious is I might not be around to get it uh in the future,

23:52

whereas I know I am today. Um, and there's a last one that's a little more

23:58

subtle, but we'll we'll talk about it, which is a substitution effect. If I

24:03

don't have social security coming in, uh, where will the money come from? Right? So, if I'm retiring at some point

24:10

and I have a choice between taking social security or not, um, I'll still

24:16

want to live on my resources. So Derek Tharp and I wrote years ago about this concept of the retirement distribution

24:23

hatchet which we by that we meant that um portfolio withdrawals

24:29

in a retirement plan where someone delays social security or other things like pensions can can have a look of a

24:35

hatchet where there's a head of the hatchet where there's a lot of withdrawals early on and then there's less once you take social security

24:42

because now you you don't have to take as much because you have social security. Um, one thing that's going to

24:48

come into play here is what's called sequence of return risk. Many of you

24:53

probably know what that is, but um, it's always worth a refresher. It's the concept that if you are withdrawing

25:00

money from an account, actually, even if you're adding money, this this comes into effect, but the typical situation

25:06

is we want to talk about it when you're withdrawing money, the order in which you get returns matters. If you get good

25:13

returns early and bad returns late, that's better than if you get bad returns early and good returns late. So

25:19

in this example, I use the exact same returns but just flipped them on their head for the bad sequence. And you can

25:26

see that the same withdrawals. I took $50,000 out each year out of a million

25:31

dollar portfolio. But a different sequence of returns lives leads to a $72,000 difference in balance after 5

25:38

years. And obviously we could see long larger differences um over a longer period of time. Um your math teacher

25:46

would be proud if you just you know remembered uh sort of order of operations and pl you know subtraction

25:51

and multiplication here. That's all this is. It's just math that leads to this sequence of return risk.

25:58

Um so the concept that we want to look at here is is substitution. How does sequence of return risk interact with

26:05

social security claiming? Because if I forego a dollar of social security now or at 62 or at 65 um but I'm retired,

26:14

that dollar will have to come from my portfolio instead. So the question is what's the effect of that fact on the

26:21

overall retirement plan including uh investment balances?

26:27

So, let's go back to um the software we're looking at here. And I'm going to

26:35

go to an example that I've created. And I created this as in a really really

26:40

simple way. This is something called the retirement stress test in income lab. Um and what it's doing is walking a

26:47

specific retirement plan through different sequences of returns and

26:52

inflation. And what I've done is created a really simple plan where there's one person uh age 62 with a million dollars

27:01

and social security. Um

27:07

we can look at just to remind us what the uh Okay. And a mill yeah million and then

27:14

the social security you know at age 62 is 2100. So, I think this was maybe a

27:21

$3,000 primary insurance amount. Um, so it's reduced because I'm not taking out

27:28

67. I'm taking out 62. All right. And if I go to the retirement stress test, we have all these

27:34

um scenarios across the top. I'm looking at the global financial crisis. And I'm going to compare this person taking at

27:41

62 um with a million dollars and at 70 with a

27:48

million dollars. Um, for those of you who know Income Lab, you know that income lab plans also have they plan for

27:55

income adjustments over time, meaning um if things get bad, you'll take a pay cut

28:02

rather than allow things to get really bad. Um, and if things get good, you you'll go ahead and spend more. So, it

28:08

keeps people on track. Make sure they're always they're always spending within their means. Uh that means that there

28:13

are these things called guard rails on the uh in the plan that tell you when you would make an adjustment. I've

28:19

removed those here. Um so because I'm just trying to kind of give a really

28:24

clean picture of of what things would look like and I've made the um the

28:32

income the total income between um between my portfolio withdrawals and my

28:37

my social security I've made it flat over time. just adjusted for inflation

28:43

and I've made them basically the same as as much as I could. So we're take we're getting about 6260 in um total in

28:51

monthly income for both of these plans whether I take it social security at 62 or at 70. Um those who use income lab

28:58

know that actually um there's a way of asking instead of you know h how can I spend exactly this much there's a way of

29:05

asking um you know how much can I spend and typically if you claim early in social security you'll have to spend a

29:11

little bit less than if you claim late but I've made them the same here in fact I've made claiming early spend a bit

29:16

more so um the question is how does that

29:22

difference in when social security is taken affect the portfolio because we

29:27

have this opportunity cost. We have this substitution effect where uh by claiming

29:33

social security early, I don't have to take as much from my portfolio. Right? If I'm taking uh you know 6,200

29:41

uh in total income, but I think it was 2100 is from social security, I only

29:46

have to take 4,000. Whereas if I'm waiting till 70, I've got to take the full 6,200 from my portfolio. So in this

29:53

in this situation, we can see predictably the the case where I claim

29:59

late and so I'm taking a lot more money out early. Um that's the the kind of

30:04

mustard colored line. Uh the balance is going to be a lot lower. And you know by

30:10

2016 here again I started with a million dollars. Actually I'm going to switch this to be nominal meaning the you know

30:17

actual dollars people would have spent. So now you can see inflation adjustments but just to give a better feel for the

30:22

the balances since you know your your uh your statements don't come in in

30:29

constant dollars they come in in nominal dollars. Okay. So, the difference here we can see is, you know, about $300,000

30:38

um you know, in in many cases along the way. This is a a really big uh

30:45

difference, right? I mean, just imagine the the experience of someone taking

30:52

Social Security early. It's it's the blue one, right? So, they're recovering faster um compared to the yellow one.

30:59

So, there's just a lot more concern. You can see here by 2013

31:04

uh we still have not recovered much from 2009. Uh if if we're still delaying

31:10

social security um so this is a sequence of return effect. Um we can look at uh that

31:17

situation. We can also say well what if what if we started this um you know

31:22

after the big market crash or kind of you know a little bit don't don't subject it to as big of a difference.

31:28

And and here, interestingly, we still see a pretty big difference. So, again, about that $300,000 difference over time

31:36

um if we had claimed early. So, this is also a sequence of return effect, but um

31:42

both of them have to do with how much money is left in the account to experience whatever returns we got. Um

31:50

so in the case of you know hitting it with the global financial crisis we're

31:56

uh we're not withdrawing as much and so we're we're we're not kind of uh making

32:03

things worse by taking money out in down markets and in the case of you know a better market um we're leaving more in

32:12

in order to uh take part in the recovery. Um, so in both cases we actually are seeing an advantage to

32:18

claiming early. So now you might say, well, you know, is that always true and that's a great question. Um, there are

32:26

situations, let me see if I can find one here. Uh, yeah, I think if I do this,

32:31

where in the plan, here we go. So this is the worst one I could find. Late in the plan, they flip-flop. And so here

32:39

we're 20 years in, right? So we're into our 80s. And finally, claiming late is

32:45

is uh is performing better. Why? Well, it's because at this point, I'm not

32:50

having to withdraw as much from the portfolio um as I would have had to uh

32:56

if I had claimed early and didn't have as high of social security. Um those of you who know Income Lab are probably

33:02

wondering what this would look like with with guard rails in place. And fair enough um because you know the fact is

33:09

um most of the time people are not going to uh just kind of let things move so

33:15

in such a big way. So I'll just give you a quick example of uh of a a plan with

33:21

guardrails. Um and here we can sort of see okay with guard rails even in this situation

33:28

actually the uh the blue line uh stays in better shape. Um, one thing I'm also

33:33

ignoring in this example because I've used just one person is the mortality

33:39

risk associated with one spouse dying. Um, so we don't have time for it today,

33:45

but the that effect is actually pretty big. Um, because if one spouse dies,

33:51

you know, let's say they both had, you know, $3,000 in social security, you're going to be left with with not 6,000 but

33:58

3,000 if one dies. and you have to make up for that at least to some extent from

34:03

your portfolio. So when you add mortality risk in the sense that if someone dies there's not as much

34:09

resources to to fund the surviving spouse's lifestyle to it this actually becomes a much bigger effect.

34:16

So again using um kind of stress testing with real sequences of returns um we can

34:24

see that claiming early has this sort of buffer

34:30

effect on on the portfolio doesn't always mean things work out better. Um,

34:38

but it usually means that at least early in the plan, again, maybe through the

34:44

80s, um, somebody has more resources to to play with, um, if they if they claim

34:50

early.

34:56

All right, so this just summarizes what we just looked at. So, um, if you claim early in a bad sequence of returns, it's

35:03

a positive because lower withdrawals into a bad market allows the portfolio

35:09

to recover faster. Claiming early and having a good sequence of returns is also a positive

35:14

because lower withdrawals into a good market allows more participation in the good markets and increases portfolio

35:20

size. By the way, I'm using about a 60/40 portfolio here. Um, the effects would be different depending on what the

35:27

portfolio is. Um

35:32

and um one other thing is I I removed the guardrails there, but if you do have

35:39

a higher portfolio, that also means you can potentially support higher withdrawals in the future. So when we

35:45

test this again with guardrails, we often see that even claiming social

35:51

security early, even though that means you might have to spend a bit less toward the beginning of, you know, at the very beginning of of retirement,

35:58

often because of those higher portfolio withdrawal, because of those higher portfolio balances rather, you'll hit

36:03

the upper guard rail and get pay raises um and wipe out the difference between uh claiming early and claiming late um

36:10

that we often see in uh in the initial retirement. and paycheck or spending capacity that people have.

36:19

What about claiming late? Well, in both these situations, we see a negative. Um,

36:24

higher withdrawals into a bad market, not good. And actually, higher withdrawals into a good market also

36:29

means less participation in good markets. However, the caveat is you can find situations where if you live long

36:36

enough, they'll they'll flip over. So you'll have um claiming late can can be

36:42

advantageous later in life. Uh but you do have to live longer. So that leads us

36:47

back to that the mortality and longevity risk slide where it's sort of what's somebody worried about and what are they

36:53

focused on. If they're focusing on their experience and kind of the you know the earlier years, the go-go years or even

37:00

the slowgo years, claiming early tends to be advantageous when you look at sequence of return risk. Um and in some

37:07

but not all situations uh you can have an advantage at least if you withdraw if you don't have any guardrails and don't

37:12

make adjustments um for uh claiming late.

37:18

There is another way to look at this. Um we're going to spend more time on this in future master classes. Um but you can

37:27

So what I just used was the stress test. And I actually think this is a really great way to kind of paint a picture for

37:32

people. um because that's that's real data, you know, it's not theoretical um

37:38

in the sense that we know sequences of returns like that can happen. So, let's see what happens. Um but there is this

37:44

other more theoretical concept that I think everybody's pretty comfortable with which is called a discount rate or

37:50

we call it an opportunity cost. Um which is just that concept of how much more is

37:55

a dollar today worth to you than a dollar tomorrow. Um, and you actually can apply a discount rate to social

38:03

security and look at those break even ages again. And here I've applied a 4%

38:08

discount rate, which would be equivalent to saying um, in real terms, so if if

38:15

you added inflation, this might be 6 or 7%. But in real terms, you know, how much is that substitution worth to me?

38:22

Is it is a dollar that I leave in my account going to earn 4%? um you know net of inflation if so this

38:30

would be a discount rate that you would apply and you can see that the break even rate break even point break even

38:36

age pushes out quite a bit um so for age 70 for example uh it's almost you know

38:42

six and a half years um and that can really change your uh your decision-m as

38:48

well so if we go back to the uh the heat map we were looking at

38:54

let's say I just want to add an opportunity cost. And maybe I'm I'm going to add these slowly. So I'll add

39:00

2% at first. I'm going to keep my life expectancy the

39:05

same. Um, and so you can see the the the big change here. As I get it higher and

39:13

higher, it's going to move down and to the left. And by the way, my uh close

39:18

enough range is also getting much bigger. um because the differences for claiming late are just they're they're

39:26

getting smaller because a dollar in the future is worth so much less. In fact, now the difference between my optimal

39:31

claiming which is at age 67 and 62 and just taking at 62 and 62. It's it's

39:38

5952. It's it's $6,000 over a lifetime, right? This is the kind of thing that would most people understanding the

39:44

uncertainty of how long they might live, they're just going to shrug at that difference. It's like it's it's kind of a who cares type thing. Um, so adding

39:52

opportunity cost and if I add it to 4% I'm assuming I'll go all the way.

39:57

Yeah, now I'm all the way down on the left. So you can kind of see how by discounting those future cash flows and

40:03

saying, "Yeah, those aren't as worth as much to me either because I might not be alive or because I'm going to have to use my portfolio." Um, that's all um

40:13

that's all that's all very real for people. And you could see how the optimal claiming date and sort of the close enough ranges um change a lot. So

40:21

one way to look at this is to use the stress test. And I think that the great

40:26

thing about that is it lets you imagine oh okay what would this have felt like as I watched my portfolio over time and

40:32

would I probably would have preferred my portfolio to be a little in better shape. Another way is simply to look at

40:38

lifetime benefits but include an opportunity cost. And there's a lot of uh kind of

40:44

disagreement out there on what opportunity cost to use, if any. Um

40:50

uh and happy to take questions on that if people have them. Okay. The last risk we're going to hit

40:57

today is funding risk. And I think this is probably the one that's most most on people's minds. Um and it has to do with

41:04

um potential changes in the Social Security program. You might call this policy risk. Um,

41:13

so if you learn about social security and how it works, it can be tempting to

41:19

think that that's always how it's worked, right? If you learn about, oh, you can claim between 62 and 70 and, you

41:24

know, full retirement age is 67 and, you know, if I wait between 67 and 70, I get

41:29

8% more per year as as I wait and there's a reduction in those benefits before 67 and so on. Um that is the way

41:36

things work today but actually social security has changed a lot in the past. So the first benefit was paid in 1940.

41:43

Um there were no early retirement options then. So full retirement age was 60 65. They added early retirement for

41:50

women in 56. They added it for men in ' 61. Um colas were sort of irregular and

41:56

ad hoc until 72. So that's cost of living adjustments. The benefit formula

42:01

in general was massively changed in 1977. Um before that it was done in really weird ways that included

42:08

essentially giving people double indexing for um for inflation.

42:13

Uh in the 80s early 80s there was a huge worry about the viability of the

42:18

program. So there were massive changes in 1983 that gave us essentially what we

42:24

have today. Not quite but very close. Um it increased payroll taxes. It introduced taxability of benefits. It

42:31

increased full retirement age. It increased delay credits to encourage people to wait. Um the uh changes to

42:39

taxability were introduced again in 1994. And then some changes also came in the year 2000. So um one of the

42:48

takeaways here is just that no things have changed a lot over time. Uh people often wonder okay when they

42:54

change how do they change how quickly are changes implemented. Here are a few

42:59

examples of um things that were applied either quickly or with a delay. Um so

43:06

often you see here that either things apply immediately um

43:11

uh for example early retirement it was not extended to people who you know were

43:16

not uh of a certain age. Um, so that was a new good thing, but it was not uh

43:22

allowed for people below a certain or over a certain age. Um, the new benefit formula in 77 applied after a 2-year

43:29

delay. And the 83 changes had the biggest grandfathering effect. There was a 20-year delay in that new full

43:37

retirement age. So, moving it from 65 to 67. Um, it only applied to people who were

43:43

45 or younger. um when that change went into effect. Um and taxability generally

43:51

that's applied immediately. So one way to look at this is tax changes tend to happen the next tax year. Uh major

43:58

changes to ages or structure have generally had some kind of grandfathering or delay.

44:09

What about you know the the the health of the program? Well, it's gone between

44:15

having surpluses and having deficits. So, we've run deficits before. We ran them before 1983. In fact, there were

44:22

really major worries about the viability of the program in the early 80s. Um, and

44:28

there was the Greenspan Commission. Uh, that's actually how Greenspan kind of

44:33

came to the public eye and later became Fed Governor um for Fed chairman. Um so

44:39

I mean the the projections were that the program would go insolvent within less than two years at that point. And so

44:45

that's where those um big changes came into effect. Um and then we had uh payroll taxes exceeding benefits paid

44:52

after that um before we went back into deficit in uh 2010.

44:59

Um, so warnings of insolveny, you know, they've they've been there in the past and most currently the most recent one

45:07

says if no changes are made, they're projecting that by 2033

45:13

only 77% of benefits will be payable. So it' be there'd be a across the board 23%

45:21

cut in benefits currently being paid. That is not to say that's what will happen. No one knows what will happen.

45:26

Um but this fact that you know that's what the trustees are currently

45:32

projecting is definitely causing clients um a lot of worry. Um and we can look

45:38

back and see how those projections have changed over time. So the blue line is

45:43

when did the trustees expect um things to go bad? And you can see

45:48

it's kind of been in the 20 in the 2030s or 2040s. Um, and the red lines are

45:54

projected uh cuts to benefits or or you know inability to to fund everything.

46:00

This gets a little complex because there is more to social security than just what's called old age um benefits or

46:06

retirement benefits. Um so you'll see slightly different numbers depending on whether you're looking at disability and

46:12

supplemental and so on. But um in general what we see here is um for a

46:18

long time people have thought okay we'll run into trouble in the 2030s or 2040s.

46:23

Um, currently benefits are being funded by payroll taxes, by tax on benefits,

46:31

by interest income from US government loan, uh, government bonds, which are

46:36

held in the quote unquote trust fund, and by redemption of reserves, meaning we're actually go working through those

46:43

government bonds. Um, and so you can see, you know, why because it's not

46:48

entirely funded by payroll taxes, that's where the the problem comes from.

46:53

All right. So, let's go back to our um heat map and

47:01

I will go ahead and turn off uh opportunity cost for now um and ask okay

47:08

what if we assume that um that reductions do happen in 2033.

47:17

Okay, as expected, we go down and to the left, right? because now we're saying um

47:24

that future benefits will not be as high as we expected right after 2033. And so

47:30

um the total lifetime benefits would would go down if I'm waiting uh a lot longer. Um you don't have to assume it's

47:37

2033. You don't have to assume a 21% reduction. You might say, "Oh no, I expect huge changes." You might say,

47:44

"No, I expect small changes." Um, but this is the kind of thing that, you know, acknowledging people's worries

47:51

about this is is very important. Um, because, you know, they're seeing

47:57

articles about it. I know the Wall Street Journal had some big articles about this. Um, and it it's definitely

48:03

worth, you know, exploring this. You can, you know, push it out a few years. Um

48:08

it's the kind of thing that is not usually considered um in sort of back of

48:15

the envelope um approaches to these sorts of what's the best claiming decision. Um but um very much can be

48:23

done. Again I don't think anybody actually knows what changes if at all

48:28

may happen when they'll happen uh and so on. Um, but this is kind of one of those

48:34

until recently more underappreciated approaches. And you can see by layering in things like more average life

48:40

expectancy, uh, stress testing the benefits themselves, and including some opportunity costs, just it just tends to

48:47

move things down into the left.

48:55

All right, so just to summarize, um, should I claim early or late?

49:01

um what we've gone over today, these kind of less appreciated risks, they

49:07

tend to move people more toward claiming early or at least make it legitimate and not crazy to think about claiming early.

49:13

I do want to acknowledge though that there are considerations that can lead people to want to claim later. Um one of

49:19

them we'll talk about next week, which is taxes. Um so um if you have

49:25

particularly high um income early, you know, before age 70, that can

49:32

push social security into higher taxability. That may be a reason um to claim later. Uh or if you have higher

49:38

earnings, that may push you toward claiming later. Um, but what we've gone

49:43

over today, um, mortality risk, funding risk, or policy risk, and opportunity

49:49

cost or sequence of returns, they do all make people think more about, uh, claiming earlier. Um,

49:56

basically, mortality risk is that thought of, okay, yeah, maybe my retirement plan has me living into my

50:02

90s, and I'm comfortable with that. I I I like the idea of claiming into my or of planning to live into my 90s because

50:09

if I do, I want to know I have a plan for it. Um, however, when thinking about

50:15

total lifetime benefits for social security, often people start to think

50:21

more about that mismatch that we talked about where um what if I decide to claim

50:27

late, but then it turns out, you know, I drew the short straw and I don't even live to 70. And that is a very risky

50:35

feeling picture. They can imagine what that's like and it and it feels very risky, right? it's hazard plus outrage.

50:42

Um whereas if they think about the other mismatch, well, what if I claim, you know, early but live a long time, I I'm

50:48

not even sure people perceive that as all that risky or all that problematic. Um because it's just not an outrageous

50:54

situation. You're living a long time. Hey, big deal. Um we'll talk a lot more

51:00

especially in our master class session on psychology about the effect of having

51:05

social security between 62 and 70 and the effect that has on people's um

51:11

feeling of their ability to spend and and so on. Um because that's a big effect as well. Um, if people are

51:18

worried about funding risk that pushes them to want to claim earlier, and if people recognize that there is an

51:23

opportunity cost, uh, if they look at sequence of returns, if they wonder, hey, I social security is not the only

51:30

thing I have, what about my portfolio? What would it feel like to live through the global financial crisis or the Great

51:37

Depression? Um, having claimed social security early or late. um that will often uh push people to claim earlier

51:45

because they want a smoother ride in their um in in their you know kind of go

51:51

go and slowgo years in that first kind of 20 years of retirement.

51:56

Um before we get to questions, uh as I said, masterclass session two is coming

52:02

next week. Uh Michael Kakakota um from

52:07

um Columbia University and NYU and uh he has an RAIA called Wolfbridge um will be

52:14

presenting on taxation of social security. As I said, what we went over today is not everything. There's lots and lots more um that is involved with

52:23

understanding social security, planning for it, including in deciding uh when to claim. So, as I said, it's not just a

52:29

straightforward everyone should claim early or everyone should claim late. Um but Mike will be uh we'll be talking

52:35

about all that in the in the context of um of taxation.

52:40

So, all right, let's get to some questions. All right.

52:52

Okay. So, um I'll just go ahead and take some of the ones that have the uh the highest uh up votes. So, as I said,

52:59

remember to upvote. That's just click on the little thumbs up um button and I'll I'll try to hit those first because

53:05

we've got a ton of questions and there's no chance I'll get to all of them today. Um all right, first question. Um

53:13

wife is six years older than husband. Um, can she claim social security now and then switch to a spousal benefit um

53:19

when he claims at age 67? You know, I probably should have included um let me

53:24

make sure

53:29

in this uh graph of all of the uh the things that have changed over time. I

53:34

forgot to include that um more recently there were changes in how you could

53:40

claim um spousal benefits. So, in the past, you could do something called uh

53:45

file and suspend or there was another one, I think it was called restricted claiming. Those those went away. And at

53:52

this point, anyone who had the ability to do file and suspend, they're already 70 or older. So, all of that, I know

54:00

probably many people on this webinar um did some of that planning in the past. It's just not a thing anymore. So

54:06

essentially what that means is you can only get a spousal benefit if your spouse is currently receiving benefits.

54:12

So that you can't um take a spousal benefit if your spouse is not yet claimed. Um and you can't only get, you

54:20

know, the little piece that is your spousal benefit and not have your own. Um and so yes, the answer to your

54:26

question is yes, you can certainly claim now and then your your spousal benefit will kick in. um you know if or she can

54:32

claim now and then when her husband starts she can get a spousal benefit but there's no way to have the the timing of

54:38

that have a mismatch anymore. So that's actually a great example of a change. I I just forgot to include it on my

54:44

timeline here. So um all right um

54:53

let's see not entirely sure what DCF is but uh have you done a net present value

54:59

calculation? I I suspect this this was put in before I I mentioned net present value. So that when I was talking about

55:04

opportunity cost um that's exactly what I meant, net present value of the of the

55:09

benefits. Um so this my my thinking on social security has changed quite a bit

55:15

um in the last couple years as I've looked really deeply into it. Um I used to kind of think it was sort of a not

55:21

that interesting of a place in financial planning. I now think it's really interesting. There's lots of considerations and one is that

55:28

opportunity cost and discount factor and as soon as you include that it is not at all obvious that everyone should wait

55:34

until age 70 which is something that you'll occasionally see out there this idea that everyone should wait till 70.

55:41

Um okay there's so this question is about

55:47

if one spouse has a much higher payment than the other it can make sense for the higher earner to delay until 70.

55:53

Excellent point. And I think you're seeing that um in this um

56:00

so let me just uh I'm going to reset things and then go back to So in this case, John has a primary insurance

56:07

amount of um 3,000 and Mary has it of 1,000. And I did that for precisely that

56:13

reason to to set up a situation where um one person has a lower benefit,

56:21

therefore they'll have a spousal benefit. And what we often see is that pushes

56:27

for the person with the lower benefit to start their benefit earlier and then

56:32

have the person with the higher benefit wait a bit. And so that's what's happening here. Um, so you know, Mary is

56:38

claiming at 66, John is claiming at 68 or close enough is 68 and 62. Um, if I

56:45

go to the details on that, what I'll see is

56:51

that Mary's benefit starts, you know, back here in 2027. And then both John's benefit and Mary's

57:00

spousal benefit are going to start in 62. Uh, now in this case, we actually

57:05

had John um you know dying in uh 2046 and so then Mary's survivor benefit

57:12

starts um and so precisely because of what you just said um the optimal or

57:20

even the close enough often in that situation the person with the lower

57:25

benefit will actually be it it makes a lot of sense for them to claim earlier in this case all the way at 62 is really

57:31

not a bad idea

57:36

All right. So, Paul has a question about what about

57:42

taking benefits and invest that amount in something liquid in um yeah, so that is actually another way to think about

57:48

what I was showing with the um with the stress tests, right? So, um now I think

57:57

you might have in mind, you know, not retiring but still taking it. Um, and so that would be an interesting thing to

58:02

do. You could do that in the software. Um, but it you'd see the same effect here, right? Of like, okay, what what

58:08

would the um essentially opportunity cost of not receiving that um because it's a dollar that I could have invested

58:15

um what what would be the effect of that? Um, so the nice thing about a stress test is it kind of removes us

58:20

from this theoretical world where we argue about what the right opportunity cost is and just says, well, how does it

58:28

change, you know, the conditions on the ground? Um, and that's what this is.

58:37

All right, I think we might have qu time for um

58:42

or a few more. Will there be a marketing quiz coming

58:48

down the road? Great idea, Brian. I like it. Um, there definitely are a lot more

58:53

social security um things coming from Income Lab. Um, it's just such a it's

58:58

such an important thing for for clients. Um, a lot of uh a lot of people really

59:03

want to know about this. Um, somebody's asking, is there a

59:09

8% year-over-year return? Um, yes, it looks like Eric, you already hit it. One

59:14

thing to note, by the way, is that it's 8 it's 8% between full retirement age and 70, but it's 8% simple. Um, and so

59:22

it's always based on primary insurance amount. It's not compounded. So sometimes you get this, I think this is

59:28

where one of some of the confusion comes in when people think about should I take early or late? They hear that 8% number

59:34

and they start to think about it as, well, hang on, I can't guarantee myself 8% in my portfolio,

59:42

but it it's not the same thing. An increase in a future income stream by 8%

59:48

simple is not the same thing as a 8% return on investment. It's just not um

59:54

in not in a mathematical sense and actually not in a psychological sense as well. And maybe I'll end on this. Um

1:00:01

there is also a general preference that people have for assets over income

1:00:06

streams. Um and the reason for that is that assets um can be transferred. So if

1:00:14

you die they're still there whereas an income stream like social security if you die it's not there. You know

1:00:19

obviously there is survivor benefits but there's not full you know it doesn't just keep going. Um and there's

1:00:26

flexibility. So, if somebody says, you know, take take 2017 here, right? If I

1:00:31

claimed early, then I have um you know, roughly, you know, $300,000 more. Okay,

1:00:38

now I would have had this ability to do, say your friends come to you and say, "Hey, doing a you know, blowout trip to

1:00:45

the Caribbean or whatever. It's a once in a-lifetime thing we're doing." you're going to feel more capable of making

1:00:51

those kind of um big spending decisions um if you have an asset than if you have

1:00:57

an income stream. Um and so having higher assets gives people this feeling of flexibility. Um and I think that's

1:01:04

that's one of these underappreciated preferences people have. um because they're they're just always even if they

1:01:10

can't articulate it, they are aware that there are those differences in in uh in

1:01:17

the nature of their of their resources. Um so with that, um we're going to close

1:01:24

it up. Please come back next week. You will get an email. I think you may have already, but you'll get an email about next week's master class. We're going to

1:01:30

have amazing sessions, four more amazing sessions over the the rest of the summer. And um hope that uh you all um

1:01:38

enjoyed this. I definitely enjoyed uh preparing it. It was it's a great um topic. And uh looks like we have some

1:01:44

questions on Income Lab. If you're interested in Incomelab, the software, go to incomelab.io or just Google us and

1:01:50

um check it out, you know, or talk to one of our our team members. So thanks everybody and have a great day.

 

0:08

Okay, welcome everyone to the second of five master class sessions on social

0:15

security um from Income Lab. Giving everybody some time to get in the room

0:21

before we kick off the presentation.

0:26

This room must have big doors cuz people are piling in. Um,

0:33

while we're waiting, if you want to drop in the chat where you're uh calling in from, it's always fun to see.

0:39

I'm uh I'm in Golden, Colorado this morning or this afternoon, I guess. Now,

0:49

yeah, all over the place. Awesome.

0:55

Nobody out of the country yet that I see.

1:01

All right, we'll just uh we'll get some of the housekeeping taken care of as the rest of uh the people. Oh, Koala Lumpur.

1:09

Okay, I think we might have a might have a winner for the for the farthest away.

1:15

Um so, Little House can be today. Uh the second of our master classes is on

1:20

taxation of social security. huge topic, super uh interesting and people just um

1:27

you know have have been asking for this kind of thing. So we're going to we're going to dive in with Michael Kakakota

1:32

who is uh professor of financial planning at Columbia and NYU and also runs Wolfbridge Wealth. Um and very very

1:42

thankful for for Mike um helping us out today. I'll be here to kind of monitor

1:47

the Q&A and maybe, you know, interject here or there if I if I have something interesting to say or maybe even if I

1:53

don't. Um, for those of you who missed last week or even if you you caught it,

1:59

uh, we we did have a session on the underappreciated risks of social security claiming, there is a uh a

2:06

recording of that available if you want to check it out. Um, and also I believe we distribute the uh the slides from it.

2:14

Um today, as I said, we'll be talking about social security and we have three more sessions. Um one next week, one the

2:20

following week and then we skip a week and have we wrap up on the 26th. So next week we'll be talking about um social

2:27

security planning with spousal benefits, survivor benefits, and divorce. Probably one of the most complicated areas of

2:34

social security. So be ready to roll up your sleeves. Um Mike is going to help us out with that one as well, as well as

2:40

uh Dylan Cobb. And then on the 12th, we'll we'll be we'll have a a panel

2:46

discussion on the psychology of social security claiming. That one's going to be great. I'm really looking forward to

2:51

that. And then we'll wrap up with talking to clients and prospects about social security. So, you got a summary of social security here ahead of you. Um

3:00

let's see some of the uh some of the housekeeping items. So, um this session

3:06

does qualify for a CFPCE. Um, so you got to make sure that you are

3:11

on here for 50 minutes or more. No, your AI noteaker does not count. Um, so it's

3:18

actually got to be you. Um, there will be a post-weinar survey that where we can you'll have an opportunity to give

3:25

us your CFP um ID. And um, if you have a question, please drop it into the Q&A,

3:32

which is not the same as the chat. It's just really hard. Chat's great. you can chat with each other, but I'm only going

3:38

to be monitoring the Q&A or I only I only promise to monitor the Q&A. I'll try to jump over to chat occasionally,

3:43

but it's really hard to follow and answer all those questions. And if you have if you see a question that you really like and want to have answered,

3:50

please upvote it. So, I think that's just clicking on the little thumbs up and that way we'll have some idea of uh

3:57

which questions we want to get to first because uh usually we have about 10 times as many questions as we can as we

4:04

can handle. So, I think that wraps up my housekeeping and I'll turn it over to you, Mike. Thanks very much.

4:10

Thanks, Justin. I appreciate it. Uh, so, uh, welcome to the second week. Uh,

4:16

there's going to be a few things about this, uh, particular, uh, session that,

4:23

um, are kind of assumed if you've watched the the first session. Um, but if you need any clarification, feel free

4:29

to, you know, put it in the Q&A or actually put it in the Q&A. It probably be a little bit easier. Sounds like

4:34

that's going to be a little bit easier. Um, this is our general agenda today. I'm going to uh we we we went through

4:41

the introduction already. Uh, and then we'll we'll go through understanding

4:47

uh like the basics of social security taxation. Uh, with that we'll talk about

4:52

the uh recent uh changes. Maybe you got an email from social security for about

4:57

the OBBA. Uh so we'll talk about uh some of the changes there and what those

5:02

actually mean as opposed to um you know what maybe some of your clients may have heard about. Uh I'm going to discuss

5:10

some state differences in social security taxation. So most states don't tax social security but there are some

5:16

uh differences and then we'll go through some planning scenarios and then answer any uh questions that you have. Um

5:23

hopefully we'll have time to get through all of these things. Uh these slides will be available to you. Uh there's a

5:29

couple links in there that could be useful, especially for those of you who are in uh Utah.

5:35

All right. [Music] Okay. So, the first thing that uh we

5:43

kind of need to talk about is that um Social Security is not taxed like most

5:48

things are taxed. It's taxed based on what's called provisional income, which we'll get to in a second. But this table

5:55

essentially represents uh the different thresholds. So, you know, as you can tell from this this particular table,

6:03

uh if you if your social security is less than $25,000 or if your pro excuse me, if your provisional income is less

6:10

than uh $25,000, you're actually not going to get taxed on your social security at all. So, none

6:16

of your social security will be taxable. Um that moves up as you move up in

6:21

income ranges. So from 25,000 to 34,000 about 50% of your benefits uh can be

6:27

taxed. So how would that work? So if you make $30,000 your provisional income is $30,000

6:34

um and your and that's entirely social security then well $15,000 of your

6:40

social security benefits would be taxed. And then over 34,000 it's going to be uh

6:45

85% of your benefits that can be taxed. And you can see this kind of plays out in the joint uh area. that there is no

6:52

head of household um filing status for this. Uh it is assumed that if you're um

6:59

that if you're of retirement age that you may not be a head of household um having we're talking about the divorce

7:06

um session next week. I can tell you there are a number of people in their 60s uh even collecting social security

7:12

that can actually claim head of household status. I think this is a little bit of a miss from uh uh the uh federal government.

7:23

Okay. So what is provisional income? So it's called it's called combined income or provisional income depending on who

7:30

you talk to. Essentially it's a formula of the income from all sources of

7:35

taxable type income. Now so that includes things like your uh 401ks, IAS,

7:42

pensions, etc. any non-t taxable interest um but not from Roth IAS. So

7:50

key there is it's not going to be from from Roth IAS, but also key is wages. So

7:56

if you think about whether you're working part-time or not, um maybe you have other sources of income uh that

8:03

could be considered wages, that is typically going to be included

8:08

in combined income. [Music] All right. So, here's here's just like a

8:14

very quick example of uh of of how you would calculate um combined income. So,

8:22

we've got uh Barb, she's got uh $32,000 in social security income, $1,000 in

8:27

dividend income, and then $40,000 in Roth IRA distribution. So, what would

8:34

her combined income be in this case? Right? So, her income appears to be

8:40

$73,000, but for purposes of social security taxation,

8:47

it's not right. So, if we go back here, we can kind of see that she's got 30

8:52

basically $33,000 is uh is what her combined income is.

8:59

And then she's going to get taxed um on that. So, it's going to be her taxable income is going to be $17,000, but she's

9:06

only going to pay she's going to pay 0% on her social security income.

9:16

[Music] All right, anybody get this email?

9:21

So, here we've got I got this email uh July 3rd. So, we can see here that um uh

9:30

Social Security uh this is from the Social Security Administration applauds the passage of legislation providing

9:36

historic tax relief for seniors. I I circled this part right here where it says the bill ensures that nearly 90% of

9:43

Social Security beneficiaries um will no longer pay federal income tax

9:49

on their benefits. Um then you can see further down I underlined where it says the new law

9:55

includes a provision that eliminates federal income taxes on social security benefits for most beneficiaries

10:00

providing relief to individuals. It then goes on to say in additionally it

10:06

provides an enhanced deduction for taxpayers aged 65 and older ensuring that retirees can keep more of what they

10:13

have earned. Okay, so that's a lot to kind of unpack. So, what does it actually what does the

10:19

OBBA actually do for seniors? Um, and I included this in here because it's

10:24

pretty important. So, what it says is this is section 70103 of the uh OBBA.

10:31

Uh, you can uh you can actually read this all online. Uh, you can typically

10:37

pull it up. I try to read all of these new bills. Um, I'm only about halfway through. I start with tax just because

10:44

uh it impacts us as financial planners. Uh but there's a lot of really uh interesting information that you may not

10:50

be aware that's not normally there's too much in it for it to go out in in the news all the time. So basically it says

10:57

in the case of a taxable year beginning before uh January 2029 there is a deduction in the amount equal to 6,000

11:05

for each qualified individual. Um a qualified individual is a taxpayer who's

11:10

attained age 65 before the close of the taxable year. uh in the case of a joint

11:16

return the taxpayer spouse if such spouse has attain 65 is also included. Um this actually doesn't take effect

11:23

until uh uh filing filing in 2029 so 2028

11:29

um is is what it says here. Um there are some different interpretations that say

11:35

well now it's because it's 65 we're going to retroactively do it to this

11:41

year. Um, and so that both interpretations are are currently um,

11:47

you know, currently being bandied about, but this is this is the actual text of the bill and it actually does say 2029.

11:54

Um, you know, I think, you know, you're going to have to you're going to have to spend some time consulting with uh CPAs

12:01

to to to figure out whether you're going to get that additional deduction or not.

12:07

Um, okay. So, what does the deduction do in practice? So, here's a just an example of Andre who's uh he's retire

12:15

he's fig trying to figure out if he's going to retire at 62 just this year. Um

12:21

he's heard that social security is uh is no longer taxable. He got that email too. That that is clearly a typo on my

12:28

part. So, he was originally going to retire at 65. Um, looking at the differences, he's going to get 34,000

12:34

per year if he retires at 62 and 42,830 if he retires at 65. So, what's the net

12:43

income uh for each scenario given OBVA? So, if we assume that he's only going to

12:49

take the standard deduction, the table looks a the comparison table looks a little bit like this, right? So, it's 62

12:56

skin 34,000. the standard deduction for uh 2025 was was raised retroactively

13:02

from 15 to 15750 um does not get an additional deduction.

13:09

This is now 65. Uh and then so we can calculate the tax

13:15

based on these two amounts and you can see that the the net income is actually

13:20

fairly close to the gross income difference. So, it's going to be about uh $5,000.

13:27

All right. So, that's that's essentially what's happening here. So, there's still tax

13:33

um if you make less than, you know, if your social security is not taxable and your uh your standard deduction gets you

13:40

low enough to where you're not going to pay any social security tax, um then you

13:46

won't pay so then you won't pay tax. This does not mean that social security is not taxable. Uh it is only that the

13:55

standard deduction uh there is an additional $6,000 deduction for people over 65. So that affects people who are

14:01

65 and older. There are a lot of people actually um we were looking at this

14:06

earlier today. It's going to be about um see 17 26

14:14

about 41% of people look looks like they claim before 65. So,

14:20

uh, they're probably they're not going to get this benefit either. Um, at least

14:25

until they turn 65.

14:31

Uh, okay. I see 1,600. Uh, the 1,600 um

14:39

dollar deduction. I um so if you look at the the bill uh it doesn't say it

14:48

eliminates it but it also doesn't uh consider it if you look at the OBDA.

14:53

Um but if I'm wrong I'm wrong and I'll update uh and and send that out the

14:58

slides. Okay. Um this is just something like

15:03

just for uh your benefit. A lot of people um don't withhold uh social

15:10

security tax. So I had a have a client recently who's been taking care of his mother. Uh he didn't know where the

15:16

social security money was going essentially. It's been sitting in this account. It's been grow. It's been

15:21

sitting in a bank account. There's about uh $85,000 in this account from social security that's just been kind of run

15:29

into that account. There was no withholding on that social security. And so, not only is the client going to have

15:36

to pay um uh you know, is going to have to pay those

15:42

taxes because they owe back taxes. They're essentially going to have to there's probably going to be some some

15:48

penalties there. So, this volunteer holding request form is something useful that um you might want to talk to your

15:56

clients about. Um but as you can see, there's only four

16:01

boxes you can check. So, if you've got a very wealthy client who is pulling a lot of money out of a 401k or an IRA or has

16:09

several pensions, uh 22% may not be enough.

16:14

But this is the uh form W4B.

16:21

Okay. Um so those of you who uh understand

16:28

foreign income exclusion so foreign income can typically be excluded from your AGI. It is actually included in the

16:35

provisional income calculation. Uh so just give you a quick example here

16:41

now um that a uh a US expat who's who's

16:46

living and working in Singapore drawings US social security Singapore wages are 120,000 Singh which is about $93,000

16:54

uh USD. So the expat has no other income sources. So that $93,000 is actually

17:00

excluded um from from US taxes or can be excluded

17:05

from US taxes there. You can also do a you can also exclude tax from the taxes

17:12

but in this case it's better to actually exclude it from income. U but those expat wages are still includable for uh

17:20

social security. So just because you're not earning US income doesn't mean that it's not included in uh provisional

17:27

income. So something that you have to think about.

17:35

Okay. So that's that's federal taxation. Um it can get a little interesting with

17:42

state taxation. Uh many states have phased out any taxation of social

17:47

security, but we do have a few. Um, and so if you're in any of these states, um,

17:55

then you have to you might want to consider, um, you know, paying attention

18:01

to whether clients want to move or not. Uh, and we'll have an example a little bit later on on moving.

18:09

So in Colorado, uh, so this is this is relevant to to

18:14

Justin here. So if uh if you're under 65, so this is a a 65 age 65 threshold.

18:22

If you're under 65, up to 20,000 of your federally taxable social security

18:27

benefits. So again, like what is actually taxable uh are not going to be taxed by the state of Colorado. Um and

18:35

then for 2025 if you're you know 55 64 so survivors um who are receiving some

18:42

of this um can deduct all of that social security income if their AGI is $75,000

18:49

or less uh $95,000 or less if they're are a couple filing jointly. Um, and

18:55

then if it's in excess of those thresholds, so if it's above 75 individual, 95 joint, then the social

19:02

security tax is going to be or the social security income is is uh only

19:07

20,000 is going to be excluded. And then if you're 65 or older, then there's no problem. So, you know, in com in

19:14

conjunction with OBBA, 65 seems to be much more of a magic age than it used to

19:20

be in the past, despite most FRA either being 66 or or 67 currently.

19:29

Okay. In Connecticut, about 25% of benefits can be taxed. Uh so one of the

19:36

things to kind of think about here is uh is the interaction between uh the state

19:42

and the federal um and so if your AGI is above you know 75 here um again AGI is

19:51

not the same thing as provisional income. So you know just because so you may so sometimes people will use

19:56

planning strategies well like well we're not going to withdraw any money so we can keep your AGI down. Um and in this

20:03

case it might make sense. Same thing here. You know Mary filing jointly.

20:10

Uh Minnesota is is is fairly unique. So this is 2024. I didn't actually have

20:15

updated numbers for for 2025. I assume um those of you in Minnesota probably

20:21

do. Um so if the AGI is 82,90 or below for 2024

20:30

uh it's exempt. So your social security is exempt. But if you're if you're you you have phases from uh 82191 to 118191

20:40

and anything above uh 1181 191 uh it's all going to be taxable. So this

20:47

is again that interplay between uh you know AGI and taxable income. So whereas

20:54

the federal government is looking at provisional income, most of the states are not. They're looking at AGI.

21:00

[Music] And Mike, let me just interrupt here. I'm noticing I'm I'm learning some some

21:05

things here and I'm noticing that it's crucial here that taxable income, federally taxable social security income

21:12

is not changing with this OBBBA thing, right? because it's really just an extra deduction. So, it's not like

21:19

you're knocking $6,000 off taxable income, taxable uh taxable social security for these state purposes.

21:26

No, it's a good question. Um, no. Yeah, you're not knocking it. It's not changing that.

21:32

And so, I mean, it's not that many states, so there is that's not a I mean,

21:38

it's not a huge thing. and and state tax is not like a a massive amount, but sometimes you know people care about

21:43

that and and it can add up when you start talking about like things like uh

21:49

you know pensions and sometimes sometimes pensions are exempt from income but if they're included in social security um and so there's a there's a

21:56

lot of really complex planning opportunities um you know when it comes to I think

22:03

OBBA what it did is it created basically some more opportunities and in fact most legislation that's kind of what it does

22:09

it just creates more opportunities for planning to figure things out. But yeah, and I I've I've noticed too there's been

22:17

a big trend towards states getting rid of taxability or social security. So I

22:23

think I wrote an article I don't know four or five years ago on the kit's blog where that list was I mean it might have

22:29

been 12 or 15 like it was much longer. So there's been a a real

22:34

somebody's lobbying the states successfully to to get rid of. So I don't know if it's the ARP or something,

22:40

but there's definitely been a a shift and I think you mentioned West Virginia's, you know, phasing out.

22:46

There's some of that stuff happening. So yeah, I mean I talk Yeah, we Yeah, we'll get second. But it's Yeah, it's uh it's

22:53

interesting um what what different states do and then how much revenue comes from social security and and the

23:00

reality is that like if you if you're taxing it, there's taxes are all about incentives. So this is I mean we all

23:07

know this, right? We're all planners. So taxes are about incentives. And so if you want to if you want somebody to do

23:13

something less, you tax them more. So, if you want people to live in your state, uh, you tax them less.

23:18

So, you're, you know, this is a, you know, if you want retirees, you're you're probably gonna eliminate

23:24

social security tax. Yep. Um, I'll actually just run through these.

23:30

So, New Mexico, um, you know, they have these these thresholds are just no tax

23:36

on AGI below 100,000. So, these are pretty high thresholds. Um, so that's kind of nice.

23:42

and 150. Uh Rhode Island is uh is also

23:48

high. So no tax um if income is below 104.

23:53

Uh it's just like any other sort of thing like if if that benefit um only

24:01

applies here at full retirement age though. So and both spouses have to be at full retirement age in order to

24:07

receive that benefit. So, they do pay they do pay Rhode Island income tax uh

24:12

if it's below 67. One of the things that we've been talking about in and and what Justin talked about last week was

24:19

talking about early claiming and how early claiming can be uh beneficial. And

24:24

what we're finding in some of these in some of these uh laws is that there's

24:29

actually some, you know, there's actually a tax consideration here. So yeah, maybe claiming early makes sense

24:36

for a lot of people, but if you're in a state that's going to tax social security,

24:43

you know, it is something that should be considered. It still may be the best thing to do, but uh you may want to

24:48

consider it. Uh Utah is a is another interesting one.

24:55

They actually look at modified adjusted gross income. So, they're adding back in some of those deductions and credits uh

25:02

that you would um you know that that gets you to um a little bit lower

25:08

taxable income. And so for them, they're looking at uh MAGI of uh anything over

25:14

45,000 they're going to tax for single filers and anything over 75,000 they're

25:19

going to tax for married. I I link in this slide there's a worksheet

25:26

like your interest income, your municipal bond interest. Those are things that you you can go through this

25:32

worksheet and this worksheet will uh can potentially provide you a credit to

25:37

offset some of these taxes. So Utah's situation here is a little bit more

25:43

complex when they're talking about um uh you know when we're talking about um

25:50

taxation. Okay, Vermont. This is interesting too

25:56

because Vermont has uh you know they they have some places in Vermont where

26:02

uh the the income for retirees actually exceeds these thresholds or it's there's

26:08

a significant proportion of the population where the income exceeds these thresholds. There's a good bit

26:14

that's below as well, but um these are fairly low uh as far as uh thresholds

26:21

for what's not taxable. Uh, and so if you're claiming IRA income, um, if

26:27

you're claiming, you know, you know, 401k income or other pensions, etc., then, you know, you're probably going to

26:33

see some tax in Vermont. Okay. West Virginia. Um it is actually a

26:41

it's the way it's set up it's pretty complex but essentially in in 2025 2024 it was

26:50

uh this number was this percentage was lower but 2025 65% of income is exempt

26:56

and then in 2026 it's 100% going to be exempt. So it's it'll be completely phased out. Um, and this is part and

27:04

part, you know, part of trying to actually uh get get a few more people

27:10

into uh West Virginia. Uh, so if you can get some more, if you want more retirees

27:15

in in Virginia in West Virginia, then, you know, like we said, you're probably going to make social security not

27:22

taxable. Let me just kind of go through here. Um,

27:32

hey, if it's answered, it doesn't go into the because I'm going to go into um some scenarios next.

27:38

Yeah, I've knocked out a few of the Okay. questions and um but yeah, maybe to to hit a couple that are related to stuff

27:45

we've already um talked about. Some people were a little bit confused about phaseins and phase outs of the OBBBA

27:51

stuff. Um and there are some slight differences but yeah a lot of things are

27:57

gone by 2029. And I think the salt might be 2030 that state note local tax

28:03

deduction which is not a topic for today but you know just and then there's a bunch of weird stuff around um

28:11

around inflation adjustments which is actually worth mentioning in the context of social security taxation too because

28:18

those thresholds that Mike just mentioned they've been there well the

28:23

50% threshold was there from 1983. We went over that last week that actually the the social security system has

28:30

changed a lot over the years. Sometimes like we learn about it, you know, you do your CFP or something and you learn about it and you think, "Oh, that's how

28:36

it's always been." No, it's changed a ton. 50% was 83. Correct me if I'm wrong

28:41

on that, Mike. I don't know. And then 85% came in in the 90s. I think it was 93. So,

28:47

and those numbers have been the same since then. So, I just did some quick math. The 25,000 is one of them. Is that

28:54

right? Yeah. I think that would be like $80ome,000 today if it had been adjusted. So, somebody was asking, you

29:00

know, seems like most people don't get taxed. Well, way more due now than did back then, you know, I mean, and then

29:07

$85,000 in, you know, 93 in today's dollars would have been like a h 100,000. So, like really what you would

29:14

have been talking about is like an 80 to $100,000 thing, but but instead it's, you know, 25 to 45 or whatever it was,

29:20

44,000. So, uh, and the OBBA stuff is not adjusted for inflation, so it's

29:26

$6,000, I don't believe. I looked for it. There's other ones where they get like a 1% bump a month. It's just it's

29:33

it's a mess. But, um, yeah, essentially there's that's that answers some of the questions people have. And for those of

29:40

you who are asking, the deduction, all that stuff is already in income lab. So, if you have plans in

29:45

there, it's it's already getting getting shown. But again, you'll only see it from through 28 and it might be phased

29:52

out. There's phase there's magi phase out as Mike said. So again, it's a total mess, but it's all in there. So it'll be

29:59

calculated for you. Uh let's see. Ren said, uh do you mean foreign income to be a pension? No, like

30:06

if you're if you're earning income in a foreign country. So say you have a job in the UK or something and a UK

30:12

company's paying you. I'm saying that that is wages that you would that would be included in provisional income. Uh so

30:19

not necessarily a pension. So pensions are included in uh in provisional income.

30:25

Yeah. And people were asking about MAGI in general in usually that's just AGI plus um taxexempt

30:32

income. I think there may be a few places where I think for Obamacare ACA

30:37

credits. It might be different but ACA credits. And then I think there's um

30:42

uh Yeah, it's it's deductions like IRA deductions, things like that. Yeah.

30:48

Yeah. Uh yeah. Well, you should pay your you

30:54

should report your foreign income because they they require that. So um

31:00

the the social security scenario uh where the standard deduction wasn't

31:05

added actually that person uh 50% of their uh at 62 50% of their um social

31:14

security was taxable. So few individuals these low income it seems possible to avoid taxes. It is

31:21

pretty um it's just like that's what Justin was saying. I think like it's just really it is really hard to avoid

31:29

taxes. Uh we're going to go through actually a scenario where maybe it's possible. Um it's a very curated

31:38

scenario and it would be a very specific situation where you could um essentially avoid taxes. of this system. I I know

31:45

that I've got like uh there are a lot of people who are, you know, Roth conversion fans. Um I don't I think I

31:52

can't open up LinkedIn without seeing, you know, six or seven posts on Roth conversions, uh you know, in a day. So,

32:00

I know they're very popular. So, we're going to talk, you know, uh briefly about this this Roth conversion

32:06

scenario. Um, and this is again, this is something this is a situation that may not pop up

32:13

that often, but it it's potentially small American, right? So, this is a this is a administrator at a uh at a

32:22

small law firm. Uh, you know, she's been working there for 30 years. Um, boss

32:29

says, "Hey, look, I'm going to close this firm in 10 years, so you know, figure it out."

32:34

um they didn't have a retirement plan, so she's been putting money into an IRA,

32:41

uh maxing as much as she can and investing aggressively. And so she's actually managed to accumulate one and a

32:47

quarter million in that IRA. And she currently earns $70,000 a year.

32:53

So she looks at her social security statement, she's like, "What how am I how much am I going to get from social security uh at age 64?" because that's

33:01

how old she's going to be when the law firm closes. And it looks like she's going to get about 24,500.

33:08

Um, and these numbers are what they are by design. Um, just to just for illustration purposes, it's not always

33:14

going to be this uh this cut and dry. In fact, it's never going to be this cut and dry as you all may know.

33:22

So, in this in this situation, we're saying, "Okay, look, let's pay the let's let's convert the IRA money over a

33:29

10-year period um to Roth." And so, overall, what's

33:35

going to happen is you're going to she's going to end up paying about $665,000

33:42

in taxes over that time period. Account's going to grow. Um she's going to be, you know, doing the conversion.

33:48

It's so it's going to cost a little bit of money. um the withdrawal the tax treatment of

33:55

the withdrawals is going to be taxfree uh and um you know definitely just

34:01

paying the taxes now. So, if we look at if there's no conversion, if she just

34:07

keeps it in the traditional IRA and let's assume basically uh that she's going to be getting taxed around bas

34:14

based on the withdrawal schedule that I chose, she's going to be getting taxed at about 25%

34:19

um between federal and state and then 85% on her social security on on 85% of

34:25

her social security, not 85% of her social security. Um, and so what we end

34:31

up with is you can kind of see, you just look at this right here. Oh, well, it's a $68,000 savings. But, uh, what I did

34:39

here too is a lot of times what happens is when people compare these Roth conversions to no conversion. Um,

34:46

they're typically not taken into account. Uh, they're not they're not doing a present value calculation. So, in this case, it did a present value

34:52

calculation. And when you do that, it's still it is still better for uh Jan to

34:59

actually um you know uh convert instead

35:04

of uh instead of paying them overtime because she's not going to pay any taxes on her social security.

35:11

Uh and so basically she'll just spend her entire retirement um not paying taxes.

35:19

Uh oh. So that savings is about $68,000 which is not a huge amount of money but

35:25

like when we think about you know $60,000 is about $68,000 is about one year of her one year of her salary. So

35:32

this is a situation obviously it's not this is not going to be this is designed

35:37

perfectly so that it um that it comes out the right way. But it is something that you would want to analyze. you

35:43

would want to spend some time with clients and say okay does a Roth conversion make sense in this case um

35:51

and in this case this particular case it does make sense

35:58

okay so I did mention a little bit about um you know that there's a possibility

36:03

that a planning scenario could include like where does somebody want to live when they retire and so I I uh created

36:10

this scenario where basically it's It's Joe the veteran. Um, and so Joe is

36:18

a retired uh US military veteran and he's trying to figure out whether he wants to live in North Carolina or

36:24

Montana. Uh, he's got a a US military pension of $70,000 per year. Uh, which

36:31

would contribute to his provisional income. He's got social security benefits which are 41,000 per year. So

36:37

essentially, he's going to pay tax on 85% of his social security. Right? those

36:42

two numbers together puts him well over that threshold. So the question, the question that Joe

36:48

wants to know is of these two places, let's say that he's got family in both places. Of these two places, which state

36:56

is the most advantageous for him to live to? And let's I mean this is actually true. Property taxes are about the same,

37:02

slightly lower in North Carolina. Um but for the most part, that would be that

37:08

would be a consideration as well. you would want to consider all those sorts of uh taxes.

37:14

And so what sorts of questions do we need to ask? Right? So, well, we going to know how how does North Carolina and

37:21

Montana each tax social security. Um we know from the previous set of slides

37:28

that Montana actually just mirrors the federal government. Uh so they're going to have the same thresholds.

37:34

And then uh how does uh North Carolina and Montana tax um military pensions?

37:42

And uh turns out that uh Montana taxes both social security,

37:50

so they tax it the same way they do federal government. Um

37:56

and they also tax uh military pensions.

38:01

Um, and so in this case, if you're looking at the same gross income, uh,

38:07

the the pension is going to be taxed in in Montana at uh, it's going to be taxed

38:12

around it's going to be about $3,70. It's going to be about $2,21 for the tax

38:19

on the on social security. You're going to pay the same federal tax because it's

38:25

it's it's the same scenario, right? And in this case, uh, it's about $5,100

38:32

difference. So it's, you know, that's that's not nothing when you're talking about annual taxes. And so in this case,

38:38

obviously, there's a lot of other considerations. It's really muggy here. I live in North Carolina. It's really

38:44

muggy here. Montana is, you know, it's big sky country. There's uh it's there's

38:50

there's a lot of nice outdoor experiences, although my understanding is it's getting a little bit more crowded there.

38:56

um uh real estate accounts as well. So yeah, how much how much are things going

39:02

to cost? But in general from a what you pay uh your various uh taxing agents,

39:10

it's going to actually be better to live in North Carolina in this case. So it's definitely something to consider

39:16

when you're talking about um so when we talk about crossber planning we're not just talking about um foreign countries

39:23

we're talking about states as well because there are differences in states as well.

39:32

All right. Okay. So a few other issues.

39:39

Um there is uh I don't I don't know if you

39:45

Justin if I don't think you talked about this last week but um there is the consideration for reductions

39:52

um in in your benefit. So, if you are not uh at full retirement age,

40:01

uh and I don't I it was unclear how this would fit in any of the any of the other weeks that we did this, but I did want

40:07

to include it here. So, if you retire early, um and you're still working, uh

40:15

you can actually have some of your benefits reduced for that year. that now these benefits are added back in later

40:21

so you don't have to worry about like one of the big concerns with with clients is always like you know I paid

40:26

in uh they owe me and so this would this would feel like it's being taken from them um but they you know consider the

40:36

fact that um they're actually going to get that money back so in this case this

40:41

is Jesse this is very similar to a situation that I had with a client uh where she was collecting social security

40:49

and uh all of a sudden her benefit was reduced because she started working for her son making $30,000 a year. And so in

40:57

2025 that benefit would be reduced for every dollar um for every $2 over uh

41:05

$23,400 it would be reduced $1. But then once

41:10

Jesse reaches her full retirement age that goes away. Um, there is one one uh

41:19

quick caveat. The month before you turn 65, that $23,000 number jumps to uh I think

41:27

it's close to $61,000. It's around there. Um, and for some

41:32

reason, it's just built in that it's that month before you turn 65, but then

41:37

thereafter um it's uh that that threshold doesn't matter.

41:43

So when you're thinking about from a planning perspective, if in this like in this case the client

41:50

could kind of control um you know work schedule to keep that number under a

41:56

certain amount um maybe even at 64 uh have you know do some work and then

42:03

have the son who she worked for um push some of that push some of that income

42:09

into the next year saying you know maybe a bonus or a raise or something in the

42:14

next year. What's that? A quick a quick comment on that because I saw a few in the in the chat. I think

42:20

it's um the year that you hit FRA. So, yes, it's the year you hit FRA.

42:26

67 for most people. Like you said, there's still a few who are at 68 and 10 months, I think. But in like a year

42:31

that'll be over. So, it'll be 66 and 10 months, right? Like sorry, 66. It'd be great if somebody was 68.

42:38

That would that means we're actually doing the right thing. Moving that up a little bit. But yeah, 60. Yeah, at FRA,

42:44

so 66, 67. Um, it's that it that threshold jumps for the, you know, just

42:51

before they the month before they turn. And just if if this seems totally arbitrary to people, the concept is

42:58

they're basically saying like social security is a retirement benefit and you're not really retired, right? And so

43:04

that's what the whole take it away and then give it back thing is all about. Um like because it does you you look at

43:10

this stuff and you're like what who came up with this? What is right? But that there is like a conceptual

43:16

reason that they have. Yeah. I I think you know my uh my my father is still working. He's 73.

43:25

Um but that was that was a situation he he claimed early and um and then was

43:32

just really confused as to why he's worked his whole life. he's like really confused as to why his benefit was was

43:38

so small. Um and it was because he had a you know he had a a great salary uh

43:43

working for the federal government. And so not only was he um you know getting

43:49

you know he he's one of those uh folks who like you know every tax dollar is a

43:54

is a is a knife wound. So not only was he getting taxed then he's also his social security is

44:01

reduced. um his provisional income is over the amount. So he's getting taxed

44:06

on 85%. So it was like this it's this it was this big issue but like he didn't realize that he was going to that he

44:13

would get that back. So and this is another place I think where policy has changed over time in this

44:19

case actually for the better. So I believe at one point there were earned income reductions I think for everybody.

44:28

Then it got pushed back to that ended in December of your FRA year and now it ends at FRA like that that actual month.

44:35

So this is actually a place where it's gotten a little bit nicer to people. Yeah, I think I think it was I think it

44:41

was originally like no matter how much not originally but like I think it was I that's right. So now there's even

44:46

these thresholds and like you said the threshold in your FRA year is much higher like three times as much and it's

44:51

a dollar for every three instead of it for every two. So it's not that things have always gotten tougher on people. Um

44:58

although that's often true. [Music]

45:03

All right. So that's so that's something to consider if you have a client who's a side hustler. If you recall the example

45:08

earlier where I was talking about the person who was uh in you know living and

45:13

working in a foreign country um obviously that person was they were full-time employed um but and so they

45:20

would they would have a reduction as well um in that scenario. I didn't do the you know any reduction calculation

45:26

but I thought that it was important for us to to kind of talk about here.

45:33

There's a a couple of other things. So actually before I get to Jamie the unbalanced. So um

45:42

one of the things that I think I want to touch on because I didn't I didn't go into too much depth in it when we were

45:48

talking about the states is the fact that there are these different thresholds of you know both people have

45:55

to be a certain age in order for some of these uh benefits to kick in. Um,

46:01

obviously the one that is is currently germaine is the OBBA one where you've

46:06

got uh the $6,000 deduction. Um, you know, you might have somebody claiming

46:13

if if both people are going to retire at the same time, but one person's 62 and one person's say 67, um, that that can

46:22

create some uh potential issues. And it's not it's not so much that um that

46:27

it should prevent them from retiring, but it is important for them to it's just information for them to know. It

46:33

might be it might not be enough to move the needle, but it might be enough to where people are like, well, you know,

46:38

maybe I'll work another year or two because um you know, I don't want to I

46:44

don't want to give that up. Um people are weird. So when we talk uh in week

46:50

four, we're going to be talking about um the you know psychology behind a lot of

46:57

this. And so people I say people are weird, people are different. And so people have uh different ideas about

47:03

what makes sense. And so even though it may not even be that big of a deal, you having this information and being able

47:10

to to transmit that information to a client uh I think is

47:16

uh is incredibly useful and it just you know demonstrates value.

47:23

Okay. So this is um this is a scenario where uh you know somebody's got

47:28

multiple income sources you know multiple income streams uh so receiving

47:33

20,000 in social security 25,000 uh from a pension and 15,000 from an IRA um and

47:41

so that's a provisional income of 70,000. So, there's a couple of different things to kind of think about

47:47

here. Is that 20,000 in social security if absent this other income

47:53

would be non-t taxable, right? It would be completely non- taxable. the the

47:58

$25,000 from the pension. One of the things that that this person's 68, but

48:04

but one of the things that might be important to think about is if you've got a pension that you that will

48:11

continue to acrue, uh it may make sense to to claim it a little later. Um

48:16

depending on how much that how much it grows. If it's like social security, you might like want that 8% or something

48:21

like that. Um, but also it also kind of plays into, you know, the the potential

48:27

for claiming early. If you've got enough sources of income, then maybe you don't care as much about, you know, the small

48:33

amount of tax that you're going to pay here. So, even at 85% of of um of the

48:39

20,000 being taxable, is it is it that big of a is it that big of a move? Um, I

48:46

don't state here that this person has a has a Roth IRA, but if they did have a Roth IRA, they might be able to reduce

48:52

their uh provisional income. Um,

48:57

that is not a provisional income of 70,000. That is a provisional income of

49:03

60,000. So, sorry about that. So, anyway, if you That was just to make sure everybody was

49:09

paying attention. You're I can tell the professor in you. Yeah.

49:14

Um I have done that in the past. Uh I don't you know this is this was totally

49:20

I messed this one up. But anyway the the idea is that if you have if you did have some Roth then um you could potentially

49:27

especially if Jamie was married you could potentially uh reduce the um

49:36

amount that is taxable uh in the amounts we're talking about. Oh, somebody somebody did catch it

49:44

actually. Uh, yep, Robert. Good good catch. Um,

49:49

so, uh, where was I? What was I going to say about that? Um, basically like these

49:56

some of these amounts are pretty small. And so, you know, when we when we think about financial planning clients, I

50:02

mean, we're usually not talking about um, you know, trying to save somebody like, you know, $360

50:08

uh, a year in taxes. Um I think uh

50:18

uh hang on a second. So provisional income I just want to make sure we're clear on something. Where was that?

50:24

[Music] Oh, somebody else answered it. Okay. Um

50:30

anyway, the the idea is that um you know you can you can be more optimal and one

50:37

of the things that as financial planners we do have to think about is well is optimal best? Um and spending all this

50:44

time trying to figure out whether um a small amount uh is is useful to a client

50:50

may not be the best. Now, if we go back to uh if we go back to Jesse, potentially

50:57

this is a this is a something that could save some significant money. Or if we go

51:02

further back to like talking about um you know, where to move. I mean, that

51:08

can be depending on what people's sources of income are. Uh this this can be a lot. And not everybody works with

51:14

military veterans. Um but military veterans need planning, too. And many of them have very nice pensions. um you

51:21

know retired 06 is uh you know making about 10 grand a month from their from

51:28

their pension. Uh and if it's if they're in a tax exempt state then that can be you know

51:35

that can be that can be pretty hefty. Um I think

51:42

yeah there we go. So, uh, so we can answer some of these questions,

51:48

uh, since we've got eight minutes left. Let me, uh, there were a couple

51:54

questions about like where to see this stuff. Um, well, maybe we should knock out the FRA thing first. So, Mike was

52:01

just talking about the whole withholding when you're working before full retirement age. They don't just give it

52:08

back to you in a lump sum. it. If you read the Social Securityurities Administration on this, it can be very

52:14

confusing. What they really do is they say, and actually, they don't reduce your

52:19

benefits proportionally. They they just withhold checks. So, like if you if you got a $2,000 check and they they're

52:26

going to withhold $5,000 that year, you're just going to skip the first check, skip the second check, and then

52:31

get half the third check. Um, so what they do then is they say, "Well, we're going to add up all the months where

52:37

that happened and pretend you actually filed that much later than you really did." So if you'd skipped 10 checks over

52:44

your, you know, that period at FRA, they'll just say, "Well, what would your benefit have been if you had actually

52:51

filed 10 months later?" So it's it's not a lump sum. Here it is back. It's like an actuarial adjustment is the best way

52:58

to think about it. Yeah. They adjust it based off like mortality tables. Yeah. Yeah. No one should remember how that

53:04

works. Just just know that Yeah. the benefit goes up at FRA and and they just kind of pay it back to you over

53:10

your lifetime. So So some of you who might have an engine have engineering clients may appreciate

53:15

that answer because they will they will ask they will say do I get a lump sum or

53:20

so I think you can explain it that way. That would be nice but but no. Um

53:25

uh let me share for a second here and I'll uh I can show folks. People were

53:31

wondering where that um taxability is calculated in income lab. So I just wanted to share that one. And this is

53:39

actually a good example also of what Mike was going over about Roth conversions.

53:45

Um Mike, do you mind unsharing and I'll Oh yeah. And Joseph, real quick, uh to

53:51

answer your question, the discount rate I used was uh the inflation rate, which was I think I used like 2.72 or

53:58

something like that. So,

54:05

um [Music]

54:21

All right. So, in if you're in tax lab,

54:27

um for those of you who don't use income lab, this is where you do like tax

54:32

analysis, compare a bunch of, you know, strategies

54:37

for how you take income out over your retirement. Do you do Roth conversions?

54:43

All that stuff. Okay. So, I'm zooming in on converting up to the 22% bracket.

54:50

And you can see taxable social security um versus non-t taxable social security.

54:58

And you know, Roth conversions are obviously going to have an effect on that. Um, I went down and I'm showing

55:04

the the, you know, year-by-year table and you can see taxable social security

55:10

or here and um, essentially the advantage, you know,

55:16

one of the advantages here is, yeah, I've got pretty high taxable social security during my Roth conversion years, right? In 2039, I'm at 51,000

55:25

versus 9,000. But then as soon as I start spending from Roths, that kind of

55:32

flips. So, um that's that's where you'd see that. So,

55:37

that's that's all calculated for you um automatically. And it definitely is one of the the things on the ledger, right?

55:44

If you're trying to figure out if Roth conversions make sense, um one is well, you know, if I live long enough, then

55:50

I'll I'll be taking home more of my social security. Um I know people

55:56

mentioned Irma as well. That's also certainly certainly a factor. Um you

56:02

know the Irma brackets and if you look at people were doing a great job uh handling some of these. They noted that

56:08

there's a two-year look back on Irma. So um that's all handled for you um

56:14

automatically. All right.

56:22

Do you see any others here that have a lot of um does taxation for a single taxpayer

56:29

change with age uh with regard to some of the states? Um yes.

56:35

Oh that's yeah that's true but not the the federal thing which

56:40

kind of right with the deduction but um but not really right. But yeah and there was a lot of

56:46

commentary on this as well. It's it's essentially being marketed as a reduction to social security, but

56:52

actually in a way it's better because it just it just reduces any income, right? So yeah, I mean you could

56:58

it it's it's better like you could almost call it like a reduction for retirees. I think just a retiree deduction

57:04

because if you think about people maybe there's somebody who doesn't maybe they didn't pay into social security. I have

57:09

a number of uh we'll talk about divorce next week actually. One of the scenarios we're talking about is like this lady

57:16

did get married and then so she and then got divorced again. So she's has no claim on social security anymore. Um but

57:23

that deduction still helps her even though she's not getting social security. Right. Right.

57:28

U federal tax estimator tool. Uh income lab. Um

57:35

is it definitely estimate your taxes. I don't know if there's a federal one. That's online.

57:41

There probably is. Um yeah. And I was also trying to find out if you can submit that withholding form um

57:47

electronically. There there are some things you can do electronically on the social security website. I don't know if that's one of them

57:52

you c. So you can do it um it you have to do it when you when you're claiming and so sometimes so if I'm claiming with

57:59

a client if I'm walking them through it and they agree to do the IDM me because that's the other thing, right? Like if a

58:05

client doesn't want to do that, forget about it. Like it's you're doing all the manual stuff. um that's less and less of

58:12

a problem these days. Um although you know um cyber security experts do have a

58:19

little bit of issue with ID. So um clients aren't completely crazy in that sense or not crazy at all actually.

58:27

Um so I think we're wrapping up. Um

58:32

please come back in the next couple weeks. We're going to keep doing we've got like like Mike said, we've got um

58:38

basically all the complicated stuff next week. Survivor benefits, spousal benefits, divorce um and then we're

58:46

going to really dive into the the psychology um around claiming which will revisit a little bit of the stuff we did

58:52

last week. Um and go over really some reasons that rules of thumb like wait

58:58

till 70 or everybody claim at 62 just they just don't hold water. Uh it's really like it's much more complex than

59:04

that. Um so those are going to be great. Um and we will send out links to this

59:10

recording, links to the the slides. Um and make sure you fill out the um the

59:17

questionnaire that you'll get when I close this webinar because that's how we're going to be able to put your um your CE credit in. Somebody was asking

59:24

where the where the questions are. Um we'll leave that as an exercise to you. you actually get the credit just for

59:29

just for attending and being a a good audience. So, um any uh

59:37

any questions that we didn't get, we will try to take a look at those and um you know, if there's something specific

59:43

that we can address for you or um you know, when we have time in future uh

59:48

future sessions, we'll try to revisit some of these if they if they uh fit the

59:54

fit the uh the topic. Um, but with that I want to say thank you to Michael Kota

59:59

Dakota and everybody for uh for joining us today. Great session. Um, thank you

1:00:05

Mike. I'll uh Yeah, no. Great. Appreciate it. Take care everybody.

1:00:10

Byebye.0:08

Okay, welcome everyone to the second of five master class sessions on social

0:15

security um from Income Lab. Giving everybody some time to get in the room

0:21

before we kick off the presentation.

0:26

This room must have big doors cuz people are piling in. Um,

0:33

while we're waiting, if you want to drop in the chat where you're uh calling in from, it's always fun to see.

0:39

I'm uh I'm in Golden, Colorado this morning or this afternoon, I guess. Now,

0:49

yeah, all over the place. Awesome.

0:55

Nobody out of the country yet that I see.

1:01

All right, we'll just uh we'll get some of the housekeeping taken care of as the rest of uh the people. Oh, Koala Lumpur.

1:09

Okay, I think we might have a might have a winner for the for the farthest away.

1:15

Um so, Little House can be today. Uh the second of our master classes is on

1:20

taxation of social security. huge topic, super uh interesting and people just um

1:27

you know have have been asking for this kind of thing. So we're going to we're going to dive in with Michael Kakakota

1:32

who is uh professor of financial planning at Columbia and NYU and also runs Wolfbridge Wealth. Um and very very

1:42

thankful for for Mike um helping us out today. I'll be here to kind of monitor

1:47

the Q&A and maybe, you know, interject here or there if I if I have something interesting to say or maybe even if I

1:53

don't. Um, for those of you who missed last week or even if you you caught it,

1:59

uh, we we did have a session on the underappreciated risks of social security claiming, there is a uh a

2:06

recording of that available if you want to check it out. Um, and also I believe we distribute the uh the slides from it.

2:14

Um today, as I said, we'll be talking about social security and we have three more sessions. Um one next week, one the

2:20

following week and then we skip a week and have we wrap up on the 26th. So next week we'll be talking about um social

2:27

security planning with spousal benefits, survivor benefits, and divorce. Probably one of the most complicated areas of

2:34

social security. So be ready to roll up your sleeves. Um Mike is going to help us out with that one as well, as well as

2:40

uh Dylan Cobb. And then on the 12th, we'll we'll be we'll have a a panel

2:46

discussion on the psychology of social security claiming. That one's going to be great. I'm really looking forward to

2:51

that. And then we'll wrap up with talking to clients and prospects about social security. So, you got a summary of social security here ahead of you. Um

3:00

let's see some of the uh some of the housekeeping items. So, um this session

3:06

does qualify for a CFPCE. Um, so you got to make sure that you are

3:11

on here for 50 minutes or more. No, your AI noteaker does not count. Um, so it's

3:18

actually got to be you. Um, there will be a post-weinar survey that where we can you'll have an opportunity to give

3:25

us your CFP um ID. And um, if you have a question, please drop it into the Q&A,

3:32

which is not the same as the chat. It's just really hard. Chat's great. you can chat with each other, but I'm only going

3:38

to be monitoring the Q&A or I only I only promise to monitor the Q&A. I'll try to jump over to chat occasionally,

3:43

but it's really hard to follow and answer all those questions. And if you have if you see a question that you really like and want to have answered,

3:50

please upvote it. So, I think that's just clicking on the little thumbs up and that way we'll have some idea of uh

3:57

which questions we want to get to first because uh usually we have about 10 times as many questions as we can as we

4:04

can handle. So, I think that wraps up my housekeeping and I'll turn it over to you, Mike. Thanks very much.

4:10

Thanks, Justin. I appreciate it. Uh, so, uh, welcome to the second week. Uh,

4:16

there's going to be a few things about this, uh, particular, uh, session that,

4:23

um, are kind of assumed if you've watched the the first session. Um, but if you need any clarification, feel free

4:29

to, you know, put it in the Q&A or actually put it in the Q&A. It probably be a little bit easier. Sounds like

4:34

that's going to be a little bit easier. Um, this is our general agenda today. I'm going to uh we we we went through

4:41

the introduction already. Uh, and then we'll we'll go through understanding

4:47

uh like the basics of social security taxation. Uh, with that we'll talk about

4:52

the uh recent uh changes. Maybe you got an email from social security for about

4:57

the OBBA. Uh so we'll talk about uh some of the changes there and what those

5:02

actually mean as opposed to um you know what maybe some of your clients may have heard about. Uh I'm going to discuss

5:10

some state differences in social security taxation. So most states don't tax social security but there are some

5:16

uh differences and then we'll go through some planning scenarios and then answer any uh questions that you have. Um

5:23

hopefully we'll have time to get through all of these things. Uh these slides will be available to you. Uh there's a

5:29

couple links in there that could be useful, especially for those of you who are in uh Utah.

5:35

All right. [Music] Okay. So, the first thing that uh we

5:43

kind of need to talk about is that um Social Security is not taxed like most

5:48

things are taxed. It's taxed based on what's called provisional income, which we'll get to in a second. But this table

5:55

essentially represents uh the different thresholds. So, you know, as you can tell from this this particular table,

6:03

uh if you if your social security is less than $25,000 or if your pro excuse me, if your provisional income is less

6:10

than uh $25,000, you're actually not going to get taxed on your social security at all. So, none

6:16

of your social security will be taxable. Um that moves up as you move up in

6:21

income ranges. So from 25,000 to 34,000 about 50% of your benefits uh can be

6:27

taxed. So how would that work? So if you make $30,000 your provisional income is $30,000

6:34

um and your and that's entirely social security then well $15,000 of your

6:40

social security benefits would be taxed. And then over 34,000 it's going to be uh

6:45

85% of your benefits that can be taxed. And you can see this kind of plays out in the joint uh area. that there is no

6:52

head of household um filing status for this. Uh it is assumed that if you're um

6:59

that if you're of retirement age that you may not be a head of household um having we're talking about the divorce

7:06

um session next week. I can tell you there are a number of people in their 60s uh even collecting social security

7:12

that can actually claim head of household status. I think this is a little bit of a miss from uh uh the uh federal government.

7:23

Okay. So what is provisional income? So it's called it's called combined income or provisional income depending on who

7:30

you talk to. Essentially it's a formula of the income from all sources of

7:35

taxable type income. Now so that includes things like your uh 401ks, IAS,

7:42

pensions, etc. any non-t taxable interest um but not from Roth IAS. So

7:50

key there is it's not going to be from from Roth IAS, but also key is wages. So

7:56

if you think about whether you're working part-time or not, um maybe you have other sources of income uh that

8:03

could be considered wages, that is typically going to be included

8:08

in combined income. [Music] All right. So, here's here's just like a

8:14

very quick example of uh of of how you would calculate um combined income. So,

8:22

we've got uh Barb, she's got uh $32,000 in social security income, $1,000 in

8:27

dividend income, and then $40,000 in Roth IRA distribution. So, what would

8:34

her combined income be in this case? Right? So, her income appears to be

8:40

$73,000, but for purposes of social security taxation,

8:47

it's not right. So, if we go back here, we can kind of see that she's got 30

8:52

basically $33,000 is uh is what her combined income is.

8:59

And then she's going to get taxed um on that. So, it's going to be her taxable income is going to be $17,000, but she's

9:06

only going to pay she's going to pay 0% on her social security income.

9:16

[Music] All right, anybody get this email?

9:21

So, here we've got I got this email uh July 3rd. So, we can see here that um uh

9:30

Social Security uh this is from the Social Security Administration applauds the passage of legislation providing

9:36

historic tax relief for seniors. I I circled this part right here where it says the bill ensures that nearly 90% of

9:43

Social Security beneficiaries um will no longer pay federal income tax

9:49

on their benefits. Um then you can see further down I underlined where it says the new law

9:55

includes a provision that eliminates federal income taxes on social security benefits for most beneficiaries

10:00

providing relief to individuals. It then goes on to say in additionally it

10:06

provides an enhanced deduction for taxpayers aged 65 and older ensuring that retirees can keep more of what they

10:13

have earned. Okay, so that's a lot to kind of unpack. So, what does it actually what does the

10:19

OBBA actually do for seniors? Um, and I included this in here because it's

10:24

pretty important. So, what it says is this is section 70103 of the uh OBBA.

10:31

Uh, you can uh you can actually read this all online. Uh, you can typically

10:37

pull it up. I try to read all of these new bills. Um, I'm only about halfway through. I start with tax just because

10:44

uh it impacts us as financial planners. Uh but there's a lot of really uh interesting information that you may not

10:50

be aware that's not normally there's too much in it for it to go out in in the news all the time. So basically it says

10:57

in the case of a taxable year beginning before uh January 2029 there is a deduction in the amount equal to 6,000

11:05

for each qualified individual. Um a qualified individual is a taxpayer who's

11:10

attained age 65 before the close of the taxable year. uh in the case of a joint

11:16

return the taxpayer spouse if such spouse has attain 65 is also included. Um this actually doesn't take effect

11:23

until uh uh filing filing in 2029 so 2028

11:29

um is is what it says here. Um there are some different interpretations that say

11:35

well now it's because it's 65 we're going to retroactively do it to this

11:41

year. Um, and so that both interpretations are are currently um,

11:47

you know, currently being bandied about, but this is this is the actual text of the bill and it actually does say 2029.

11:54

Um, you know, I think, you know, you're going to have to you're going to have to spend some time consulting with uh CPAs

12:01

to to to figure out whether you're going to get that additional deduction or not.

12:07

Um, okay. So, what does the deduction do in practice? So, here's a just an example of Andre who's uh he's retire

12:15

he's fig trying to figure out if he's going to retire at 62 just this year. Um

12:21

he's heard that social security is uh is no longer taxable. He got that email too. That that is clearly a typo on my

12:28

part. So, he was originally going to retire at 65. Um, looking at the differences, he's going to get 34,000

12:34

per year if he retires at 62 and 42,830 if he retires at 65. So, what's the net

12:43

income uh for each scenario given OBVA? So, if we assume that he's only going to

12:49

take the standard deduction, the table looks a the comparison table looks a little bit like this, right? So, it's 62

12:56

skin 34,000. the standard deduction for uh 2025 was was raised retroactively

13:02

from 15 to 15750 um does not get an additional deduction.

13:09

This is now 65. Uh and then so we can calculate the tax

13:15

based on these two amounts and you can see that the the net income is actually

13:20

fairly close to the gross income difference. So, it's going to be about uh $5,000.

13:27

All right. So, that's that's essentially what's happening here. So, there's still tax

13:33

um if you make less than, you know, if your social security is not taxable and your uh your standard deduction gets you

13:40

low enough to where you're not going to pay any social security tax, um then you

13:46

won't pay so then you won't pay tax. This does not mean that social security is not taxable. Uh it is only that the

13:55

standard deduction uh there is an additional $6,000 deduction for people over 65. So that affects people who are

14:01

65 and older. There are a lot of people actually um we were looking at this

14:06

earlier today. It's going to be about um see 17 26

14:14

about 41% of people look looks like they claim before 65. So,

14:20

uh, they're probably they're not going to get this benefit either. Um, at least

14:25

until they turn 65.

14:31

Uh, okay. I see 1,600. Uh, the 1,600 um

14:39

dollar deduction. I um so if you look at the the bill uh it doesn't say it

14:48

eliminates it but it also doesn't uh consider it if you look at the OBDA.

14:53

Um but if I'm wrong I'm wrong and I'll update uh and and send that out the

14:58

slides. Okay. Um this is just something like

15:03

just for uh your benefit. A lot of people um don't withhold uh social

15:10

security tax. So I had a have a client recently who's been taking care of his mother. Uh he didn't know where the

15:16

social security money was going essentially. It's been sitting in this account. It's been grow. It's been

15:21

sitting in a bank account. There's about uh $85,000 in this account from social security that's just been kind of run

15:29

into that account. There was no withholding on that social security. And so, not only is the client going to have

15:36

to pay um uh you know, is going to have to pay those

15:42

taxes because they owe back taxes. They're essentially going to have to there's probably going to be some some

15:48

penalties there. So, this volunteer holding request form is something useful that um you might want to talk to your

15:56

clients about. Um but as you can see, there's only four

16:01

boxes you can check. So, if you've got a very wealthy client who is pulling a lot of money out of a 401k or an IRA or has

16:09

several pensions, uh 22% may not be enough.

16:14

But this is the uh form W4B.

16:21

Okay. Um so those of you who uh understand

16:28

foreign income exclusion so foreign income can typically be excluded from your AGI. It is actually included in the

16:35

provisional income calculation. Uh so just give you a quick example here

16:41

now um that a uh a US expat who's who's

16:46

living and working in Singapore drawings US social security Singapore wages are 120,000 Singh which is about $93,000

16:54

uh USD. So the expat has no other income sources. So that $93,000 is actually

17:00

excluded um from from US taxes or can be excluded

17:05

from US taxes there. You can also do a you can also exclude tax from the taxes

17:12

but in this case it's better to actually exclude it from income. U but those expat wages are still includable for uh

17:20

social security. So just because you're not earning US income doesn't mean that it's not included in uh provisional

17:27

income. So something that you have to think about.

17:35

Okay. So that's that's federal taxation. Um it can get a little interesting with

17:42

state taxation. Uh many states have phased out any taxation of social

17:47

security, but we do have a few. Um, and so if you're in any of these states, um,

17:55

then you have to you might want to consider, um, you know, paying attention

18:01

to whether clients want to move or not. Uh, and we'll have an example a little bit later on on moving.

18:09

So in Colorado, uh, so this is this is relevant to to

18:14

Justin here. So if uh if you're under 65, so this is a a 65 age 65 threshold.

18:22

If you're under 65, up to 20,000 of your federally taxable social security

18:27

benefits. So again, like what is actually taxable uh are not going to be taxed by the state of Colorado. Um and

18:35

then for 2025 if you're you know 55 64 so survivors um who are receiving some

18:42

of this um can deduct all of that social security income if their AGI is $75,000

18:49

or less uh $95,000 or less if they're are a couple filing jointly. Um, and

18:55

then if it's in excess of those thresholds, so if it's above 75 individual, 95 joint, then the social

19:02

security tax is going to be or the social security income is is uh only

19:07

20,000 is going to be excluded. And then if you're 65 or older, then there's no problem. So, you know, in com in

19:14

conjunction with OBBA, 65 seems to be much more of a magic age than it used to

19:20

be in the past, despite most FRA either being 66 or or 67 currently.

19:29

Okay. In Connecticut, about 25% of benefits can be taxed. Uh so one of the

19:36

things to kind of think about here is uh is the interaction between uh the state

19:42

and the federal um and so if your AGI is above you know 75 here um again AGI is

19:51

not the same thing as provisional income. So you know just because so you may so sometimes people will use

19:56

planning strategies well like well we're not going to withdraw any money so we can keep your AGI down. Um and in this

20:03

case it might make sense. Same thing here. You know Mary filing jointly.

20:10

Uh Minnesota is is is fairly unique. So this is 2024. I didn't actually have

20:15

updated numbers for for 2025. I assume um those of you in Minnesota probably

20:21

do. Um so if the AGI is 82,90 or below for 2024

20:30

uh it's exempt. So your social security is exempt. But if you're if you're you you have phases from uh 82191 to 118191

20:40

and anything above uh 1181 191 uh it's all going to be taxable. So this

20:47

is again that interplay between uh you know AGI and taxable income. So whereas

20:54

the federal government is looking at provisional income, most of the states are not. They're looking at AGI.

21:00

[Music] And Mike, let me just interrupt here. I'm noticing I'm I'm learning some some

21:05

things here and I'm noticing that it's crucial here that taxable income, federally taxable social security income

21:12

is not changing with this OBBBA thing, right? because it's really just an extra deduction. So, it's not like

21:19

you're knocking $6,000 off taxable income, taxable uh taxable social security for these state purposes.

21:26

No, it's a good question. Um, no. Yeah, you're not knocking it. It's not changing that.

21:32

And so, I mean, it's not that many states, so there is that's not a I mean,

21:38

it's not a huge thing. and and state tax is not like a a massive amount, but sometimes you know people care about

21:43

that and and it can add up when you start talking about like things like uh

21:49

you know pensions and sometimes sometimes pensions are exempt from income but if they're included in social security um and so there's a there's a

21:56

lot of really complex planning opportunities um you know when it comes to I think

22:03

OBBA what it did is it created basically some more opportunities and in fact most legislation that's kind of what it does

22:09

it just creates more opportunities for planning to figure things out. But yeah, and I I've I've noticed too there's been

22:17

a big trend towards states getting rid of taxability or social security. So I

22:23

think I wrote an article I don't know four or five years ago on the kit's blog where that list was I mean it might have

22:29

been 12 or 15 like it was much longer. So there's been a a real

22:34

somebody's lobbying the states successfully to to get rid of. So I don't know if it's the ARP or something,

22:40

but there's definitely been a a shift and I think you mentioned West Virginia's, you know, phasing out.

22:46

There's some of that stuff happening. So yeah, I mean I talk Yeah, we Yeah, we'll get second. But it's Yeah, it's uh it's

22:53

interesting um what what different states do and then how much revenue comes from social security and and the

23:00

reality is that like if you if you're taxing it, there's taxes are all about incentives. So this is I mean we all

23:07

know this, right? We're all planners. So taxes are about incentives. And so if you want to if you want somebody to do

23:13

something less, you tax them more. So, if you want people to live in your state, uh, you tax them less.

23:18

So, you're, you know, this is a, you know, if you want retirees, you're you're probably gonna eliminate

23:24

social security tax. Yep. Um, I'll actually just run through these.

23:30

So, New Mexico, um, you know, they have these these thresholds are just no tax

23:36

on AGI below 100,000. So, these are pretty high thresholds. Um, so that's kind of nice.

23:42

and 150. Uh Rhode Island is uh is also

23:48

high. So no tax um if income is below 104.

23:53

Uh it's just like any other sort of thing like if if that benefit um only

24:01

applies here at full retirement age though. So and both spouses have to be at full retirement age in order to

24:07

receive that benefit. So, they do pay they do pay Rhode Island income tax uh

24:12

if it's below 67. One of the things that we've been talking about in and and what Justin talked about last week was

24:19

talking about early claiming and how early claiming can be uh beneficial. And

24:24

what we're finding in some of these in some of these uh laws is that there's

24:29

actually some, you know, there's actually a tax consideration here. So yeah, maybe claiming early makes sense

24:36

for a lot of people, but if you're in a state that's going to tax social security,

24:43

you know, it is something that should be considered. It still may be the best thing to do, but uh you may want to

24:48

consider it. Uh Utah is a is another interesting one.

24:55

They actually look at modified adjusted gross income. So, they're adding back in some of those deductions and credits uh

25:02

that you would um you know that that gets you to um a little bit lower

25:08

taxable income. And so for them, they're looking at uh MAGI of uh anything over

25:14

45,000 they're going to tax for single filers and anything over 75,000 they're

25:19

going to tax for married. I I link in this slide there's a worksheet

25:26

like your interest income, your municipal bond interest. Those are things that you you can go through this

25:32

worksheet and this worksheet will uh can potentially provide you a credit to

25:37

offset some of these taxes. So Utah's situation here is a little bit more

25:43

complex when they're talking about um uh you know when we're talking about um

25:50

taxation. Okay, Vermont. This is interesting too

25:56

because Vermont has uh you know they they have some places in Vermont where

26:02

uh the the income for retirees actually exceeds these thresholds or it's there's

26:08

a significant proportion of the population where the income exceeds these thresholds. There's a good bit

26:14

that's below as well, but um these are fairly low uh as far as uh thresholds

26:21

for what's not taxable. Uh, and so if you're claiming IRA income, um, if

26:27

you're claiming, you know, you know, 401k income or other pensions, etc., then, you know, you're probably going to

26:33

see some tax in Vermont. Okay. West Virginia. Um it is actually a

26:41

it's the way it's set up it's pretty complex but essentially in in 2025 2024 it was

26:50

uh this number was this percentage was lower but 2025 65% of income is exempt

26:56

and then in 2026 it's 100% going to be exempt. So it's it'll be completely phased out. Um, and this is part and

27:04

part, you know, part of trying to actually uh get get a few more people

27:10

into uh West Virginia. Uh, so if you can get some more, if you want more retirees

27:15

in in Virginia in West Virginia, then, you know, like we said, you're probably going to make social security not

27:22

taxable. Let me just kind of go through here. Um,

27:32

hey, if it's answered, it doesn't go into the because I'm going to go into um some scenarios next.

27:38

Yeah, I've knocked out a few of the Okay. questions and um but yeah, maybe to to hit a couple that are related to stuff

27:45

we've already um talked about. Some people were a little bit confused about phaseins and phase outs of the OBBBA

27:51

stuff. Um and there are some slight differences but yeah a lot of things are

27:57

gone by 2029. And I think the salt might be 2030 that state note local tax

28:03

deduction which is not a topic for today but you know just and then there's a bunch of weird stuff around um

28:11

around inflation adjustments which is actually worth mentioning in the context of social security taxation too because

28:18

those thresholds that Mike just mentioned they've been there well the

28:23

50% threshold was there from 1983. We went over that last week that actually the the social security system has

28:30

changed a lot over the years. Sometimes like we learn about it, you know, you do your CFP or something and you learn about it and you think, "Oh, that's how

28:36

it's always been." No, it's changed a ton. 50% was 83. Correct me if I'm wrong

28:41

on that, Mike. I don't know. And then 85% came in in the 90s. I think it was 93. So,

28:47

and those numbers have been the same since then. So, I just did some quick math. The 25,000 is one of them. Is that

28:54

right? Yeah. I think that would be like $80ome,000 today if it had been adjusted. So, somebody was asking, you

29:00

know, seems like most people don't get taxed. Well, way more due now than did back then, you know, I mean, and then

29:07

$85,000 in, you know, 93 in today's dollars would have been like a h 100,000. So, like really what you would

29:14

have been talking about is like an 80 to $100,000 thing, but but instead it's, you know, 25 to 45 or whatever it was,

29:20

44,000. So, uh, and the OBBA stuff is not adjusted for inflation, so it's

29:26

$6,000, I don't believe. I looked for it. There's other ones where they get like a 1% bump a month. It's just it's

29:33

it's a mess. But, um, yeah, essentially there's that's that answers some of the questions people have. And for those of

29:40

you who are asking, the deduction, all that stuff is already in income lab. So, if you have plans in

29:45

there, it's it's already getting getting shown. But again, you'll only see it from through 28 and it might be phased

29:52

out. There's phase there's magi phase out as Mike said. So again, it's a total mess, but it's all in there. So it'll be

29:59

calculated for you. Uh let's see. Ren said, uh do you mean foreign income to be a pension? No, like

30:06

if you're if you're earning income in a foreign country. So say you have a job in the UK or something and a UK

30:12

company's paying you. I'm saying that that is wages that you would that would be included in provisional income. Uh so

30:19

not necessarily a pension. So pensions are included in uh in provisional income.

30:25

Yeah. And people were asking about MAGI in general in usually that's just AGI plus um taxexempt

30:32

income. I think there may be a few places where I think for Obamacare ACA

30:37

credits. It might be different but ACA credits. And then I think there's um

30:42

uh Yeah, it's it's deductions like IRA deductions, things like that. Yeah.

30:48

Yeah. Uh yeah. Well, you should pay your you

30:54

should report your foreign income because they they require that. So um

31:00

the the social security scenario uh where the standard deduction wasn't

31:05

added actually that person uh 50% of their uh at 62 50% of their um social

31:14

security was taxable. So few individuals these low income it seems possible to avoid taxes. It is

31:21

pretty um it's just like that's what Justin was saying. I think like it's just really it is really hard to avoid

31:29

taxes. Uh we're going to go through actually a scenario where maybe it's possible. Um it's a very curated

31:38

scenario and it would be a very specific situation where you could um essentially avoid taxes. of this system. I I know

31:45

that I've got like uh there are a lot of people who are, you know, Roth conversion fans. Um I don't I think I

31:52

can't open up LinkedIn without seeing, you know, six or seven posts on Roth conversions, uh you know, in a day. So,

32:00

I know they're very popular. So, we're going to talk, you know, uh briefly about this this Roth conversion

32:06

scenario. Um, and this is again, this is something this is a situation that may not pop up

32:13

that often, but it it's potentially small American, right? So, this is a this is a administrator at a uh at a

32:22

small law firm. Uh, you know, she's been working there for 30 years. Um, boss

32:29

says, "Hey, look, I'm going to close this firm in 10 years, so you know, figure it out."

32:34

um they didn't have a retirement plan, so she's been putting money into an IRA,

32:41

uh maxing as much as she can and investing aggressively. And so she's actually managed to accumulate one and a

32:47

quarter million in that IRA. And she currently earns $70,000 a year.

32:53

So she looks at her social security statement, she's like, "What how am I how much am I going to get from social security uh at age 64?" because that's

33:01

how old she's going to be when the law firm closes. And it looks like she's going to get about 24,500.

33:08

Um, and these numbers are what they are by design. Um, just to just for illustration purposes, it's not always

33:14

going to be this uh this cut and dry. In fact, it's never going to be this cut and dry as you all may know.

33:22

So, in this in this situation, we're saying, "Okay, look, let's pay the let's let's convert the IRA money over a

33:29

10-year period um to Roth." And so, overall, what's

33:35

going to happen is you're going to she's going to end up paying about $665,000

33:42

in taxes over that time period. Account's going to grow. Um she's going to be, you know, doing the conversion.

33:48

It's so it's going to cost a little bit of money. um the withdrawal the tax treatment of

33:55

the withdrawals is going to be taxfree uh and um you know definitely just

34:01

paying the taxes now. So, if we look at if there's no conversion, if she just

34:07

keeps it in the traditional IRA and let's assume basically uh that she's going to be getting taxed around bas

34:14

based on the withdrawal schedule that I chose, she's going to be getting taxed at about 25%

34:19

um between federal and state and then 85% on her social security on on 85% of

34:25

her social security, not 85% of her social security. Um, and so what we end

34:31

up with is you can kind of see, you just look at this right here. Oh, well, it's a $68,000 savings. But, uh, what I did

34:39

here too is a lot of times what happens is when people compare these Roth conversions to no conversion. Um,

34:46

they're typically not taken into account. Uh, they're not they're not doing a present value calculation. So, in this case, it did a present value

34:52

calculation. And when you do that, it's still it is still better for uh Jan to

34:59

actually um you know uh convert instead

35:04

of uh instead of paying them overtime because she's not going to pay any taxes on her social security.

35:11

Uh and so basically she'll just spend her entire retirement um not paying taxes.

35:19

Uh oh. So that savings is about $68,000 which is not a huge amount of money but

35:25

like when we think about you know $60,000 is about $68,000 is about one year of her one year of her salary. So

35:32

this is a situation obviously it's not this is not going to be this is designed

35:37

perfectly so that it um that it comes out the right way. But it is something that you would want to analyze. you

35:43

would want to spend some time with clients and say okay does a Roth conversion make sense in this case um

35:51

and in this case this particular case it does make sense

35:58

okay so I did mention a little bit about um you know that there's a possibility

36:03

that a planning scenario could include like where does somebody want to live when they retire and so I I uh created

36:10

this scenario where basically it's It's Joe the veteran. Um, and so Joe is

36:18

a retired uh US military veteran and he's trying to figure out whether he wants to live in North Carolina or

36:24

Montana. Uh, he's got a a US military pension of $70,000 per year. Uh, which

36:31

would contribute to his provisional income. He's got social security benefits which are 41,000 per year. So

36:37

essentially, he's going to pay tax on 85% of his social security. Right? those

36:42

two numbers together puts him well over that threshold. So the question, the question that Joe

36:48

wants to know is of these two places, let's say that he's got family in both places. Of these two places, which state

36:56

is the most advantageous for him to live to? And let's I mean this is actually true. Property taxes are about the same,

37:02

slightly lower in North Carolina. Um but for the most part, that would be that

37:08

would be a consideration as well. you would want to consider all those sorts of uh taxes.

37:14

And so what sorts of questions do we need to ask? Right? So, well, we going to know how how does North Carolina and

37:21

Montana each tax social security. Um we know from the previous set of slides

37:28

that Montana actually just mirrors the federal government. Uh so they're going to have the same thresholds.

37:34

And then uh how does uh North Carolina and Montana tax um military pensions?

37:42

And uh turns out that uh Montana taxes both social security,

37:50

so they tax it the same way they do federal government. Um

37:56

and they also tax uh military pensions.

38:01

Um, and so in this case, if you're looking at the same gross income, uh,

38:07

the the pension is going to be taxed in in Montana at uh, it's going to be taxed

38:12

around it's going to be about $3,70. It's going to be about $2,21 for the tax

38:19

on the on social security. You're going to pay the same federal tax because it's

38:25

it's it's the same scenario, right? And in this case, uh, it's about $5,100

38:32

difference. So it's, you know, that's that's not nothing when you're talking about annual taxes. And so in this case,

38:38

obviously, there's a lot of other considerations. It's really muggy here. I live in North Carolina. It's really

38:44

muggy here. Montana is, you know, it's big sky country. There's uh it's there's

38:50

there's a lot of nice outdoor experiences, although my understanding is it's getting a little bit more crowded there.

38:56

um uh real estate accounts as well. So yeah, how much how much are things going

39:02

to cost? But in general from a what you pay uh your various uh taxing agents,

39:10

it's going to actually be better to live in North Carolina in this case. So it's definitely something to consider

39:16

when you're talking about um so when we talk about crossber planning we're not just talking about um foreign countries

39:23

we're talking about states as well because there are differences in states as well.

39:32

All right. Okay. So a few other issues.

39:39

Um there is uh I don't I don't know if you

39:45

Justin if I don't think you talked about this last week but um there is the consideration for reductions

39:52

um in in your benefit. So, if you are not uh at full retirement age,

40:01

uh and I don't I it was unclear how this would fit in any of the any of the other weeks that we did this, but I did want

40:07

to include it here. So, if you retire early, um and you're still working, uh

40:15

you can actually have some of your benefits reduced for that year. that now these benefits are added back in later

40:21

so you don't have to worry about like one of the big concerns with with clients is always like you know I paid

40:26

in uh they owe me and so this would this would feel like it's being taken from them um but they you know consider the

40:36

fact that um they're actually going to get that money back so in this case this

40:41

is Jesse this is very similar to a situation that I had with a client uh where she was collecting social security

40:49

and uh all of a sudden her benefit was reduced because she started working for her son making $30,000 a year. And so in

40:57

2025 that benefit would be reduced for every dollar um for every $2 over uh

41:05

$23,400 it would be reduced $1. But then once

41:10

Jesse reaches her full retirement age that goes away. Um, there is one one uh

41:19

quick caveat. The month before you turn 65, that $23,000 number jumps to uh I think

41:27

it's close to $61,000. It's around there. Um, and for some

41:32

reason, it's just built in that it's that month before you turn 65, but then

41:37

thereafter um it's uh that that threshold doesn't matter.

41:43

So when you're thinking about from a planning perspective, if in this like in this case the client

41:50

could kind of control um you know work schedule to keep that number under a

41:56

certain amount um maybe even at 64 uh have you know do some work and then

42:03

have the son who she worked for um push some of that push some of that income

42:09

into the next year saying you know maybe a bonus or a raise or something in the

42:14

next year. What's that? A quick a quick comment on that because I saw a few in the in the chat. I think

42:20

it's um the year that you hit FRA. So, yes, it's the year you hit FRA.

42:26

67 for most people. Like you said, there's still a few who are at 68 and 10 months, I think. But in like a year

42:31

that'll be over. So, it'll be 66 and 10 months, right? Like sorry, 66. It'd be great if somebody was 68.

42:38

That would that means we're actually doing the right thing. Moving that up a little bit. But yeah, 60. Yeah, at FRA,

42:44

so 66, 67. Um, it's that it that threshold jumps for the, you know, just

42:51

before they the month before they turn. And just if if this seems totally arbitrary to people, the concept is

42:58

they're basically saying like social security is a retirement benefit and you're not really retired, right? And so

43:04

that's what the whole take it away and then give it back thing is all about. Um like because it does you you look at

43:10

this stuff and you're like what who came up with this? What is right? But that there is like a conceptual

43:16

reason that they have. Yeah. I I think you know my uh my my father is still working. He's 73.

43:25

Um but that was that was a situation he he claimed early and um and then was

43:32

just really confused as to why he's worked his whole life. he's like really confused as to why his benefit was was

43:38

so small. Um and it was because he had a you know he had a a great salary uh

43:43

working for the federal government. And so not only was he um you know getting

43:49

you know he he's one of those uh folks who like you know every tax dollar is a

43:54

is a is a knife wound. So not only was he getting taxed then he's also his social security is

44:01

reduced. um his provisional income is over the amount. So he's getting taxed

44:06

on 85%. So it was like this it's this it was this big issue but like he didn't realize that he was going to that he

44:13

would get that back. So and this is another place I think where policy has changed over time in this

44:19

case actually for the better. So I believe at one point there were earned income reductions I think for everybody.

44:28

Then it got pushed back to that ended in December of your FRA year and now it ends at FRA like that that actual month.

44:35

So this is actually a place where it's gotten a little bit nicer to people. Yeah, I think I think it was I think it

44:41

was originally like no matter how much not originally but like I think it was I that's right. So now there's even

44:46

these thresholds and like you said the threshold in your FRA year is much higher like three times as much and it's

44:51

a dollar for every three instead of it for every two. So it's not that things have always gotten tougher on people. Um

44:58

although that's often true. [Music]

45:03

All right. So that's so that's something to consider if you have a client who's a side hustler. If you recall the example

45:08

earlier where I was talking about the person who was uh in you know living and

45:13

working in a foreign country um obviously that person was they were full-time employed um but and so they

45:20

would they would have a reduction as well um in that scenario. I didn't do the you know any reduction calculation

45:26

but I thought that it was important for us to to kind of talk about here.

45:33

There's a a couple of other things. So actually before I get to Jamie the unbalanced. So um

45:42

one of the things that I think I want to touch on because I didn't I didn't go into too much depth in it when we were

45:48

talking about the states is the fact that there are these different thresholds of you know both people have

45:55

to be a certain age in order for some of these uh benefits to kick in. Um,

46:01

obviously the one that is is currently germaine is the OBBA one where you've

46:06

got uh the $6,000 deduction. Um, you know, you might have somebody claiming

46:13

if if both people are going to retire at the same time, but one person's 62 and one person's say 67, um, that that can

46:22

create some uh potential issues. And it's not it's not so much that um that

46:27

it should prevent them from retiring, but it is important for them to it's just information for them to know. It

46:33

might be it might not be enough to move the needle, but it might be enough to where people are like, well, you know,

46:38

maybe I'll work another year or two because um you know, I don't want to I

46:44

don't want to give that up. Um people are weird. So when we talk uh in week

46:50

four, we're going to be talking about um the you know psychology behind a lot of

46:57

this. And so people I say people are weird, people are different. And so people have uh different ideas about

47:03

what makes sense. And so even though it may not even be that big of a deal, you having this information and being able

47:10

to to transmit that information to a client uh I think is

47:16

uh is incredibly useful and it just you know demonstrates value.

47:23

Okay. So this is um this is a scenario where uh you know somebody's got

47:28

multiple income sources you know multiple income streams uh so receiving

47:33

20,000 in social security 25,000 uh from a pension and 15,000 from an IRA um and

47:41

so that's a provisional income of 70,000. So, there's a couple of different things to kind of think about

47:47

here. Is that 20,000 in social security if absent this other income

47:53

would be non-t taxable, right? It would be completely non- taxable. the the

47:58

$25,000 from the pension. One of the things that that this person's 68, but

48:04

but one of the things that might be important to think about is if you've got a pension that you that will

48:11

continue to acrue, uh it may make sense to to claim it a little later. Um

48:16

depending on how much that how much it grows. If it's like social security, you might like want that 8% or something

48:21

like that. Um, but also it also kind of plays into, you know, the the potential

48:27

for claiming early. If you've got enough sources of income, then maybe you don't care as much about, you know, the small

48:33

amount of tax that you're going to pay here. So, even at 85% of of um of the

48:39

20,000 being taxable, is it is it that big of a is it that big of a move? Um, I

48:46

don't state here that this person has a has a Roth IRA, but if they did have a Roth IRA, they might be able to reduce

48:52

their uh provisional income. Um,

48:57

that is not a provisional income of 70,000. That is a provisional income of

49:03

60,000. So, sorry about that. So, anyway, if you That was just to make sure everybody was

49:09

paying attention. You're I can tell the professor in you. Yeah.

49:14

Um I have done that in the past. Uh I don't you know this is this was totally

49:20

I messed this one up. But anyway the the idea is that if you have if you did have some Roth then um you could potentially

49:27

especially if Jamie was married you could potentially uh reduce the um

49:36

amount that is taxable uh in the amounts we're talking about. Oh, somebody somebody did catch it

49:44

actually. Uh, yep, Robert. Good good catch. Um,

49:49

so, uh, where was I? What was I going to say about that? Um, basically like these

49:56

some of these amounts are pretty small. And so, you know, when we when we think about financial planning clients, I

50:02

mean, we're usually not talking about um, you know, trying to save somebody like, you know, $360

50:08

uh, a year in taxes. Um I think uh

50:18

uh hang on a second. So provisional income I just want to make sure we're clear on something. Where was that?

50:24

[Music] Oh, somebody else answered it. Okay. Um

50:30

anyway, the the idea is that um you know you can you can be more optimal and one

50:37

of the things that as financial planners we do have to think about is well is optimal best? Um and spending all this

50:44

time trying to figure out whether um a small amount uh is is useful to a client

50:50

may not be the best. Now, if we go back to uh if we go back to Jesse, potentially

50:57

this is a this is a something that could save some significant money. Or if we go

51:02

further back to like talking about um you know, where to move. I mean, that

51:08

can be depending on what people's sources of income are. Uh this this can be a lot. And not everybody works with

51:14

military veterans. Um but military veterans need planning, too. And many of them have very nice pensions. um you

51:21

know retired 06 is uh you know making about 10 grand a month from their from

51:28

their pension. Uh and if it's if they're in a tax exempt state then that can be you know

51:35

that can be that can be pretty hefty. Um I think

51:42

yeah there we go. So, uh, so we can answer some of these questions,

51:48

uh, since we've got eight minutes left. Let me, uh, there were a couple

51:54

questions about like where to see this stuff. Um, well, maybe we should knock out the FRA thing first. So, Mike was

52:01

just talking about the whole withholding when you're working before full retirement age. They don't just give it

52:08

back to you in a lump sum. it. If you read the Social Securityurities Administration on this, it can be very

52:14

confusing. What they really do is they say, and actually, they don't reduce your

52:19

benefits proportionally. They they just withhold checks. So, like if you if you got a $2,000 check and they they're

52:26

going to withhold $5,000 that year, you're just going to skip the first check, skip the second check, and then

52:31

get half the third check. Um, so what they do then is they say, "Well, we're going to add up all the months where

52:37

that happened and pretend you actually filed that much later than you really did." So if you'd skipped 10 checks over

52:44

your, you know, that period at FRA, they'll just say, "Well, what would your benefit have been if you had actually

52:51

filed 10 months later?" So it's it's not a lump sum. Here it is back. It's like an actuarial adjustment is the best way

52:58

to think about it. Yeah. They adjust it based off like mortality tables. Yeah. Yeah. No one should remember how that

53:04

works. Just just know that Yeah. the benefit goes up at FRA and and they just kind of pay it back to you over

53:10

your lifetime. So So some of you who might have an engine have engineering clients may appreciate

53:15

that answer because they will they will ask they will say do I get a lump sum or

53:20

so I think you can explain it that way. That would be nice but but no. Um

53:25

uh let me share for a second here and I'll uh I can show folks. People were

53:31

wondering where that um taxability is calculated in income lab. So I just wanted to share that one. And this is

53:39

actually a good example also of what Mike was going over about Roth conversions.

53:45

Um Mike, do you mind unsharing and I'll Oh yeah. And Joseph, real quick, uh to

53:51

answer your question, the discount rate I used was uh the inflation rate, which was I think I used like 2.72 or

53:58

something like that. So,

54:05

um [Music]

54:21

All right. So, in if you're in tax lab,

54:27

um for those of you who don't use income lab, this is where you do like tax

54:32

analysis, compare a bunch of, you know, strategies

54:37

for how you take income out over your retirement. Do you do Roth conversions?

54:43

All that stuff. Okay. So, I'm zooming in on converting up to the 22% bracket.

54:50

And you can see taxable social security um versus non-t taxable social security.

54:58

And you know, Roth conversions are obviously going to have an effect on that. Um, I went down and I'm showing

55:04

the the, you know, year-by-year table and you can see taxable social security

55:10

or here and um, essentially the advantage, you know,

55:16

one of the advantages here is, yeah, I've got pretty high taxable social security during my Roth conversion years, right? In 2039, I'm at 51,000

55:25

versus 9,000. But then as soon as I start spending from Roths, that kind of

55:32

flips. So, um that's that's where you'd see that. So,

55:37

that's that's all calculated for you um automatically. And it definitely is one of the the things on the ledger, right?

55:44

If you're trying to figure out if Roth conversions make sense, um one is well, you know, if I live long enough, then

55:50

I'll I'll be taking home more of my social security. Um I know people

55:56

mentioned Irma as well. That's also certainly certainly a factor. Um you

56:02

know the Irma brackets and if you look at people were doing a great job uh handling some of these. They noted that

56:08

there's a two-year look back on Irma. So um that's all handled for you um

56:14

automatically. All right.

56:22

Do you see any others here that have a lot of um does taxation for a single taxpayer

56:29

change with age uh with regard to some of the states? Um yes.

56:35

Oh that's yeah that's true but not the the federal thing which

56:40

kind of right with the deduction but um but not really right. But yeah and there was a lot of

56:46

commentary on this as well. It's it's essentially being marketed as a reduction to social security, but

56:52

actually in a way it's better because it just it just reduces any income, right? So yeah, I mean you could

56:58

it it's it's better like you could almost call it like a reduction for retirees. I think just a retiree deduction

57:04

because if you think about people maybe there's somebody who doesn't maybe they didn't pay into social security. I have

57:09

a number of uh we'll talk about divorce next week actually. One of the scenarios we're talking about is like this lady

57:16

did get married and then so she and then got divorced again. So she's has no claim on social security anymore. Um but

57:23

that deduction still helps her even though she's not getting social security. Right. Right.

57:28

U federal tax estimator tool. Uh income lab. Um

57:35

is it definitely estimate your taxes. I don't know if there's a federal one. That's online.

57:41

There probably is. Um yeah. And I was also trying to find out if you can submit that withholding form um

57:47

electronically. There there are some things you can do electronically on the social security website. I don't know if that's one of them

57:52

you c. So you can do it um it you have to do it when you when you're claiming and so sometimes so if I'm claiming with

57:59

a client if I'm walking them through it and they agree to do the IDM me because that's the other thing, right? Like if a

58:05

client doesn't want to do that, forget about it. Like it's you're doing all the manual stuff. um that's less and less of

58:12

a problem these days. Um although you know um cyber security experts do have a

58:19

little bit of issue with ID. So um clients aren't completely crazy in that sense or not crazy at all actually.

58:27

Um so I think we're wrapping up. Um

58:32

please come back in the next couple weeks. We're going to keep doing we've got like like Mike said, we've got um

58:38

basically all the complicated stuff next week. Survivor benefits, spousal benefits, divorce um and then we're

58:46

going to really dive into the the psychology um around claiming which will revisit a little bit of the stuff we did

58:52

last week. Um and go over really some reasons that rules of thumb like wait

58:58

till 70 or everybody claim at 62 just they just don't hold water. Uh it's really like it's much more complex than

59:04

that. Um so those are going to be great. Um and we will send out links to this

59:10

recording, links to the the slides. Um and make sure you fill out the um the

59:17

questionnaire that you'll get when I close this webinar because that's how we're going to be able to put your um your CE credit in. Somebody was asking

59:24

where the where the questions are. Um we'll leave that as an exercise to you. you actually get the credit just for

59:29

just for attending and being a a good audience. So, um any uh

59:37

any questions that we didn't get, we will try to take a look at those and um you know, if there's something specific

59:43

that we can address for you or um you know, when we have time in future uh

59:48

future sessions, we'll try to revisit some of these if they if they uh fit the

59:54

fit the uh the topic. Um, but with that I want to say thank you to Michael Kota

59:59

Dakota and everybody for uh for joining us today. Great session. Um, thank you

1:00:05

Mike. I'll uh Yeah, no. Great. Appreciate it. Take care everybody.

1:00:10

Byebye.