One of the top ways that my agents get in front of consumers is by them—the agent—understanding Social Security retirement benefits in order to help their clients file correctly. Some folks who have never really dug into Social Security filing strategies will say that Social Security is a “bait and switch” method of getting in front of clients. I disagree!
Furthermore, when consumers are concerned with maximizing their Social Security, it is because they are concerned about increasing their retirement income. Mr. Obvious here I know. So, if you are in the business of helping your clients generate more retirement income, it is a natural transition to and from the topic of Social Security.
Folks will also say Social Security filing timing (age 62? age 67? Age 70?) is as simple as: Does the consumer have longevity in their family or not? Hence, if you have good longevity in your family, file late; if you have no longevity, file early.
I recently saw a LinkedIn post where the gentleman showed a “crossover” graph that showed at what age in a person’s life will filing late (age 70) be better than filing early (age 62). He had two lines that represented the cumulative benefits received by Social Security. The “Age 62” line started accumulating at age 62 but the slope of total benefits was fairly flat. He compared that line to the “Age 70” line that started accumulating at age 70 but was steeper. The “crossover point was around the client reaching their early 80’s. The gentleman exclaimed in bold letters, “There! The math is the math!”
Wrong! This “crossover analysis” is overly simplistic because it doesn’t take into consideration taxation on Social Security benefits as well as the impact on Required Minimum Distributions! I know what you are thinking, “How on earth does Social Security timing impact Social Security taxation and also Required Minimum Distributions on IRAs?” I will get to that in a bit.
As I tell consumers, “I don’t care about the amount of Social Security that you get. I care about the net net net amount of Social Security that you get.” What I am referring to there has to do with minimizing Social Security taxation, which is a function of their provisional income, which is a function of the various other types of retirement income that the consumer has coming in—which is something that you, the financial professional, should be deeply involved with. Again, Social Security should be a natural part of anybody’s business that focuses on helping their consumers get more retirement income, which is certainly most of you that are reading this article.
In next month’s article I will be digging into an actual scenario by using my planning software, but in the meantime I will address how the taxation of Social Security and also how the size of RMDs can be adjusted by the timing of their Social Security.
In the analysis, I will discuss the difference between a person that retires at age 67, files for Social Security at age 67, and then just blindly takes additional income from their IRA portfolio that is needed to finance their monthly expenses. This is what many consumers do! Then I will contrast that with the person that retires at the same age (67) but delays Social Security until age 70. With this second structure, they are less reliant on income from their pre-tax IRA portfolio while they are on Social Security. Why is that? Because they have a higher Social Security amount coming in because they waited until age 70 and got all of their “delayed retirement credits.” And since they are less reliant on income from their pre-tax accounts, Social Security taxation can possibly be less, because their provisional income is less.
What about Required Minimum Distributions that people fear in the future when tax rates will likely be higher? Well, in our second scenario, those “bridge years” between age 67 and 70, the client had to draw down their pre-tax IRA dollars because they retired at age 67 and didn’t file for SS until age 70. So, on a relative basis, with our second option (the person who filed at 70), they have a lower pre-tax IRA balance on a relative basis once they start needing to take RMDs. Hence, that person will be less “punished” when it comes to the size of the RMDs.
Again, next month, we will put numbers to this and by the end of the article, it will be obvious that Social Security is about so much more than just the simple “crossover analysis” and “bait and switch.”
