Any other pension or asset manager or investor or fiduciary for somebody else that invested that way over 30 years would be sued for negligence
Do you want a wealthy retirement without worrying about money? Do welcome to the Retire In Texas Podcast, where you will discover how to enjoy your faith, your family, and your freedom in the state of Texas. And now here's your host, financial advisor, author, and all around good Texan, Darryl Lyons.
(00:36): Welcome to the retire in Texas podcast. My name is Darryl Lyons. I'm the co-founder of PAX financial group in San Antonio, Texas PAX financial group is the sponsor of this program. Visit PAX financial group.com. Before I get started, I need to share the legal disclosure. This material contains general information only and is not intended to provide specific investment tax or legal advice. Visit PAX financial group.com for more information, investment advisory services offered through PAX financial group, LLC. Okay, so we're going to talk so security. Is it a false promise or a safety net? I have three points I want to make, I want to talk about how much you can expect. I want to talk about the system itself. What's the problem. And then I want to talk about what I think might happen to solve that problem. So we'll talk about how much you can expect.
(01:19): I actually teach my kids about social security, who my kids are 16, 14, 10, and eight. Right? Okay. I got that. Right. So I teach them about social security. What I do is I take 30% of their Halloween candy and I promise to give it back to them in 70 years. And that's kind of how I feel about social security. It is your money, right? You did put it in the system. So certainly I'm an expert, my opinion on social security and you'll hear my opinion, but let me set up the stage first and let you know how the whole game works. Some people have full retirement age for social security at 66 and two months, but most people have full retirement age of social security at age 67. Basically, if you're born after 1960, your full retirement age is 67. That's the one that you'll see on your statement.
(02:06): The green statement, you can take social security at 62, that's called early social security or reduced benefit. It's about a 30% reduction. One of the bigger problems by taking it early is if you work, they take some of your social security away. So you've got to be very careful. If you decide to work and take social security at 62, you've got to be very careful to play within the rules. Otherwise they will take your social security way. Quite a bit of it, not all of it, but quite a bit of it. So be careful of working before for retirement age, which for many people, like I said is 67. Now you can let your social security cook up until age 70. What I mean by that is it's going to earn about an 8% rate of return by letting it cook until 70. Meaning that, Hey, I don't need it right now.
(02:59): And I'm going to live off of my investments and or whatever I'm going to work and I'm going to let it cook longer. And then it, 70, it doesn't grow past 70. So you don't want to let it cook longer than 70. Cause it doesn't really cook anymore. But at 70 you take your social security at that point. What's cool about doing that though. What's smart about doing that is that if you died, your surviving spouse will get that higher amount. So that's a very important survivorship strategy by letting your social security cook and to the highest amount. So your surviving spouse gets that higher paycheck, very smart survivorship strategy, very smart, very smart, letting it cook. That's why I don't want you to pull the trigger too early and say, I'm going to take it at 62 because I think social security is not going to be there.
(03:41): I'm going to get it while I can. I don't know if that's the best decision for you. You need to put some more thought into it than that. Now social security is still subject to taxes. 85% of social security could be subject to taxes. Now I'm not saying that it's an 85% tax on social security. I'm just saying that about 85% of social security is subject to taxes depending on your income. I don't know why they're just being nice. The other 15%, you don't have to pay taxes. I don't get it. But 85% of social security is subject to taxes. Depending on your income, you also get an inflation factor on social security. It's about 1.3% changes every year cost of living adjustment, but it's really offset quite a bit by the rising Medicare costs. So when you get social security, your social security check hits your bank account and it's the net check after Medicare cost.
(04:30): So if Medicare is going up, the cost of Medicare is going up and you're getting an inflation factor in social security. You really don't see an increase in your net check on your bank account. So even if there is a Cola factor, the cost of living adjustment on your social security, it's often offset by Medicare costs. Now I have a client that this is not an uncommon question is okay, we're doing a financial plan, right? We're running all the numbers, crunching the numbers, trying to figure out if they are going to out live their money and or they can leave a legacy. And so social security is a part of the dialogue. And we plug in the numbers from social security and the plans working, right? So you're not going to run out of money. Mrs. Client, you're fine. Looks like you're may even be able to leave an inheritance, but this particular client said, well, I want to run it without social security.
(05:17): Well, that's not difficult to do. Let me just put it, you know, no social security in there and sure enough, the plan still worked just not near as good. Right? The legacy was kind of, you know, it wasn't much of an inheritance, frankly, but you still didn't run out of money. So, well, why don't we just play with the numbers a little bit? What if it's 50% of social security? Okay. Let's look at that too. Now the number I kind of like looking at it. So security right now, and I'm thinking about this more and more as I do, retirement analysis is looking at social security through the lens of what if it's 78% of what's stated on your check on your own gut check, but you're a statement. What if it's 78% of your statement, full retirement age or whatever you choose 62, 6 67 or 70.
(06:05): But what if I start modeling everyone's social security at 78% of their stated benefit? The reason I say 78%, well, let me I'll tease it out. I'll tell you why. I said 78%. Just a few minutes. I do want to mention to you though, if we're talking about social security and you're interested in this conversation, you probably have kids. You may or may not have kids, but if you do have kids or people that younger than you, I need you to do me one favor. I need you to tell them to save money because social security might not be there for them. Can you do that for me please? Because the system is just not, I mean, right now in the current state, it's not looking good for those in the thirties and forties. It's just not looking good and member, we're not in a pension environment anymore where you get a pension that you can't outlive.
(06:53): The pensions, a broken social securities are broken. I want you to do me a favor and just tell those whenever you can, that are younger. You need to start saving. And the advice I'd say is say 15% of your gross income, so important. So I think you understand the framework of social security. Hopefully you get at 67, you can get it at 62. If you want, it's a 30% reduction. You can let it cook until 70. It's an 8% compounded return at 78, your surviving spouse gets a higher benefit at a 70 it's taxed up to 85%. If you take it early and you work, it's reduced. It's kind of the summary of social security cost of living adjustments are included. That's just the framework of how social security works.
(07:33): I hope that helps. Of course your financial advisor can unpack your personal situation. In fact, many of our advisors actually will go online and help you access your social security page. So you can actually see your real numbers. And it's kind of fun to look at the history of earnings there's stories there. Like I'll ask people, what did you do in 1982? Oh, you know, it was a bus boy. So it's, it's interesting. Cause you can see your earnings history and it just tells a story life story. But what's the current situation of social security? What does it look like right now? Here's the problem in 2021, the social security programs, expenses are now exceeding its income. The social security program is spending more than it's making and you're not stupid. You know, that's not sustainable. And so what do you do when you're spending more than you're making?
(08:27): Well, if you're in a good financial situation, you go to your savings account and you tap into your savings account and it fills in the gap. And that's what social security is going to have to do. They're going to have to go to something called their trust fund, which I don't trust and based on their need to tap into their trust fund. That's going to run out in 2033 COVID is making run out sooner because if your people are paying into it, 2033, the savings account for social security is wiped out. The trust fund is no longer there based on the projected income coming in to pay for all the social security recipients. There's only enough income coming in to pay for 78% of social security benefits. There's only enough money coming in to pay for 78% of social security benefits. Now the federal government made a very stupid move.
(09:31): And since 2000 you can look this up. They've been investing the social security trust fund. This is a $2.8 billion trust fund. They've been investing in treasury bonds and basically treasury type securities. And so it's been earning 6%. Now it's earning, you know, 1%, 2.3% somewhere around there. But if you look at the average, it's probably in the last 20, 30 years, it's probably been bad at about three or 4%. Holland is getting 10% on their money. Any other pension or asset manager or investor or fiduciary for somebody else that invested that way over 30 years would be sued for negligence. I remember years ago, there was proposal to invest the trust fund into securities, into the markets, just like all of us and a finger was pointed in this politician's face and said, you just want to make wall street richer. And then it died.
(10:30): And politics are killing this trust fund. In 2000, there are 700 million in the trust fund and now it's 2.8 billion. It could honestly probably be 6 billion. I mean the last 20 years, the market's averaged 8.8, 7% S and P 500, just look at just, you know, you can look at whatever averages you want, but it's a lot more than what they invested in. It's completely negligent, completely negligent. I even saw one politician and 2008 said, aren't you glad that we didn't invest those security and invested in the markets in 2008? He said that foolish. Cause we know what happened since then. Just politics is just killing the social security system. This is the third point I want to make is how are we going to fix this thing?
(11:21): I'll put a link in the in the show notes on this little interactive tool, it's a little outdated on ways that a security can be fixed. But let me just share with you kind of some of the thoughts on how to fix this thing. And one is beans based testing, and actually this gets bipartisan support. And that means a hate even saying it, if you don't need it, you don't get it. If you don't need it, you don't get it. That's called means based testing. Warren buffet says, Hey, look, I don't need so security. Why do I get it? And people are like, yeah, that makes sense. You need it. Well, the problem becomes is what's the threshold? Is it based on your income? Is it based on your assets? And it doesn't seem right that if you put money in the system that you can't get your money out, it just doesn't feel Texas.
(12:11): Right? But means based tested has bipartisan support. Now I think that they're probably going to go with this option, which means higher taxes cause that one's kind of easy. Payroll taxes are the way that this whole thing is funded. So basically an employee pay 6.2% of their wages into social security. And the employer matches that. And that's up to 142,000 of earnings. That's the max earnings that that'll be subject to tax anything above. That's not subject to social security tax is subject to Medicare, but not social security. So they will likely move that from 12.4 to something else, maybe 13.4. And so everyone will pay more in social security taxes, payroll taxes. I can see that very easily. They can also shorten the payout period. Remember so security. If you look at the history of it, FDR German chancellor is all long time ago in thirties, forties, maybe even twenties that this was this was developed.
(13:10): And at that time life expectancy was like 68, 70, and now people are living longer. So the payout periods for social security are extremely long relative to what you know, the original developers thought. So I can easily see them moving the start date for social security from age 67, that's full retirement age. I can see them easily moving that to 70 or maybe even 72. Now of course they won't do that for people that are right around the corner. They'll likely do that for the kids, for the forties and the thirties, the non-voters right. They don't want to mess with those 65 year olds that are just looking at their social security statement. They will not touch those people because those people vote. But the thirties and 40 year olds, yeah, let's move that from 67 to 70, 72, I can see that easily happening. They will not mess with those that are voting, you know, 65 million people get social security and they vote.
(14:10): It's really easy to see that they're going to have to make some changes, but it will likely be an increase in taxes, payroll taxes, changing the dates. They could also mess with some of the cost of living adjustments. They've done that before. And that's, I don't think that I don't believe that requires a legislative agenda to go ahead and change the cost of living. You can change to cost of living adjustments. One, the cost of living of how you calculate somebody's full retirement age, and then to the cost of living the pay increases that people get for those that are receiving social security. So they could definitely mess with those and not have to go through legislation. So those would be easy, not fun, not right. I've my Pitchfork right next to me. Cause if they would've just invested that trust fund, we wouldn't be having this conversation.
(14:57): So in summary, I just want to summarize our conversation today. First of all, I hope you know how much you can expect, go to social security's website, run the numbers, look at your earnings history. You may find that there's errors in there. So check that to the current situation is they messed up on the trust fund. They didn't invest it foolishness. And it's going to run out in 2033, just math and number three. There's the way that they fix the system is they're going to have to pay more tax. I mean, people are going to have to pay more taxes. Business owners are going to have to pay more taxes and there's indirect consequences of all of those decisions. That's where we're at. You know, it's funny, I say all this and I find myself kind of in a depressive state, but the reality is I'm still optimistic.
(15:35): I really am. I mean, the system's got to be fixed, but it's going to be okay. Those that are 50, 60, they're going to get their stuff. They're going to get their money. Those are in thirties and forties. We just need to save more. I'm in that group. We need to just save more and that's not going to hurt us. It's good for you. You know, we spend too much money anyways. So if you're in your fifties and sixties and you're thinking about social security, I wouldn't worry about it so much. I think you're going to be okay. Maybe few modifications here and there, but I'm just going to encourage you to go to the younger people and say, look, you need to start saving, say 15% of your gross income. Suck it up. You don't need that extra latte. And if you could do anything, I would encourage you to do two things. One, not worry about social security, just to try to understand it and to encourage the next generation to save money. Hey, thanks for joining us today. Grab our ebook retirement, Texas on our website, PAX financial group.com. And please don't forget you think different when you think long-term,
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