Myths, Benefits, and Clearing Up Misconceptions

Mindy:
Welcome to the BiggerPockets Money Podcast, where we interview Jeremy Keil and talk about Social Security.

Jeremy:
The more you make, the more you need to rely on yourself and your own savings. Because Social Security is one of the best progressive… People might like or not like that we’re progressive, but that’s what it is. It’s a progressive system where the people with lower income amount get a higher payout coming to them, and the people with a higher income amount get a lower payout in Social security, which means you are more responsible for your own retirement the more money that you make.

Mindy:
Hello. Hello, Hello. My name is Mindy Jensen, and joining me today as cohost is Emily Guy Birken, Social Security expert, author of Making Social Security Work for You, and retirement expert in general. Emily and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Today I’m joined by Emily and Jeremy, and we are going to talk about Social Security. But don’t worry, it’s not boring. I promise you we are going to blow out all of your misconceptions about Social Security because, spoiler alert, it is still going to be around when you retire. Yes, even you millennials, it’s still going to be around when you retire. Jeremy Keil is our guest today. Jeremy is a national Social Security advisor, a retirement-focused financial planner, and the host of Retirement Revealed Podcast. Jeremy, welcome to the BiggerPockets Money Podcast.

Jeremy:
Thanks for having me here, Mindy.

Mindy:
We haven’t spoken about Social Security on this show before mainly because I’ve never counted on it to be part of my retirement plan. All the rumors online say that it’s underfunded or it’s going to go bankrupt. I used to get statements in the mail that showed what I was going to be receiving, and mine never really amounted to anything. Both of these concepts led me to the decision that it wouldn’t be around for me or it wouldn’t be around it any sort of capacity so that when I reach retirement age, if I want any money, I’m going to have to do it myself. So I did, I’m self-funded with my retirement.
But it turns out that I’m kind of completely wrong, and I’m not the only one who is kind of completely wrong about Social Security and their concepts. At the most recent FinCon, I met Jeremy Keil, who is a Social Security expert, and then I learned Emily Guy Burkin, who I have known forever, is not only a Social Security expert, she’s written a whole book on Social Security that is called Making Social Security Work for You.
So Emily is here to help me ask intelligent questions, and Jeremy is here to help us learn about this program and how we can best utilize it and help our older relatives best utilize it. Emily, thank you for helping. Jeremy, welcome to the show. I want to get into the history of Social Security, I think that’s really important. I think it’s important to know why this is even a thing. But even before that I think that, I feel obligated to clear up the literal biggest misconception of the program, and that is that it’s going to run out of money, it’s going to go bankrupt, it’s going to be perpetually underfunded. I feel like people are going to hear the title of the show and be like, “Oh, Social Security’s not even going to be around for me, so I’m not even going to listen.” Please tell me what’s going on with Social Security.

Emily:
So Jeremy, one of the things that is consistently talked about in the news, the pundits, the talking heads is that Social Security is on its way to going bankrupt, and it’s going to be bankrupt in 2034. Can you explain what that means and why that doesn’t mean that the sky’s falling and there’s no Social Security if you’re younger than 60?

Jeremy:
People hear the word bankrupt, and they feel like bankrupt means zero, because it normally does, right? If you’re bankrupt, you have nothing. And so, people think Social Security going bankrupt means there is zero. And so when they make their plans, they’re just assuming there will be zero. The reality is that Social Security will still keep taxing people, and they’ll still keep paying things out. It’s just that they project that they will only have roughly 75% available from the taxes to pay out the promises. So right now, bankrupt for Social Security means that if they promised you a hundred bucks, expect about 75 down the road, which is way better than zero. It’s not good. Who wants a 25% pay cut, especially when it’s not their own fault? But 75% is way better than zero. And if you’re thinking of your Social Security plans way down the road, think of that number, don’t think of bankrupt equals zero.

Mindy:
Okay, that’s a much better way to think about this. I don’t think people realize that. When you hear bankrupt, you think zero. That has factored into the way that I treat Social Security, it’s just it’s not going to be there for me at all in any capacity. $75 out of 100 is a whole lot better than $0 out of 100, especially if you haven’t planned for your retirement yourself, if you haven’t funded your retirement. Yeah, that’s going to stink, the 25% pay cut like you mentioned, but it’s still better than nothing. Let’s get back to a bit of the history of Social Security. Why does this even exist in the first place?

Jeremy:
I’d say it exists because Americans generally are not good savers. And so, 90 years ago, the government realized that, said, “Oh my goodness, people are getting older. They don’t have things that are saved up.” Or even back to, if you look at Social Security, it’s called old-age survivors and disability insurance. 90 years ago, there’s widows who perhaps didn’t have a job before. Next thing they know, their husband dies in a farming or manufacturing accident. They’ve got no ability in 1935 to go out and get some money on their own. It’s a helpful insurance thing that helps people whether you’re a saver or not. Back in the day, if you were looking at just the retirement side of it, they created 65 as a retirement age because most people didn’t actually make it to 65. It was literally insurance. They didn’t look at it like an investment. It’s their, “What if you’re old? What if you’re a widow? What if you’re on disability? Here’s some insurance from the government paid through by taxes to help people out.” And of course now, most everyone’s getting the 65, and people are looking at more like an investment as in, “I put the money in, I need to get the money out.” And that’s meaning that the government doesn’t have as much as they thought they would to pay out. That’s the whole 75 cents on the dollar that’s coming up.

Emily:
Just to piggyback on that, when Social Security was first implemented was in part in response to the Great Depression where over 50% of elderly Americans lived in abject poverty. And so, seeing these older Americans who could not go back to work and there was no work to be had even if they could living in this horrible state is part of the reason why Roosevelt and Francis Perkins, who was the labor secretary who spearheaded this program, is why they put it in place.
That is something that I know having done research for the book that was really helpful to me. I write about all kinds of money issues. I’ve written about taxes before. When I look into the tax code, you don’t necessarily see good faith efforts to help people behind any one particular piece of the tax code. When it comes to Social Security, as big and overwhelming and even bloated, you might want to call it just because it has so much to it, it is so complex, if you dig down to the rule as it was written, you can always see the good faith attempt to help people from that. The problem is when you’ve got something that affects every single American, someone is going to get the short end of the stick. It can’t be completely fair to everyone. So coming at it from the historical perspective of more than 50% of elderly Americans living in poverty during the Great Depression and then also the sense that this is always attempting to be as fair as possible to the most number of people possible in a way that is going to be helpful to the most number of people possible, it lets you unclench a little bit, because so many people are very clenched when they think about Social Security.

Mindy:
How did it morph into an end-all be-all retirement plan? It seems like the beginnings were just, “Hey, we want to give you a little bit of help,” and now it is what people depend on 100%.

Jeremy:
It just goes back to people that aren’t saving for retirement, so it’s unfortunate. Emily may know the numbers better, I’m going to guess she knows the numbers better than I do, where there are so many people that do rely on Social Security specifically. And even if you don’t rely on Social Security alone for your income, it’s a big dollar amount. So something you said, Mindy, is it’s like, “I don’t expect to be there. I’m not really counting on it,” and when somebody has that attitude towards Social Security, they just throw away their decision. They don’t realize that their personal choice, their decision of when they check a box and how they go about filing for Social Security can make or break them hundreds of thousands of dollars. And so, this is a huge asset to a lot of people. It might be the biggest asset of their life, is how much Social Security they’re going to be bringing in.
And if they’ve got an ability to increase the value of that asset just by knowing how to check a box and when to check a box, they ought do that. It’s so important for so many people, and that’s why I want, one, people to look at and realize it’s going to be around. It might be some changes, and you have more control over the value of Social Security to you and your family than the government does. You’ve got a big ability to decide when you’re going to file, how you’re going to file, and that can mean tens or hundreds of thousands of dollars to you over your entire lifetime.

Emily:
Based on that, I think it’s really helpful for people to understand how Social Security is calculated. People have this sense of like, “Well, I paid taxes in, I get something out,” but they don’t really know how the numbers work. In particular, since Mindy’s audience are probably going to be people who may not have a traditional career, they may be retiring early, how does the Social Security administration determine what someone’s benefits are?

Jeremy:
It’s the top 35 years of earnings you’ve ever had in your lifetime. People might look at it like a pension, and you might think, “Oh, it’s the last three years or top five years.” It’s maybe related more to a pension they’ve heard of. Now, what’s the top 35 years? It’s virtually your entire working career where they calculate it out. Now, some people hear that and they say, “Well, I only earned a few thousand bucks in 1980.” or “I only earned $30,000 in the year 2000, that doesn’t affect me too much.” They actually take those numbers and inflate it with inflation. They equalize it out. They index it, they call it. So it’s not like the money you earned 20 years ago and 30 years ago is worth nothing. They index it up to try to compare that with today. Then they pack in all 35 of those years, they add them up, they average it out by the 35, and then there you go, there’s your monthly average.
And then they apply some percentages. Basically comes down to, if you earn about 12,000 a year on average for those whole 35 years, they’re going to give you back about 90% of it. And then from roughly 12,000 up to about 72,000, they’re going to give you back about 32% of it. And then for a section above that, they’re only giving you 15% back. And then when you make more than roughly 150 grand for that average, they’re giving you nothing back on there at all. So two things that are important there is that you have a lot of control around your years of working. If you’re somebody that has 20 years of working, you have 15 years of zeros in there. So when you’re deciding, “When do I retire?” one extra year of working gives you one extra year in there. That’s 5% more you can expect from Social Security because you made the choice to work that extra year and take out a zero and make sure that you have 21 years that’s counting instead of 20. That’s a big help there.
Another piece of it is that the more you make, the more you need to rely on yourself and your own savings, because Social Security is one of the best progressive… People might like or not like that word progressive, but that’s what it is. It’s a progressive system where the people with a lower income amount get a higher payout coming to them, and the people with a higher income amount get a lower payout from Social Security, which means you are more responsible for your own retirement the more money that you make.

Mindy:
I want to clarify the numbers and percentages that you just gave. Is that a… Let’s see, how do I ask this? Is that a incremental scale just like taxes, so everybody gets 90% of the first 12,000 they made and everybody gets 32% of the next from 12,000 to 70,000 and everybody gets 15% of 70 to 150, assuming that they qualify in those tax brackets? It isn’t if you made 150,000 on average, you just get nothing at all?

Jeremy:
Right, it’s incremental.

Mindy:
Okay.

Jeremy:
It’s just like the marginal tax brackets.

Mindy:
Okay, so you do still get something. That is very interesting, the amount of money that you’re getting, 90% and then the next bracket is 32%. What a giant jump.

Jeremy:
It’s just really like Emily said, it’s here to help people that are having in their older age being in poverty. Clearly, if you have a lower income to begin with, it’s a bigger help that you need. And so, they’re helping people out at that bigger amount at the lower levels. They’re still giving it to you. If you’re making a billion dollars a year, they’ll still give you 90% of that first 12 grand. They’ll still give it to you. But the more that you make, the more you have the capability and the more you need to rely on your own savings and investments for Social Security. And yet, you have control over how long you work. You have control over when you file based on age. You have control if you’re in a couple to decide how you coordinate between the two of you to get the most for you and the most for the widow.

Emily:
Actually, can I have you expand on that? Let’s start with you have control over when you file. What difference does that make in terms of your monthly benefits, the time when you file?

Jeremy:
When you file has a huge difference to your monthly benefit. You might have seen already the statement that says, “Here’s the dollar amount that you’re expecting from Social Security.” That dollar amount is an estimate, and it’s an estimate based on your full retirement age. Let’s just assume right now it’s age 67. So if your promise is $2,000 at age 67 and you file early at 62, they’re going to give you a 30% pay cut. You’ll get only $1,400 coming out of that promise because you’d made the choice to file early. You could also make the choice to file later. If you’re promised $2,000 at the age of 67, you could file all the way up to the age of 70. That would give you a 24% pay raise. You’d get $2,480. So most people don’t go into their boss’s office and ask for a pay cut. And yet, most people go into Social Security and say, “I would like a pay cut for the rest of my life, and it’s going to affect my widow down the road.” That’s what you’re doing when you make a choice with Social Security.
And of course, I went through the extremes, the full retirement age amount, the beginning at age 62, the max at age 70. It’s actually on a per month basis on there, so every month you wait, you do get a little bit more from Social Security mainly because your pay cut is a little bit less.

Mindy:
So why would someone take Social Security early if you’re getting such a drastic pay cut?

Jeremy:
People take Social Security early, I think the number one reason is they just don’t understand the system. They’ve got that thought, “It’s not going to be around for me. It’s not going to amount to much. It should be all relatively equal.” It maybe was relatively equal back in 1983, the last time they made big changes to it, but things have changed. Interest rates are different. People are living longer. The way that you get paid out from Social Security for waiting really is not fair to the government. It is overly fair to you. You are getting a better deal than you should by waiting on Social Security because people are living longer and interest rates are lower compared to 30, 40 years ago now that they made these choices on there.
And so it’s just really more of a misconception. I think the best way to look at it is, number one, Social Security is expected to be around, it’s not going bankrupt down to zero. Yes, there may be a pay cut, but it’s not going down to zero. Think of Social Security in its original terms, old age survivor and disability insurance. This is insurance to help you out in your old age, to help out your survivor. And when you’re making choices, make the choice that gives you the most in your old age. Make the choice that gives the most to your survivor. That’s the best way to look at it. And when you do, you often make choices that end up pushing you towards the waiting point. Now, how long you wait is up to you, and you should do some math behind it. My philosophy with Social Security is, number one, learn the math, we’ve talked a little bit about that. Number two, do the math. Now, that take some calculations and perhaps work with an advisor like myself. And number three, follow the math, right? The math doesn’t lie. When you’ve done all that, you end up realizing that this is a good choice that gives you some great probabilities. And if we can talk about probabilities, I’d be happy to talk about that.

Emily:
Actually, I was wondering if you could go into a little bit more detail about how survivors’ benefits work for widows and widowers. That’s something that also there seem to be quite a few misconceptions about what a widow or widower gets after their spouse passes away.

Jeremy:
I’m going to go with maybe the typical gender traditional because it’s easier to conceptualize with that. People generally think the survivor benefit is, “I’ll get whatever he was getting.” In reality, her promise is exactly what he was promised or was getting. So if he took it early, her promise of what she could get as a survivor is actually lower. If he took it later, her promise of what she could get as a survivor goes up. And then she has a choice too. She can take it all the way early as age 60, which would be a 30% pay cut roughly, or she could take it at her full retirement age, roughly age 67. And so, there’s a lot of choice that oftentimes he gets to make on when he files. There’s a lot of choice that oftentimes she gets to make on when she files for that survivor. And so it’s kind of a double-leveraged sword that could be harmful to the widow, could actually be helpful.
And what’s so interesting and why I care so much about Social Security is that we meet a lot of 92-year-old widows that are living on the Social Security decision of their dead husband and he made it 30 years ago. It’s too late. You ought to know how survivorship works. And really, you’ve got this ability to get money from Social Security that could be 76% higher. The survivor benefit could be 76% higher because the person who is older and has the higher benefit made the choice to wait all the way to 70. And often, the person right now that’s older and has a higher benefit is the husband. The choices that a lot of times the guys are making that affect the widow down the road, and we want to make sure they’re doing all right.

Mindy:
Let’s get that out there right now. How do you do it right to get this 76% higher benefits?

Jeremy:
The way to do it right, and now we’re talking about couples… What’s so problematic with Social Security is people are making decisions based on what they think longevity is. All the studies show that you usually underestimate your life expectancy by about five years. So right now, if you’re thinking how long you might live, just add five, that’s the easy number. In a reality, you need to go get your own personalized longevity estimate. There’s a great place for it, longevityillustrator.org. It’s free, it’s from the Society of Actuaries. We use that with people. It just shows you how long you might live, how long your spouse might live. But more importantly, it’s going to tell you something called the joint life expectancy. It’s harder for two people to die than one person to die, which means on average, the couple is actually going to live longer than the individual life expectancies.
So he might live to 85, she might live to 88. Number one, that’s later than they probably expected, but that’s the real math. Number two, the joint life expectancy, the chance of the second person being gone, the survivor being gone, is probably around age 92. The joint life expectancy, how long that survivor will be living as a widow, is longer than what you expect. So if you’re going into the math, you ought to learn that part first. Learn the longevity part of it first. Get your own personalized longevity estimate through a place like Longevity Illustrator.
The second part that people don’t quite realize is that the first person dies, no matter who it is, the lower one goes away. It’s the bigger one that last longer. So think of it like a cash box. You’ve got the length of time you get money from Social Security, you have the amount you get from Social Security. There’s two benefits in a couple. The smaller one will be less. Think of a box, you have less amount of time, a lower amount of money, it’s a small box. The bigger one is a longer amount of time with more money, it’s a bigger box. If you have the choice between making your bigger box of cash bigger or your smaller box of cash bigger, you’d rather make the bigger box a cash bigger. Which means you’re oftentimes the best way to get the survivor to get a better benefit is to look at who is older, who has the higher benefit, and do what you can to wait on that benefit as long as you can.
Most of the calculations are going to tell you to wait all the way to 70. Do not hear that and say, “No, no way, forget about it. I’m not going to wait till 70.” We’re talking about one benefit, not both of them. And just any level of waiting on that higher benefit is going to be a huge help to you as a couple and especially to that widow.

Emily:
If I can put some numbers to that just because it can be hard to conceptualize, so let’s say my husband, his benefit will be $2,000 at his full retirement age of 67, and mine will be $1,000 at my full retirement age at 67. If Heaven forfend, he were to pass away after having gotten that benefit… So while we’re both drawing benefits, we get $3,000. If he were to pass away, I would not continue getting $3,000. I would not continue getting $1,000, I would get $2,000, which is basically his full benefit. And so, that’s why it would be in our best interest and my best interest for him to wait until age 70 when he’d get $2,400. Is that correct? No, $2,600.

Jeremy:
2,480.

Emily:
2,480. 2,480. Thank you. I can do math. So it would be got it in our best interest for us to wait until age 70 because then he’ll get 2,480, and whether or not I wait with my $1,000, I will get 2,480 if I outlive him. So just want to make sure that’s clear. Okay, I don’t know about Mindy, but I need to have real-world examples to clinging on to and to understand.

Mindy:
Well, no, that’s really helpful. Let’s go with your real-world example. What if Jamie passes before age 70, does she still get his benefits at the age that he passes?

Jeremy:
Yes, you will. That’s exactly it. And so many people are making a decision of, “Oh, I better file for my benefits now just so that my spouse can get it.” That’s a bad excuse because it’s incorrect, that’s not how it works. If you happen to not have filed for Social Security and you happen to have died before age 70, whatever that age is, 63, 65, 68, whatever it is, that’s the age that the widow, the spouse’s benefits are going to be based on. I like how you’re talking to Emily about what if you both file at age 67, because a lot of times people have a conception of, “I’m going to file at this exact amount. We’re going to file at 65, we’re going to file at 67, whatever it is. Oftentimes it’s the same age on there. I’m just going to ask you to think through a little concept here.
Let’s go back and pretend you actually make the same dollar amount. Let’s make it both at 67 you both get $2,000. Now, if somebody files three years early, they’re going to get about a 24% pay cut. The next person files three years later they’re going to get about a 24% pay raise. When you’re both filing and when you’re both turned 70, those equal out. You’re both alive. You’re both getting that amount from Social Security. Someone got a pay cut, somebody got a pay raise, it averaged out. Somebody took it early, somebody took it later. It averages out to the same dollar amount at the same exact time. So, as a couple, it did nothing to you. You’re aged 70, you’re making four grand a month. That’s great. It made no difference if you filed at 67 both of you or one person three years early, one person three years later. But it is a huge difference to that surviving spouse because that lower amount went away, that higher amount stayed on, and that higher amount’s now at the 2,480.
So the first concept I want people to think of is if there’s two of you and you’ve already got an idea in your head of when you want to file, whoever’s got the lower benefit, just consider filing theirs maybe two or three years early. Consider filing the higher benefit two or three years later. Everything averages out to exactly the same. You don’t need to call me and say that you lost out of money. But do call me when you’re a widow because, oh my goodness, you just gave the widow 24% higher just because of how Social Security works out.

Mindy:
I think we need to pull that and make that a social media quote because that is so interesting and that is going to save you or get you higher benefits, however you want to say that. What about if there’s grossly different benefits? Is there any benefit to the lower receiving spouse taking their benefits as soon as they can at what is at age 62?

Jeremy:
Yeah, so that’s why you want to personalize your estimates. That’s why you want to think about the probabilities. I’ll tell you right now that any calculator, because calculators and computers are heartless, any calculator is going to tell you that both people should wait. But what you want to think about is how does this impact you. Because 8%’s roughly the growth every year of waiting on Social Security. 8% on a higher number is a higher number. And so, when we look at it and say, “Oh, yes, you came out ahead by waiting on the lower benefit.” Well, for you personally it might be like $17, who cares? But the computer’s going to tell you to wait. So you need to go and get a personalized estimate of what your Social Security looks like.
When the Social Security Administration tells you their estimate, it’s not personalized. They assume whatever you made last year you’re going to make for the rest of time. So if you weren’t working last year for whatever reason, you’re taking care of your kids or taking care of your parents, there’s a zero on last year, and the government just assumes you made that zero for the rest of the time. They make the same assumption of you’re going to make that dollar amount all the way to your full retirement age, let’s go with age 67. So if you are 51 years old and you retire today and last year you made 100 grand, 200 grand, whatever the number is, the government thinks you’re making 100 grand for the next 16 years, and they’re giving you an estimate that’s completely wrong. So you want to go to ssa.gov, go in there and make your own estimate to say, “This is the dollar amount that I expect to make for however long I expect to make it.”
Get a personalized estimate of your Social Security and definitely go get that personalized estimate of your life expectancy. Pay attention, when there’s two of you, what are the probabilities? A lot of people walk into our office and they say, “I’ve figured this out, and I’ve done this break-even calculation on my own. I figure I’ll break even by the age of 75 or 78,” whatever their number is. And then they’ll throw their hands up in the air and say, “Well, what are the odds I even make it that far?” Well, let’s find out what are the odds. I can tell you in two minutes, “These are the odds.” You would be quite surprised how high the odds are. The odds are usually in your favor that you’ll make it out to 75 or 70 or however much it is.
I’ll talk to the guys right now. The odds are almost irrelevant how long you’re around, if you’re the older spouse, if you had the higher income… For some reason us guys turn 62 and we think we’re dying next week, and we want to get all we can out of Social Security. I don’t care how long you’re living, I care how long your surviving spouse might live. So you need to take a look at that joint life expectancy, and when there’s two of you and you say, “There’s a break even age of whatever it is,” and you run the numbers, a lot of times the odds you’ll actually get there are 90% or higher.
I’d love to go to a casino with 90% odds. You can’t do it. But you can walk into Social Security Administration with 90% odds and say, “This higher benefit, I’m going to wait and I’m going to push out, increase my big cash box from Social Security by waiting on that higher Social Security amount.” If you happen to have a lower Social Security amount for that other spouse and you happen to want to take it early, who cares? Go for it. It doesn’t matter. It’s the biggest amount that matters. Start there and then maybe work backwards to other decisions.

Emily:
Just on the break-even calculation, one thing I like to point out to people who are thinking that way, like, “What are the odds I live to 78,” is, well, you do realize the only way to win is to die early. Is that really winning? Is that really how you want to put your… It’s like I’ll put all on red on the idea that you’re going to die before age 78 when you would break even. That is also another way if you’ve got this sense, “I want to get the most possible out of this, I want to maximize my Social Security benefits.” I can understand wanting to do that because you’ve been paying into it your whole life, but by maximizing the benefits if you take early because you know have this break-even calculation, you’re not maximizing your life. That seems like just a very cynical way of looking at the world, so much better to assume you’re going to live to be 100 and you’re going to get to see your great grandchildren.

Mindy:
Let’s talk about this break-even point. This is something that came up a couple of times. I posted in our Facebook group, “Does anybody have any questions about Social Security?” and there were a lot of questions about Social Security, and one of them was the break-even point.

Jeremy:
I’ve seen a lot of people with their break-even calculators, and I applaud you for going through and trying to create your break-even calculator and trying to do the right thing. People with the break even, they’re trying to do the right thing and say what’s the best way to go about it. There’s a bit of misinformation. It’s just so complicated. A lot of people will create this break-even calculator and they will assume, “Well, if I get the money now, I can earn an investment rate on it.” Well, usually you’re not actually investing your Social Security, you’re spending your Social Security, so perhaps don’t apply an investment rate to something you’re not going to have to invest.
But even if you did invest it, usually people apply some level of investment rates to their break-even calculation, and they completely forget that there’s a cost of living adjustment to Social Security. Social Security goes up every year with inflation. The best thing about Social Security is it goes up every year with inflation for as long as you’re around. You have no idea what inflation will be. You have no idea how long you are around. And when you’ve got a backstop that helps you out with that, that allows your investments to do better. You get to rely less on your investments because you’re relying more on Social Security. When you have less pressure put on your investments, you can do different things and you can likely get a better return because you don’t have the pressure on there. So people are just mistaking one piece of it or forgetting the other piece. They’re forgetting that Social Security goes up with a cost of living. They’re forgetting that you earn money on your investments, you pay taxes on it. They’re forgetting that Social Security in a lot of states it’s tax free for their income. I’m in Wisconsin, it’s tax free for state income taxes in Wisconsin.
Even if you are in a state that tax is Social Security, which is most of them, don’t ask me which ones because it’s a lot of them, look it up and figure that out on your own for what state you’re in, but even if you are in a state that you get taxed for Social Security for state income, at least 15% of Social Security is tax free. So every extra dollar you get out of Social Security because you waited, some of that’s going to be tax free. So many people create this break-even calculator. Good for you for working on that. I’ve seen so many of them and everyone’s forgetting about the cost of living for Social Security. They’re ignoring the Social Security piece. They’re looking at it individually and completely ignoring the survivorship part of it and how the higher benefit will be around longer for the survivor. And then they say, “Well, what are the odds I’ll make it to 75, 78?” whenever they figure out they’re at break-even. Go figure out those odds, and don’t look at your own odds, look at that survivorship odds, the joint life expectancy. I’ll tell you, most people are looking at 90 percentage points or more of, “Here are the odds that waiting actually made sense.”

Emily:
One other thing I see and I think in the Facebook group where people were asking us someone suggested take it as early as you can and invest it because it feels like free money that you’re investing. But the difference between age 62 and 70, it’s about 8% per year. Are there investments that can guarantee that?

Jeremy:
You can’t get a guaranteed 7%, 8%. I’ve done the compounding in terms of return, it’s 7.2% compounding every year from 62 to 70. That’s guaranteed. And it’s so easy for people to look at next month and next year and say, “Well, if I had 30 grand from Social Security come in over the next year, I can invest and make this dollar amount.” What they have trouble seeing, and I can’t blame you for having trouble seeing that, is, well, what about eight years from now when you’re getting $1,000 more a month from Social Security? It’s really easy to project out the growth on the money you would get from Social Security today, and everyone seems to forget about, when you get more money from Social Security because you waited on Social Security 10 years from now, that’s a value as well too. And you say, “Oh my goodness, I’d have to take out 30 grand for my investments this year if I didn’t get Social Security.” And eight years from now, you get to take out 15 grand less from your investments. If you’re looking at it and doing the math, you’ve got to take both sides of it. It’s easy to forget the second site. It’s easy to remember how much money you get next month. So it’s a tough decision because there’s just so much going into it.

Mindy:
Well, and the take it and invest it comment is really easy to say. How long has the stock market been on the tear? It’s been going up and to the right since what? 2012, ’13, ’14 with little bitty dips, but for the most part, up to the right, I don’t know if anybody remembers 2008, ’09, ’10 where it was decidedly not up into the right, it was down and to the right very much. So take it and invest it might be great advice for the last 10 years, but perhaps we are entering a period of high volatility in the stock market. I say perhaps in air quotes because I really do believe that’s where we’re going right now. That doesn’t mean I’m not going to be investing in the stock market, but if you’re investing because you don’t need your Social Security money right now, “Oh, I’ll invest it for the future,” you’re investing at age 62 for the future three years from now, for five years from now when you will need it.
You will need it and maybe it’s a lost value because the stock market is in a squidgy place. Or maybe you’ve invested it and it has gone flat. Or maybe you’ve invested it and… I had another point to make. I’m lost now. But it’s not guaranteed, whereas, if you, like Emily said, if you leave it in there because… I mean, if you need it, that’s a different story. I’m talking about people who don’t need it. Leave it in there and get the guaranteed 8%

Jeremy:
People are looking for a good deal. What’s the best deal? Who doesn’t want a good deal? I’d like to find something that will last your entire lifetime and goes with inflation and has zero commissions. You get more money from Social Security, you’re not paying an annuity agent any commissions, you’re not paying your investment manager anything. Social Security is just about the best deal around because it will last as long as you do, it’ll help out your survivor, it grows with inflation. You’re not paying anybody to manage that investment for you.

Emily:
I do want to just talk a little bit about the guarantee, because I know that there are people who side eye anything that says a guarantee from the government, how much is that worth? And so, I’d love to talk about why do you feel confident saying this is guaranteed and this will be there. You’re going to get the 8%. You’re going to get the [inaudible 00:40:22]. Can you talk a little bit about what that guarantee comes from, what we’re basing it on?

Jeremy:
It’s not that the government says, “Hey, guess what, we’ll give you 8% interest. Why don’t you come invest with us?” It’s a matter of they came up with a program, with a promise at age 67 now, the full retirement age, and they’re going to give you a pay cut if you take it early, and they’re going to give you a pay raise if you wait till later on. It happens to match up with roughly 8% that this income grows every single year by waiting.
Now, when it comes to Social Security, yes, it’s backed by the government. Imagine if the government stopped paying Social Security. Now think about what’s going on with your US stocks. Somehow people look at the Social Security, they look at government debt and say, “Oh, that’s going to go away. The US government won’t pay that. And somehow, all the US companies on the US stock market are going to be phenomenal investments.” Just imagine how bad your real estates and how bad your stocks are looking if the US government isn’t paying back their money. And so, it’s guaranteed by the US government. Find me a better guarantee out there and let’s go for it.

Emily:
Actually, I like to tell people that if Social Security goes away, if you can’t count on it, if you can’t count on whatever promises, we’ve got bigger problems than Social Security. It’s because the aliens have invaded, the zombies have emerged from the earth and oceans have risen, the dollar has fallen. Social Security is going to be the least of your concerns at that point. So probably a little less hyperbolic, but still, you make a very good point, if the government fails to pay its promised debts, then the stock market is not going to be doing well either, so that’s a very good point.

Mindy:
I want to say a few years ago, some political candidate floated the idea of an opt-out program. I don’t remember the specifics, but somebody in our Facebook group asked, “What progress is being made for an opt-out program?” I haven’t heard anything about this for a really long time, so I’m guessing not much. What is your opinion on the opt-out program?

Jeremy:
I’m going to say there’s zero progress being made on an opt-out program, and I’m wondering if people actually do want to opt out. This is the cheapest insurance you’ll get for how long you might live and going up with inflation. That’s the reason why Social Security is running out of money. It’s too good of a deal. And usually, when you find too good of a deal, you want to get more of it. And so, if you are thinking of opting out, which you can’t even do anyways, really think hard on that, of where can you get something that lasts your lifetime, grows with inflation, and has no commissions in any way to anyone. So that’s something that maybe they ought to consider not doing even if the opt out is available.
What I have seen is Dr. Larry Kotlikoff, he’s just a smart economist to begin with, he was on my podcast, and he talked about where he thinks that Social Security just needs a refresh. There’s been a lot of promises made, so let’s keep all those promises, but let’s go forward to where there’s a new system. He’s talking more about a system of basically a forced savings. I haven’t seen much evidence in my lifetime that the government likes to give up control, and so I can’t imagine that the government would want to say, “Let’s give you more choices and let’s let the people run their retirement more.” If there’s a change to Social Security where there is personal savings accounts and things like that, I imagine it’ll be more government mandated, more government control. So I wonder if someone’s thinking of the opt-out program, if and when it exists, if the option to opt out is even better than what they are imagining Social Security is today.

Mindy:
I don’t want a program that has more government control. I remember when I was 15 and I got my first paycheck, I’m like, “What is FICA, and why did it take half of my paycheck?” Seemingly half of my paycheck. I worked five hours at 5,35 or 3,35 an hour, that’s going to be $15. You’re like, “Why is my paycheck $9?” I was so excited to get my first paycheck. Then I would’ve gladly opted out. But yeah, I think that the opt-out program will continue to experience the same level of success and progress that you just quoted at. What was that? 0%?

Jeremy:
Yes.

Mindy:
I think it will continue the 0%. Because the very program is I’m paying in so that current beneficiaries can pull out. So if I’m not paying in, they can’t pull out.

Jeremy:
That’s it. And people call that a pyramid scheme. They call it a Ponzi scheme. Well, guess what? It’s legal, and it’s been working so far.

Mindy:
It didn’t just start yesterday, it’s been around for a while. It does need some improvements. I think that it is slightly more complicated than just, “Hey, we should fix this.” If it was easy to fix, it would’ve been fixed. I think this is a hot button issue for both sides of the political aisle. Of course, they want to fix it because when you fix it, then people like you. When you’re going to give them money in retirement, they’re going to like you. They’re going to vote for you. That’s why politicians do things so they can get reelected. We’re not talking politics. I’m making a general statement. This is true on both sides of the aisle. They want to get reelected, so they’re going to do things that make you happy, that reelect them. So if they could fix this easily, I think they would.

Jeremy:
Well, they made changes before. They made changes 40 years ago in 1983. When they made those changes, they changed some of the benefits. They made it an older age when you got the promises. They didn’t change anything for people that were 40 and over. They said, “Here’s a change.” Because this is a long-term projection. They look at 75-year projections. So when they make changes, of course the closer we get to the problems that are arising down the road, the more changes they’ll have to make. But in the past they’ve made changes. They’ve given people plenty of time and room on there. I would just focus on the things you can control. That’s my general suggestion to people with investing and different things. It’s focus on what you can control. You can control how long you work. You can control when you take your Social Security. You can control educating yourself about Social Security and how it affects the surviving spouse, and educate yourself on what your true life expectancy is and how that actually applies and what are the odds that your decision works out. There’s so much more that you can control with Social Security than what the politicians can even do to you with it.

Mindy:
That sounds like a lot like what I tell my kids all the time, “Focus on what you can control, not what you can’t control.” You can’t control the fact that you have to contribute, so focus on what you can. I love it. Okay, Jeremy, is there anything else that we should know about Social Security?

Jeremy:
Let’s see here. What does it take to know about Social Security? I would just reiterate the old fuddy-duddy name of old age survivor and disability insurance, because it is there to help you out when you’re in your old age, it is there to help you out when you are a surviving spouse, and it’s there as insurance. It’s not an investment. It’s not, “Here’s my internal rate of return.” It is saying, “In case bad things happen, in case I live longer than I expected or my spouse lives longer than expected, in case inflation goes haywire, it is there to help you out with it.” We want you to learn the math on Social Security. It’s not going bankrupt to zero. There might be a pay cut. Learn the math on longevity. Chances are you’re living longer than you expect. Chances are your spouse or surviving spouse is living longer than you expect. So now you’ve learned some of the math, go out and do the math, see how it applies to you, and make those choices that give you the best amount coming from Social Security, not next month, but over your entire lifetime. This is a lifetime decision you get to make once, get it right the first time by learning the math, doing the math, and following the math.

Emily:
If I could just-

Mindy:
Awesome.

Emily:
… jump on that. I’d also like to let people know that you can find out more about your specific Social security benefits if you go to ssa.gov and then they have my Social Security tab on there. They no longer send out paper benefits… paper statements rather. And so, you can go there and play around with the numbers. The other thing that I want to let people know is, that coming shortfall that Jeremy mentioned about the 75% promised, that’s anticipated to occur around 2034. The thing is, there are things that our government can do to avert that shortfall. So learning about some of those things that can be done and calling your senator and Congress people and letting them know, “Hey, I’d really like you to do something to avert this shortfall, and here are some options.” There’s changes to the payroll tax is one option. There’s changing the cost of living adjustment is another possibility, although that I think is going to be something we don’t want to see happen. But there are several different ways that Congress can act if we make it clear that we as the beneficiaries of Social Security expect them to act and fulfill their current promises or adjust the promises so that people can know what to count on. I think that the powers in our hands, and it’s really helpful to do that.

Mindy:
Absolutely. Awesome. I really appreciate you both today. Jeremy, tell people where they can find more about you.

Jeremy:
Great. I’m a retirement-focused financial advisor. I’ve got a website, keilfp, K-E-I-L fp.com. But we love talking to people on our podcasts. It’s the Retirement Revealed Podcast, so just go look us up there.

Mindy:
We will include links to all of these in our show notes, which can be found at biggerpockets.com/moneyshow344. Jeremy, thank you so much for your time today, and we’ll talk to you soon.

Jeremy:
Thanks, Mindy. It’s been a blast.

Mindy:
That was Emily Guy Burkin and Jeremy Keil from Keil Financial Planning. Thank you so much for listening to this episode. I hope you learned as much as I did, which was pretty much everything I knew about Social Security was a great big fat lie. I am actually really excited that I was wrong about Social Security. I don’t really like to be wrong, but I’m glad I was wrong about this. It sounds like there will be funds available. I’m actually a bit excited about the prospect of perhaps someday Congress actually doing something to alter Social Security and make it a little bit more robust for those who are counting on it. But it sounds like there will always be something around for us if we need it. From episode 344 of the BiggerPockets Money Podcast, thank you for listening. My name is Mindy Jensen signing off.