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Gaby Lapera: Hello everyone, welcome to Industry Focus, financials edition. Today is
March 11th, 2016, and we are pre-filming a show that you're probably listening to on March
21st, 2016. This is Gaby Lapera in the studio, and I'm joined by The Motley Fool's personal
finance expert, Dan Caplinger, on the phone. Thanks very much for joining us! I'm pretty
excited to have you here.
Dan Caplinger: Hey, thanks for having me, Gaby, I appreciate it.
Lapera: Yeah. We've decided to kind of shake things up on the financials episode and and
include personal finance every few weeks. Definitely write in to let us know how you
feel about that, or if you have any general questions. And, speaking of listener questions,
I wanted to give a shoutout to Michael Monico, and a listener named Tom for writing in and
letting me know about their experiences using their phones to pay for things. Sounds like
they're both pretty strong converts. My mom let me know last night that's she's going
to convert to using her phone to pay for things as well, and I have this co-worker, Taylor
Harris, who will not stop telling me about everything he uses his phone to pay with.
And he’s really helpful that the Washington Metropolitan Area Transit Authority will start
letting us put our smartcards on our phone. Don't hold your breath, because the Metro
lights itself on fire every few months, so I very much doubt that they're going to be
able to do that anytime soon. (laughs)
Anyway, today, we have a special episode, like I said, Dan Caplinger is a personal finance
expert. So today, we thought that we would talk about Social Security.
Caplinger: Gaby, you're making me feel old, because not only are we going to be talking
about Social Security, but I'm thinking back to, I actually visited an ATM to get cash
money the other day. The idea of using my phone for all of my payments, I'm afraid I'm
not going to be the early adopter or even the on-time adopter for that.
Lapera: (laughs) That's okay. I'm pretty reluctant too. I don't know why I don't want to, but
I just don't.
Caplinger: For me, I think it's just that I already am using my phone for so many things,
it's like having one more thing that could possibly go wrong if something happened to
the phone. It'd just be a total disaster.
Lapera: And if my head weren't attached to my shoulders, I would lose it. So, that's
-- and that's the same with my wallet and my phone. But, anyway. Social Security. This
is one of the most common questions that we get, and this is something that The Motley
Fool writes, I feel like 8 million articles about, and I feel that way because I edit
a lot of them. (laughs) The major question that people ask is, when should they take
Social Security?
Caplinger: That's one of those questions that you'd think there would be just a nice, basic
answer. Yes, no, or an age number, or something like that. And unfortunately, it isn't that
simple, and that's why you see so many different articles. One thing I've heard back from is,
not all the articles that we run have the same opinions. I mean, some people think it
makes sense to take it earlier, some people think it makes sense to take it later. And
the reason that you can have these differing opinions is that it really is an individual
decision for everybody.
There are a lot of factors that can make it make sense for one person to take it as early
as possible, but somebody else in a different situation, it really makes more sense for
them to wait longer.
Lapera: And just for our listeners who maybe haven't thought about Social Security, when's
the earliest you can take it according to the Social Security Administration?
Caplinger: The earliest that you can take your retirement benefits is age 62.
Lapera: Okay. And is there a latest age that you can take it?
Caplinger: Technically no, but you stop getting a financial incentive for waiting once you
hit age 70. So, between 62 and 70, there's this trade-off going on where the earlier
you take it, the earlier you start getting the payments, but the smaller those payments
are. The longer you wait, obviously, you're giving up those payments between age 62 and
whenever you decide to go ahead and take it. But when you eventually get around to taking
it, the payments that you get are bigger. But they stop making the payments bigger after
age 70. You max out at 70. So, when people are thinking about when to take it, it's always
a question of where on that timeline between 62 and 70 are you thinking about making the payment?
Lapera: Definitely. And, obviously, that means for listeners that if you haven't taken Social
Security yet and you're 70, you should maybe start, because there's no benefit in waiting
anymore. (laughs)
Caplinger: Absolutely right, and you'd be surprised how often that sort of thing happens,
because there's nothing at Social Security that says -- you know, it doesn't automatically
kick in. You'd think it would automatically kick in, if 70 is sort of the date on which
you’re going to go ahead and there's no reason to wait any longer, you'd think they
would just go ahead and start it for you. But, no, they don't do that. You have to do
it yourself. So, yeah, get out there.
Lapera: That saves them some money, I'm sure. (laughs) So, why would you want to take Social
Security at 62 versus 70 if you're going to get bigger payments if you wait?
Caplinger: The cost benefit analysis -- there's a bunch of different ways to think about this.
A lot of financial planners, they do the numbers-driven way of thinking about it. And the argument
for when to take Social Security based on that, it kind of runs like this: if you are
getting smaller payments earlier, then in the beginning, it looks like it makes sense
to take it as early as possible, because obviously, if you're taking those payments starting at
62, then the total amount of money that you've gotten from Social Security is way ahead from
somebody who hasn't gotten anything from it yet.
But, what happens later on is, if you wait and you take those payments later, you'll
get bigger payments. So, you'll slowly but surely catch up to the people who took it
earlier. And, at a certain age, which varies but usually runs somewhere in your late seventies
early eighties, having waited, the total amount that you'll have gotten from Social Security
will pass up the people who took their benefits early. So, that's sort of the baseline question
a lot of financial planners will ask you is, what do you expect your life expectancy to
be? If you have a family history where people tend to live a lot longer, then you're going
to end up ahead of the game if you wait. If you tend to have a weaker history with health
problems or something like that, then it makes more financial sense to take it early.
So, that's the numbers-driven way of thinking about it. And that's where a lot of people
leave it, with the situation.
Lapera: Just in case you're curious, the average life expectancy, I literally just googled
this, in the United States is 78.74 years.
Caplinger: But you have to be careful with that, Gaby. Like I say, it's easy to get lost
in the numbers here, because the number you're talking about, that's a life expectancy as
of birth. And the question you have to be asking yourself is, that life expectancy includes
a bunch of people who never even get to the age where they're even thinking about taking
Social Security.
Lapera: I see. So, if you make it to, like, 65, the chances that you make it to 85
are way higher.
Caplinger: Yeah, exactly. Lapera: Got it.
Caplinger: The numbers that kept the overall average down to 78 included some people who
died at 20, who got in an accident or something. It included some people who died at 30. So,
once you've made it that far, your odds are a lot better that you'll make it even further.
So, that's an important part of it. But, you're right. That life expectancy often surprises
people, just how high it is. A lot of people take the Social Security as early as they
can. They figure, "Boy, I'd better hurry up and get something out of this." And only later
do they realize that if they'd been a little bit more patient, they'd have ended up getting
a better deal by having waited longer.
Lapera: Yeah. I mean, ultimately, it's a gamble, right? No one knows exactly how long they're
going to live. But, like Dan said, if you feel you are in good health, there's not really
a reason to take it particularly early, unless you have some kind of financial situation
that requires the extra money now.
Caplinger: That's the other thing, too. Like I said, there's that numbers-driven equation,
but then there's the quality of life issue. A lot of people will tell you, "If I have
a choice between taking money earlier in my retirement years, in my 60s, in that early
part, when I'm still young enough to do all the things that I've worked my whole career
looking forward to," in that case, a lot of people look past just that dollar amount and
say, "You know what? That money has a lot more actual value to me, in terms of lifestyle,
if I get it early rather than later." And, it's hard to argue with that. You can talk
about the numbers, you can do assumptions, and you can get hard answers that way. But
when you try to translate that into an actual quality of life thing, that's really something
that everybody has to decide for themselves. The numbers will help support your decision.
They won't make the decision. You really have to translate those numbers into what’s meaningful
for you.
Lapera: I was just having a conversation at lunch today about, I believe it's called
“retired husband syndrome.” I'm serious, this is something that's been popping up in
Japan. It's been reported on for the past few years, I think, about how these Japanese
men work really hard, they work 80-hour weeks for most of their life, and then they retire.
And they go home. And they drive their wives up the wall, because they have no interests
outside of work. They don't really have any friends. So, they just annoy their wives so
much that these women end up having these psychosomatic manifestations of their anxiety
of having their husband around call the time.
So, besides wondering when should I take Social Security, one of the things you should also
think about is, when you retire, what are you going to do with yourself?
Caplinger: Yeah, that's definitely not just something that happens in Japan. There's all
kinds of things, I've heard stories personally, and you've seen it all over the country here,
too. It is a big deal, because so much of your life ends up being tied to your work.
And once you lose that, if you do just sort of a hard-stop full retirement, get the gold
watch and leave the office and never return again, then yeah, there's this huge gaping
hole in your life. And unless you've really planned well to fill it, you can end up being
really surprised at just what's missing. It can be really hard to replace that.
And that's a good reason to think about things like phasing into retirement. So, trying to
work with an employer, saying, look, I don't want to retire, I don't want to quit entirely,
but I'd love it if I could back off on my hours, or take advantage of, some employers
offer flexible working schedules where you might be able to take a day off in the middle
of the week. Doing something like that, it gives you a sense of what you would do with
a portion of that free time. It lets you ramp down and get acclimated to that situation
so that you don't have that craziness factor of, "Oh my God, I've been retired for a week
and I've run out of things I want to do! What do I do!?"
Lapera: Yeah. So, okay, this is another question that I have, then, about Social Security:
does it get taxed? Because I know that if you work and you're also drawing Social Security,
obviously, your income is going to be taxed from the money you make from working. What
about your Social Security?
Caplinger: Well, a lot of people are surprised to find out that Social Security benefits
can be subject to income tax, because they figure, wait a minute, I already paid for
that Social Security with all those FICA taxes that I had taken out of my paycheck throughout
my career. So, what, now you're going to hit me with a double dip? And the answer, for
some people, is yes. Not for everybody. Basically, what the IRS does is it takes a look at two
things. It takes your Social Security benefits, it only includes half of those benefits for
purposes of this calculation, how much income you made. It then adds in any other sort of
income that you have. So, if you're still working, your wage income goes into there.
If you have any investment income, that goes into there. And actually, the IRS does something
kind of tricky -- if you own tax-free municipal bonds, usually you don't have to pay income
taxes on them, but it'll still make you add that income into this figure for purposes
of this calculation.
So, you add all that money up and you end up with a figure. If that figure is above
a certain threshold, then a portion of your benefits could end up getting taxed. Now,
for single folks, that threshold is $25,000. So, half your Social Security, plus the rest
of your income. If that adds up to more than $25,000, then a portion of your benefits can
get included in your taxable income. And the percentage of those benefits, it can start
very low, but it ramps up to a maximum, as your income goes up, of 85%. So, as much as
$0.85 on the dollar of every dollar that you get from Social Security can end up being
part of your taxable income. You then apply whatever your tax bracket is, and that's the
extra tax that you end up paying. So, definitely something to think about, because, a lot of
people just figure, okay, Social Security, free and clear, that's money I'm going to
have, I don't have to worry about taxes. But, if you have enough income, it is something
to think about.
Lapera: Yeah, that's really interesting, and I definitely wouldn't have guessed that at
all. And probably most of our listeners -- $25,000 a year isn't that much. That's a pretty low
threshold. So that's probably going to affect the majority of our listeners, anyway.
Caplinger: Yeah. If you don't have any outside sources of income, if you're only living on
Social Security, then it's rarely a problem. But if you have even modest amounts of investment
income, you know, like a pension coming from somewhere, you're taking withdrawals from
your IRA or from a 401(k) plan at work, those kinds of things do get included, and because
they're included, you're right, those low thresholds -- I think it's $25,000 for singles,
and for married couples filing jointly the starting point is about $32,000.
Lapera: That's nothing.
Caplinger: Yeah. It's very easy to trigger this. Something to run by your accountant
before you make a decision about whether or not it makes sense to take your Social Security.
Well, if it's going to get taxed, maybe not.
Lapera: Yeah. So, you kind of answer this question, but should you rely entirely on
Social Security for your retirement?
Caplinger: Ideally the answer is no. A lot of people are increasingly concerned about
the Health and Social Security system, and they think, well Social Security could disappear,
so it makes sense to have money outside of that system to support your retirement. I'm
not that alarmist. I have pretty high confidence that, for one thing, the crisis in Social
Security is still decades away, and I think that it may not be the most efficient solution
in the world when it comes, but when the time does come, there's going to be enough uproar
that benefits, at least at their current levels, are going to be preserved.
But, obviously, it depends on how much money you earned during your career, because the
higher your average earnings were while you were working, the larger your Social Security
check is going to be. So, for a lot of people, that might be enough to live on. But, you
hear so many stories about how ordinary folks are having trouble making ends meet because
their primary source of income is coming from Social Security. And it was never meant to
be the sole means for support. When the program was first created, it was generally meant
to be just part of the solution. So, you're supposed to think about--
Lapera: It was supposed to supplement.
Caplinger: You were supposed to think about other things that, you might have a pension
at work. So, the idea that that's all you would rely on, it's doable, there are plenty
of people who have to make it work, and they do make it work. But it's much more comfortable
if you can manage it another way.
Lapera: Definitely. So, that means, clearly, that you should start saving really early,
right?
Caplinger: As early as you can. The time value of money, the power of compounding really
works in your favor the earlier that you can. Countless examples of situations where somebody
who starts even a year or two earlier than somebody else, the difference in how much
money they eventually have in their retirement accounts can be tens of thousands, even hundreds
of thousands of dollars higher, just for a short period of time getting started earlier.
So, it really makes a lot of sense for everybody.
Lapera: Yeah, so, I have these friends who have kids, and the kids get an allowance,
they get, let's say $20 a week for doing chores. If they don't do their chores, they don't
get paid, because my friends are big believers in preparing the kids for seeing how the real
world works. And, as part of that, their allowance has line items that shows them a tax that's
taken out which prepares them for their Social Security taxes and their FICA whatever. And
they're just taking it and putting it into a savings account for the kids, which is nice.
Caplinger: Yeah, but that's hardcore, man. To get the FICA guy on your lawn allowance?
Lapera: (laughs) I know. But yeah, I always thought that was a really smart way to introduce
kids to how paychecks work, why you need to start saving, and explaining to them how Social
Security works and how retirement works.
Caplinger: It is. I have a story that, unfortunately, isn't as good as that, because it speaks to
the changes of how the financial world has worked. When I was a kid, I remember I had
a savings account, and every month, they would credit the interest, and I would be like,
wow, that's kind of cool, I got $1.12 or something on my interest. Well, I set up an account
for my daughter, but because the interest rate on savings account is like 0.00% whatever,
she gets $0.01 every month. It doesn't matter how much money--
Lapera: I was going to say, what kind of interest rate? (laughs)
Caplinger: Doesn't matter if somebody goes up or down, it's a penny every month. I mean,
she just turned 11, and her idea of saving is, oh boy, if I save, I'll get a penny a
month. That'll be good incentive to get her to look at other investments besides savings,
but it's just a different educational path from what I remember when interest rates on
savings accounts were a little bit higher.
Lapera: I was going to say, I don't think that's ever happened in my lifetime. The other
thing that you could consider doing is, I started working when I was 14, parents immigrated
here back in the early 80s, and had those good, hard-working immigrant values, so I
started working really young. Not because I had to, I guess, just because I saw them
doing it, so I thought, that's what I should be doing, too. So, I opened an IRA when I
was 18 (laughs) because I was a really boring kid. But, it's amazing to see how much that
has grown since I was 18. I don't think that too many people my age have as big of a nest
egg as I do. And I've obviously been very lucky and have had life circumstances that
allow me to contribute in such a way that that has been possible. I haven't had to scrape.
Well, for most of my life, at least. There were a few years they're in grad school that
were pretty desperate. (laughs)
Caplinger: That's a character-building time, as well.
Lapera: Definitely.
Caplinger: Yeah, it's a good idea, and even something that, you were talking about your
friends withholding money from allowances and doing chores and work around the house
and that kind of thing, that is something that, if your child earns income, then they're
eligible to start an IRA. You don't have to be 18. And if that's something you want to
encourage as a parent, then getting out there and opening an IRA on behalf of your kid can
be a good way to introduce them to the concept of investing and saving and thinking about
long-term financial goals. It can be a very visible method of putting a real concrete
-- the kid can actually see what's happening instead of it being this nebulous concept
of, gee, at some point I'm not going to earn money anymore, so I need to have this account
out there. It's really helpful.
Lapera: Yeah. It's a great way to start investing, investing the stuff that's already in your
IRA that you can't touch. Maybe later we should do an episode on different types of retirement
plans, that'd be pretty cool. Caplinger: I'll be ready.
Lapera: Awesome! Just, try and get your kids in the habit of saving. We are out of time
for this week. As usual, people on the podcast may have interests
in the stocks they talk about, and The Motley Fool may have recommendations for or against
stocks mentioned; please don't buy or sell based solely on what you hear. Dan, thank
you so much for joining us, this was great.
Caplinger: Thank you Gaby, I had a lot of fun.
Lapera: Yeah, me too! And, for our listeners, please email at industryfocus@fool.com, or
tweet us @MFIndustryFocus to let us know what you think of the new show format. Everyone
have a great week!