S1 E4: Understanding the importance of Social Security in Retirement Income Planning

Transcript

Intro (00:03):

Hello, and welcome to the 15 minutes to financial freedom educational podcast series hosted by Arvind Ven . These 15 minutes or so. Podcasts are meant to educate and empower listeners about key financial topics towards the road to financial independence and plain English. And without financial jargon. Our invent is independent financial advisor, founder and CEO of capital V group in Cupertino, California. He is regularly featured in leading national financial publications, such as Forbes and many others. And now for our host Arvin, Ben,

Arvind Ven (00:38):

Welcome back. This is Arvind Ven CEO of Capital V Group. Good to have you back. Today's topic is social security and on everybody's mind. So let's talk a little bit more about that. I'm getting a lot of questions, whether it's going to be there, what's going to happen. There's so much changes happening. There's a lot of wrangling going on in Washington. And so today I also have a special guest we'll start off with social security, but let's see what's going on in social security. The baby boomers are actually retiring at a very high rate. The U S is undergoing the largest greying of its workforce more than 10,000 baby boomers retiring every day for the next 15 years. Baby boomers are those born between the years, 1946 and 1964. And there were 15 million of them at, or nearing retirement and will join approximately about 54 million people who are already receiving social security benefits.

Arvind Ven (01:36):

So the government has many options to keep social security, fully functional. However, when is it going to happen? We used to build there. Those are the, I would say the trillion dollar question. So before we dive in, let's see what social security does mean as well as social security then, and now it's how did this begin and where is it now and how is it funded? Social security can be traced back to the great depression and established in 1935. The Program's main purpose was to provide a minimum floor of income support for all eligible workers. At that time, the average life expectancy of the working male was approximately 62 years. So full retirement age came in at 65. Well, that's not going to fly well now because the life expectancy has changed for the better, a lot over the last 70 to 80 years. Now, the life expectancy of a working male is 84.

Arvind Ven (02:27):

That's good news, but the not so good news is that at current rates, Social security has enough money to pay out in full to every recipient until around the year 2033. And after that, it looks like from current funding, they'll only be able to pay out 75% from 2033 until 2078 or so, but that's a sizeable haircut. That's 25%, unless something gets fixed in the government. So that's where we are right now, but why is there a shortfall? But that's because the system is funded by employee payroll deductions. So one portion of the relevant tax and she's on an equal amount of employee income paid by the employee and employer. Self-employed people, freelancers, contractors, Uber drivers, and others. They bought the employee and employer portion. These benefits are calculated according to the 35, highest earning years in the workforce.

Arvind Ven (03:24):

And addition for inflation. So does it mean that they got increased? The cap right now is about $145,000 of income, which social security is taxed. So there are options to fix this shortfall, but the question is, how is it going to happen? Right? I'm going to ask Andrew Beltowsky. Andrew is the regional vice president of Allianz, one of the world's largest insurers. He knows all about social security and he was actually one of our webinars as an expert guest speakers earlier this year, for those of you attended the webinar. So I asked Andrew where we are. So, Andrew, welcome to the podcast. Great to have you today.

Guest (04:03):

Thanks for having me.

Arvind Ven (04:06):

Here's the trillion dollar question for you. What's happening with social security? And do you think that it's going to stay? That's why I keep getting asked all the time and what's going to happen after year 2033, when there's only enough money to pay only 75% percent of benefits.

Guest (04:23):

That's a very good question. And one that has been coming up quite frequently and I don't necessarily see it going away, but I could see a reduction of benefits moving forward and I'll elaborate on why I don't think it can go away this year. Roughly 65 million Americans will receive social security benefits totaling over $1 trillion, more than 65 million Americans depend on social security for some or even all of their income with pensions becoming less and less prevalent in Americans needing to fund their own retirement. Social security is a pillar that is necessary for millions of Americans to have a successful retirement. And the problem with social security fund moving forward is mathematical in nature. The number of workers for each social security beneficiary has been decreasing dramatically over the past few decades. Currently there are 2.8 workers for each social security beneficiary and their ratio is expected to be down to 2.3 to one in the year 2035. But while I don't see social security going away entirely, I wouldn't plan for a reduction of benefits moving forward and look for ways to cover more of my retirement income and personally funded pensions have become more popular.

Arvind Ven (05:46):

Wow. So that's not great news, but I think we continue hoping that there are other avenues. For example, the government has continued increasing the social security cap every year, all the way from 119,000. I think that it is $148,000, now that can be one aspect if that flies, but again, the thing is what's going to happen. So I think we'll have to watch and see, as I said, personally, a hundred pensions definitely become more popular in that era. What's the difference between Medicaid and Medi-Cal a lot of them just like to hear the difference. I have explained that, but I'd love to have you explain to us what's the difference. If at all,

Guest (06:23):

There's actually little difference between the two medical is merely California's Medicaid program, which has paid for federal and state revenues. And Medi-Cal provides coverage for low income individuals and families

Arvind Ven (06:37):

Right now, coming back to benefits and tax that I spoke about that the government collects is popular because it provides social security, provides four types of benefits. Retirement benefits are for those who have worked in COVID employment for many years and they are those eligible people are eligible to receive retirement benefits beginning at age 62. And we've talked a bit more about whether it makes sense to hold off or start right away. Then the second minute is Medicare health benefits for the spouse and minor children of any retired or disabled worker who qualifies the benefits. The third benefit is survivors of the disease work are covered by social security or entitled to income benefits. That's arriving. Spouse is eligible to receive benefits until the youngest child turns 18. That's something good to know because many don't know that that benefit was also offered by social security and disability benefits are for workers who will make a real contribution, but are disabled mentally, physically before reaching retirement age.

Arvind Ven (07:39):

So just because you can collect social security, I started collecting in the 62 doesn't mean that you can or should start getting the check right away, because for every year that you wait after age 62, they collect social security. You approximately get a nice 8% bump up annually until age 70. Where else can you find such an annual risk-free race on your income? And that doesn't the government no less. So it pays to wait, if you can write that there are some other caveats too, right? So if it's going to be diminished, if you go back to work after age 62 and until the full retirement age, but yeah, we run all this analysis for our clients and those who would like to have an analysis, we happy to do that. So that gives you an idea as to what you've said. Are you choosing between 62 full retirement age and age 70? So this is definitely something to keep in mind. Andrew is a way people need to register for Medicare could be talking about the four benefits of social security. Medicare is one, but why do people need to register for Medicare at age 65? Even if they have health benefits coming from the government, there's a penalty to not enrolling. Can I talk about that?

Guest (08:49):

It can be a good idea to register for Medicare at age 65. Even if you still have coverage from your employer, Medicare part, a typically doesn't cost anything, and it can serve as your secondary insurance potentially picking up the tab for anything your primary insurance doesn't cover. Additionally, this can also help avoid the 10% annual surcharge on Medicare part B premiums. If you fail to sign up on time.

Arvind Ven (09:16):

Okay, that's good to know what's important because the balance is going to stay pretty much for the rest of their lives. So that's a small thing to do, but it has a fairly sizable price, significant price to pay. So I always remind my clients would they get to post 65, that it is time to register and keep that ready. So these employer pensions seem to be going in the way of dinosaurs that fixed income in a time that is any park and aspect of retirement income planning. So what are the other options for fixed income? Social security right now is the only fixed income component that employer pensions are pretty much gone. I think I saw a statistic that I think think less than a 12% of companies or buyers offer pensions at the end of the day, every person's requirement situation is different, but as important to understand that social security has so many different ways of collecting for American couples that are literally over a thousand different ways in which you can choose.

Arvind Ven (10:17):

It's very important to calculate and understand how it works so that you don't leave money that you deserve and you work for, they don't leave it on the table. So again, just because you can start receiving income at 62 doesn't mean that you have to collect right away, do the math, understand how it works and realize that either you're getting an 8% bump up every year until age 70. And so it doesn't really embark with just social security benefits. It's not a simple matter that are under surveys to accept the benefits and the choices will have significant impact over the course of the retirement years to millions of people rely on the system that I used to think that it's very complicated to change than simply pulling a plug. Just like what our guests also mentioned to me. They just have to agency. And in the meantime, just got to stay educated and see how the best we can to leverage social security benefit.

Arvind Ven (11:08):

So before I sign off today, I got to point out one important news. You probably saw that already that the cost of living increase, the Cola increase for social security was 5.9% that came out recently, and that is the highest increase in over 40 years. Now that is, That is huge. We never seen this kind of increase in such a long time. And what that means in addition to good news is that inflation is starting to run high and that's been taken note of. The trillion dollar question is whether this is transitory, whether this inflation is temporary or is the beginning of high inflation ahead. So that remains to be seen. And we'll be talking more about that in upcoming podcasts. We'll have some expert guests giving their opinions about that too. So stay tuned, join us soon for the next podcast and that's it for today. And for this podcast, let me end that with another disclaimer that Andrew Beltowsky, Allianz, Capital V Group and LPL financial are not affiliated. So we look forward to seeing you soon and you tuning in at the next podcast. You can also read more about us at www.capitalVgroup.com or call us at (408) 725-7122. Or you can like us or read more about us on Twitter and on Facebook

Disclaimer (12:34):

Arvind Ven is a registered representative with advisory services and securities offered through LPL financial, a registered investment advisor member FINRA. And SIPC the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results. The information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Financial planning offered through capital V group, a registered investment advisor and a separate entity from LPL financial.