I Love Social Security!

I know, I know, I can’t be a right-winger by saying that. But facts are facts, and until Social Security started Americans didn’t have a retirement system at all. Hardly anyone talked about retirement planning.  In fact, if you go to Newspapers.com you type in the phrase “retirement planning” you’ll see it was written about less than ten times a year up until the mid 1940s. 

Why is that? Simple, NO ONE was thinking of retiring in the same way we do today.  Social Security changed all that.  Oh I hear you, “Josh, you’re wrong! People DID have pensions back then!” Uh huh. Arguing with the pension true believers gets old fast because they simply don’t know what they’re talking about. It’s just not worth the energy to argue with the true believers.  “Communism will work…this time!” Sure, it will, as long as you’re in charge, amirite???

Anyway, as I’ve mentioned before, one of the key reasons FDR wanted to establish Social Security was to spread work out to the younger folks who couldn’t find jobs.  Too many old people were staying on well past the days they were productive only because they needed the money. 

FDR was very worried about the unemployed rabble rousers in the younger generation so Social Security was a way to get the older people to leave the workforce.  And just like that, with the advent of Social Security in the US, ‘retirement planning” became a thing. 

So now we’ve come full circle to not only talking about “retirement planning” all the time but to having people, many people, fear monger about it. In fact, we get untold commentary that you can’t retire on Social Security alone. “You don’t wanna be eating cat food, do you Miriam? Well do you???”

But a funny thing happened to me along the way. I began to deal with clients over the course of my career where Social Security was more than enough for them to retire comfortably.  It was weird because I was told by the best and brightest among us professionals that this was un-possible. 

Yet, with my very own eyes I was seeing this happening for clients, time and again. So I started researching various government data and found out most retirees have no mortgage, most retirees are empty nesters too, so their required income needs drop significantly in retirement as compared to what they were while working. Oh, and very interesting, is that their Social Security benefit is based on the salary they had while working. That same salary which was being used to finance kids’, pay off the mortgage, car loans, contribute to their retirement accounts, pay taxes with etc. is what their benefit is based on. 

The higher your salary while working, the higher your Social Security will be. It’s a very simple calculation, you had a high salary in your working years, you’ll have a high Social Security benefit in your retirement years, even if your income needs drop like a brick in water. Your Social Security benefit is not based on your income needs, it’s based solely on how much you put into the system!

But it gets better!

Check out the following image:



That is the effective tax rate for a couple I was dealing with recently.  Notice while working, they’re losing over 20% of their income to taxes. Yet when they retire what happens? Effective tax rate is below 5% until the day the hubby dies and the wife is a widow.  And even then it’s nowhere near 10%.  And even this is misleading,



See the very last line item #24 in the image above?  That’s your total taxes paid. Right Capital takes that amount and divides it by line 11, your AGI, to get your “estimated tax”.  But in reality you’d take line 24 and divide by your total GROSS income which includes the difference between lines 6a and 6b.  6a is your total Social Security.  6b is your taxable Social Security, a $60k difference!  That means 3/4 of your Social Security is tax free! Thus your gross income here is over $100k but you’re only paying $1,031 in tax, meaning our effective tax rate is less than 1%.

The next image shows what happens BEFORE RMD’s kick in by the way. About 75k in total income and how much in tax??? 

NOTHING!




Obviously these guys are multi millionaires aren’t they??? NOPE! Far, far from it. Just regular, good ole fashioned Americans who really didn’t even start making much money until about ten years ago and that’s when they started saving.  They don’t have close to a million dollars but because of Social Security they’re going to be able to spend nearly $100k a year and hardly pay any tax. 

If you think the Government is going to reduce their Social Security benefit, plus the other 74,999,999 people who rely heavily on this program, well, meet my friend George Strait. 

What’s my point? Don’t overlook Social Security! In fact, not only don’t overlook it, maximize it by waiting as long as you possible can before you draw it.  From an income tax perspective, from a security perspective, from an inflation perspective it’s the best thing going.


Blessings, 

Josh

P.S. Don’t even tell me you haven’t purchased Andrew Biggs’ book “The Real Retirement Crisis: Why (Almost) Everything You Know About the US Retirement System Is Wrong”. It’s imperative we support people who are out there preaching the truth.  Sadly, there aren’t many of us but Andrew is one of them for sure.

P.P.S.  Don’t forget I did write the classic book on Social Security, :You CAN RETIRE On Social Security” and if you haven’t bought that one yet, we can’t be friends anymore!