Social Security often dominates discussions around retirement planning. And there's no doubt that it's important, especially when studies show that it accounts for at least 50% of income for more than half of households headed by someone 65 or older. But here's a secret: it's not the only factor that determines a successful retirement. In fact, if your retirement plan is solely hinging on your Social Security decision, it may be time to rethink your strategy.
In today's video, we're going to simplify Social Security, breaking down everything you need to know about Social Security retirement benefits in under 60 seconds. We'll also dig deeper into four key areas of retirement planning that often get overshadowed by Social Security: savings, where you're saving, your investment strategy, and your spending.
- Savings: Are you maxing out your contributions to employer-sponsored plans like 401(k)s? Could you be saving more than you currently are?
- Where You're Saving: Diversifying your savings based on tax implications can give you significant financial flexibility in retirement. This involves having a mix of pre-tax, after-tax, and Roth assets.
- Investment Strategy: Having a disciplined, diversified investment process that aligns with your individual goals and risk tolerance is crucial. This also includes considering asset location, a tax optimization strategy that maximizes your after-tax returns.
- Spending: Knowing what you plan to spend in retirement, including a strategy for healthcare planning, is critical to ensure you don't outlive your savings.
Remember, Social Security is just one component of a comprehensive retirement plan. While it is important, it shouldn't overshadow other critical aspects of your retirement planning. If you need help planning your retirement, click the link below, and a member of our firm will be happy to assist you. 👇
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Ask any financial advisor what the number one retirement planning topic that gets the most attention and they will all likely give you the same answer Social Security. It’s a topic that always draws a crowd. Host a seminar, webinar, lunch and learn or any event and it is always the one that fills up the fastest. Just look at YouTube. Social Security videos are typically the most watched videos when it comes to retirement planning. I’ve got a little secret for you. come here. it’s not that complicated, let me explain, but before I do, for those that are new to the channel, I am Johnathan Rankin, the founder of Theorem Wealth, a retirement focused wealth management firm and I have been helping people plan and execute their retirement goals for going on 20 years now. So welcome to the channel, make sure you hit that subscribe button so you don’t miss any of our retirement planning videos or episodes of our retirement podcast called the Retire Once show. If you have been following us for a while, welcome back.
Now look I get it Social Security can be overwhelming because for a lot of people it's their main source of retirement income and it's very important to understand and get right. Studies show that Social Security accounts for at least 50% of income for more than half of households headed by someone 65 or older and it provides nearly 80% of income for 1 in 5 of those households. It is a very important program and it keeps almost 27 million people from falling below the poverty line. People who are planning on retirement typically fall into 3 categories. The first are the people who rely on Social Security as their entire retirement plan, they didn’t save much or at all for retirement and if Social Security is the only thing that will fund your retirement, then retirement planning is pretty simple for you retire when the amount of your Social Security is more than or equal to your retirement expenses. The second category are people who have saved more than they will ever spend and to them, Social Security is a fraction of their retirement plan. It’s not something they count on or think too much about. The third category and the one that most people that I speak to fall into is the group of people who have saved for retirement, and social security will be an important part of their retirement because it is usually the only guaranteed income they will receive. For this group, Social Security is not enough to cover their desired retirement lifestyle and they will have to rely on other sources of income to make up the difference. This is the group of people that tend to overthink Social Security. And while Social Security is important, there are so many other things they can focus on that will make a much bigger impact than their social security decision. The most important thing you should think about when planning your retirement regarding social security is that if your retirement success hinges on your Social Security decision, then you should rethink your retirement goals. Yes, there is a difference between claiming early vs delaying, but if your retirement plan is failing and it shows that at some point you are in danger of running out of money because of your claiming decision, then you should rethink the age you’re retiring or how much you are living off of in retirement.
So, let’s simplify Social Security and then talk about 4 more important pieces of your retirement that you should focus on instead. There are always special situations that are a little more nuanced and have more rules around them like survivor benefits, disability and divorced spouses, and for questions or help around those items, use the link in the description and we would be happy to help. But for regular retirement benefits assuming you worked the 10 years needed to become eligible, it’s pretty straightforward So let’s run through everything you need to know about Social Security retirement benefits in 60 seconds. Here we go.
You can start at 62, but it's 30% less than if you wait till your) Full Retirement Age of either 66-67, Now How much will you get? The easiest way to figure that out is to just log the SSA website which You can do that faster than this video. The most you can get is at age 70 as your benefit goes up 8% every year you delay after full retirement. You don’t have to stop working to receive benefits, but if you are below full retirement your benefits may be reduced based on your income once you reach full retirement age your benefits will be increased to make up for what was lost. As for taxes, your benefits could be taxable depending on your combined income. Take half of your benefit and add that to all of your other income check the numbers on the screen to see what’s taxable. When should you start Social Security? Do you expect to live past 77? If not, consider 62. expect to live past 81, consider 70. Ages in between, well you have a great crystal ball and you should consider FRA. If married, You should Treat Social Security as a joint decision. The spouse earning less should claim first while the higher earner waits especially if there is a big difference between the two. delaying increases both regular and survivor benefits. If the higher-earner passes, the other inherits their larger benefit. For questions please reach out
Ok now that we’ve got that out of the way, lets talk about 4 other important pieces of your retirement that you should focus on instead of Social Security.
The first is how much you are saving. Are you maxing out employer sponsored plans like 401(k)s. Do you have the capacity to save more than what you are doing today?
The next thing is where are you saving? You want to try and build a mix of savings accounts. This will give you tax flexibility in retirement. So making sure you have a mix of pre-tax assets like in a 401k or IRA, after tax assets like a brokerage account or savings account and roth assets. Having a diverse mix of assets based on taxation can be extremely valuable in retirement, especially as you get older and the amount of RMDs on your pre-tax savings increases.
The third thing you should focus on now that Social Security is out of the way is your investment strategy. You want to establish a disciplined investment process that is diversified and is based on your individual goals and risk tolerance. You not only want to focus on your asset allocation, but you should also consider your asset location. Asset location is a tax optimization strategy that involves deciding what types of investments to hold in various types of accounts, to minimize taxes and maximize after-tax returns. It's an often overlooked aspect of retirement planning that can provide significant tax benefits over time. The basic concept of asset location is to place investments that generate higher-taxed income in tax-advantaged accounts, and investments that generate lower-taxed income in taxable accounts.
For instance, you might hold bonds, which produce interest income taxed at your ordinary income tax rate, in tax-deferred retirement accounts, where you won't pay any taxes on the income until you start making withdrawals. On the other hand, you might hold stocks, which can generate qualified dividends and long-term capital gains taxed at lower rates, in taxable accounts. By strategically choosing where to "locate" your assets, you can maximize your after-tax returns, which can significantly increase the amount of wealth you have available in retirement.
The last thing you should focus on for your retirement is having a clear understanding of your spending. Everybody hates the word budget, so we don’t have to call it that. But you should have a good understanding of what you plan on spending in retirement and that includes a strategy for healthcare planning. Healthcare is often one of the most significant expenses in retirement. Understanding your options, like Medicare and supplemental insurance plans, and their costs, is essential. I have seen so many people enter into retirement thinking they are going to spend one amount and then in reality spend significantly more than they were planning. You can know the ins and outs of Social Security better than anyone else, but if you don’t know exactly how much your spending in retirement, then it doesn’t matter what your Social Security benefits are.
Just remember, Social Security is just one component of retirement planning. Yes it is important, but it’s likely not the most important thing you should focus on. If you are focused on retirement, make sure you check out this episode of our retirement podcast where we discuss why many American’s are not ready for retirement. I’ll see you there.
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