Social Security and Retirement Planning: A Hit or Myth Proposition
Kurt Czarnowski (00:00:05):
Hey, good evening, everyone. Welcome. My name is Kurt Czarnowski. Before I get started in the formal program let me just start by saying, I hope you're all staying safe and healthy and doing about as well as could be expected during these crazy, crazy times, so. Thanks for joining us this evening. Yeah, as I said, my name is Kurt Czarnowski. I'm currently the principal in Czarnowski Consulting. Those one or two in the webinar not intimately familiar with us, I'm always proud to say we're an international consulting firm whose world headquarters are conveniently located here in the basement of my house in Norfolk, Massachusetts, which is where I'm coming to you from this evening. But don't worry. At Czarnowski Consulting we like to say we provide expert answers to your social security questions. And why can I say that? Well, simple, I worked for the Social Security Administration for 34 years.
Kurt Czarnowski (00:00:56):
And the last 20 years of my job there, I was the communications director for the Social Security Administration here in New England, which meant I spent most of my time as our Canadian friends would say, oot and aboot, talking to people about the social security program. And in my retirement, such as it is, I'm actually now in my 10th year of continuing to do that same type of work, largely because I enjoy the heck out of it. It's also because I believe there's a real need for the information. Believe it or not, the social security program is now a little over 85 years old. And each and every month, the Social Security Administration pays about $88 billion in benefits to just over 64 million people. But on top of that, there's another 178 million folks like most of you on the webinar who are out there working and currently paying into the program.
Kurt Czarnowski (00:01:50):
And what I saw during my time with the agency and now that I'm out on my own is despite the age of the program, despite the size of the program, despite the economic impact that social security has in this country today, unfortunately, the myths and misunderstandings that are out there about what it is as well as what it isn't are frankly staggering. Nobody knows nothing about the social security program as best I can tell. So as was excited to accept the invitation to spend the next seven or eight hours with you dispelling the... Well, all right, won't spend seven or eight hours, but we'll spend a little bit of time talking about some of the things I think is important for you to know about what the program is and, perhaps equally importantly, understand what it isn't. And why is it important to have that information these days? Simple. Two words, baby boomers. 75 million of us storming towards retirement, starting to wake up to the fact that the social security program has a guaranteed stream of lifetime income. They will be a bigger part of our retirement income than we had originally anticipated.
Kurt Czarnowski (00:02:50):
We're also recognizing that the retirement world staring us in the face is different than the retirement world that faced our parents and our grandparents. And so we're struggling to catch up, trying to get some good information to help better understand what the program is and recognize what it isn't. So on our time together this evening, I want to give you some good, solid information. Again, help you understand what it is, recognize what it isn't, dispel Some of those myths and misunderstandings that are out there, and set you down the road to the comfortable retirement we all hope to enjoy.
Kurt Czarnowski (00:03:23):
Most important slide in the presentation is going to be this one, and you'll hear me reference it over and over again. Key message for me tonight that people need to understand is that when social security was created a little over 85 years ago, the program was put in place simply to provide you with a base or a foundation of income that you can count on being there for you, but it's a base of income protection you must take steps to supplement because the program was never intended to be anyone's sole source of income in retirement. But unfortunately these days about 23% of retiree couple households, the social security money that comes in each month is virtually the only income those folks get. A terrible situation.
Kurt Czarnowski (00:04:05):
So how do you avoid that happening? Well, simple. By planning for retirement, and you're to be commended taking time out of your evenings, spend a little time with me, learning about the social security program and planning for that aspect of retirement. Now, for the longest time, the Social Security Administration tried to play a more proactive role in helping you plan for your retirement. Because as I hope you recall, back in the day, social security used to mail you a paper document on annual basis. Social security statements. They started being mailed out 1999 and the original distribution plan had them going out on an annual basis to anyone who was 25 years of age or older who had ever paid into the program and who was not yet collecting benefits. That social security statement designed to show up in your mailbox about three months before your birthday each year, providing you with important retirement planning information, provided benefit estimates at three different ages, 60 to your full retirement age or 70. We'll talk in a second why those are important ages.
Kurt Czarnowski (00:05:14):
The other thing the statement did that was so important, it provided you with a nice year by year breakout in what the Social Security Administration had recorded as your work and earnings under the program. Excuse me. We'll see it a little bit. What you eventually collect is directly related to what your work and earnings have been. So if a mistake had occurred in crediting you with some earnings, it was important to catch it and correct it because if you didn't, it would have a direct impact on what you eventually receive from social security. But you may have noticed, hey, I haven't got one of those in the mail every year lately. What's the deal? Well, social security has significantly altered its distribution plans for social security statements and the big news is they no longer mail a paper document on an annual basis to anyone and everyone, 25 years of age or older.
Kurt Czarnowski (00:06:06):
Instead, what they've done first and foremost is put in place a system whereby if you go to www.socialsecurity.gov/myaccount and take about 15 or 20 minutes or so to set up an individual social security account for yourself, an important by-product of having that account in place, you'll be able to download through a secure website, a social security statement for yourself whenever you need one or want one. You're going to come in, meet with your financial advisor at Milestone, bringing a current social security statement with you is going to make that a more worthwhile exercise. So I would encourage you if you haven't done it yet, to set up an individual social security account for yourself. You'll see down the road, there are a lot of other advantages to having that account in place, particularly once you start to collect benefits. But prior to collecting benefits, the biggest advantage is, again, you can download a social security statement whenever you need one or want one.
Kurt Czarnowski (00:07:06):
By the way, social security has announced, they've decided to resume mailing paper documents, but all be it on a very limited basis. Then what they say these days is, if you're 60 years of age or older and you haven't yet set up a social security account for yourself, they will mail you a paper document, same old schedule, showing up in your mailbox about three months before your birthday. But that's it for mailing paper documents. If you're under the age of 60, the only way you get a social security statement is by setting up your individual account. But my view is even if you're over the age of 60, I think it makes sense to set that account up. Because again, you're going to come in and do some financial planning, being able to download and bring to that meeting a current social security statement, going to make it a more worthwhile exercise.
Kurt Czarnowski (00:07:59):
So an important message for me this evening. You hear me repeat it again. Social security is going to provide you that base, that foundation. Got to find ways to supplement it. And as soon as you use that planning tool of the social security statement designed to help you see what that foundation is going to be, help drive home the message you've got to find ways to supplement it. The earlier you learn that, take steps accordingly, the more likely you are to have that comfortable retirement that we all hope to enjoy. So take advantage of this planning tool, the social security statement, and the best way to access it these days is by setting up your individual social security account.
Kurt Czarnowski (00:08:40):
So let's talk about retirement benefits. And as I travel around the country and talk to folks about... Wait a minute, who am I kidding? I'm not traveling around the country anymore these days, I'm locked here in splendid isolation at the world headquarters of Czarnowski Consulting. But I used to travel around the country and talk to folks about retirement. And when I did that, I think the single most frequently asked question had to be, "Well, when should I take my money?" That's what most people are interested in knowing.
Kurt Czarnowski (00:09:11):
So understand this, under the rules of the program, you've got choices and you got options. And what I'm going to hope to do this evening is fully explain those choices and options to you so that you fully understand what you can do under the program, but I'm in no position to tell you what you should do. After all, you're the ones who worked and paid into the program. That's your choice to make. But my view is, unless and until you fully understand what you can do, you're in no position to decide what you should do. So let's make sure you fully understand the choices and options that are available to you, understand what you can do so you can make an informed decision about what you should do. And going through that exercise, the place to start is by making sure you know what social security calls your full retirement age. Key concept under the program. Full retirement age. Now, when social security started back in 1935, Congress set full retirement age as the month you turned age 65. It was age 65 for everyone without exception. And in fact, continued that way until 1983, when Congress changed the law and increased this social security full retirement age for anyone born 1938 or later. Now, the increase gradually been phased in over time. We're now at the point where for a big chunk of the baby boomers, and it was born between 1943 and 1954, our social security full retirement age is the month we turn age 66. But it's important to note that under current law, it continues to increase beyond that. And tops out right now, anyone born 1960 or later has a social security full retirement age as the month you turn age 67.
Kurt Czarnowski (00:11:12):
You understand this, collecting at your full retirement age isn't your only choice, it isn't your only option. But make sure you know what your full retirement age month is based on your year of birth. Because you'll see, as we go through the discussion this evening, a lot of features of the program do flow from at least having reached your full retirement age, so make sure you know what yours is. But in terms of collecting social security retirement benefits, you have to start the month you hit your full retirement age. That means one thing and one thing only, it means you'll get 100% of the amount you're work and earnings entitled you to receive. And we'll talk in a second how that all gets calculated, but you start full retirement age month, you get a hundred percent of your benefit. But among the options you have are to start collecting prior to reaching your full retirement age, if that makes sense for you. And under the rules today, you can start to draw retirement payments as early as age 62, or at any point in between, by the way, you don't have to start right on your birthday. You don't have to start the first of the calendar year. But here's the thing. Social security as the name implies, is a social insurance program. And Congress has built certain social goals into the program. And one is a hope that at the end of the day, based on average life expectancy, everyone ends up with roughly the same total amount of lifetime benefits regardless of when they start to collect them.
Kurt Czarnowski (00:12:45):
And so, you opt to start collecting retirement payments prior to reaching your full retirement age month, well, because by starting sooner, in theory anyway, you'll be collecting for a longer period of time, you'll find that your monthly payment amount gets reduced. How much of a reduction? Well, it's roughly half a percent per month for each month prior to your full retirement age that you opt to collect benefits. Half percent per month, roughly a 6% per year reduction by starting early. But again, as I said before, you can start at whatever point you want. You don't have to start at your birthday. You don't have to start the first of the calendar year. But if you opt to start drawing benefits prior to reaching your full retirement age, you'll find that full retirement age benefit amount has been reduced by roughly half a percent for however many months are scheduled to elapse. And oh yeah, it's a permanent reduction. Number of those myths are out there. Too many folks mistakenly think, yeah, I know. I'll start early. I'll get less, but as soon as I hit my full retirement age, my payment will bump back up, right? Wrong. Again, permanent reduction, because the idea is if you're starting sooner, in theory again anyway, you'll be collecting for a longer period of time, you'll find that that payment amount permanently reduced by that roughly half a percent for each month prior to your full retirement age you're going to collect benefits.
Kurt Czarnowski (00:14:24):
Now, as I mentioned, you start right at your full retirement age, you get 100%, but among the options you have are to wait past full retirement age before starting. If that makes sense for you. And, excuse me, with that social insurance ID in place, if you opted to defer, well, by starting later, in theory anyway, you'll now be collecting for a shorter period of time based on average life expectancy. So by all rights, your payment amount ought to be increased if you wait. And it is. These are referred to as delayed retirement credits. And for each month after your full retirement age you opt not to collect, you'll find your benefit now increased by two thirds of a percent per month. Two thirds percent per month increase, that translates into an 8% per year increase by waiting. But again, you don't have to not collect for a full year. For each month past your full retirement age you defer, you'll find your payment permanently increased by that two thirds of a percent.
Kurt Czarnowski (00:15:37):
But here's the key thing. Delayed retirement credits only accrue from your full retirement age month until you turn age 70. Now understand this, under the rules of the program, you never have to take your social security payments. Not like there's a required minimum distribution or anything like that like you have with your 401(k) or IRA, but you opt to defer from full retirement age until you turn age 70, you'll see your payment permanently increased by that two thirds percent for each month you deferred, you opt to wait past that before starting, it's certainly your right to do so, but you'll see no additional increase in your payment because you've waited past age 70 to collect. So let me give you a couple of examples to illustrate what I'm talking about.
Kurt Czarnowski (00:16:26):
First one. Here, we've got somebody born between '43 and '54. So therefore her full retirement age was age 66. And let's say at her full retirement age, she'd received $1,000 a month from the program. What were the options that were available to her? Well, she wanted to start right at the earliest point, right at age 62, the way the reduction factor worked out, she'd have received 75% of her full retirement age amount. In other words, a 25% reduction. Meaning she started at age 62, she wouldn't get a thousand a month. No, she'd get $750 per month and continuing. Well, yeah, she'd be getting $250 less each month than she'd received if she waited. The trade-off, obviously, she'd received that lower amount sooner and in theory would have collected it for a longer period of time. Now, if she wanted to wait a bit, start at age 63, payment would have been higher. She'd had gotten $800 a month and continuing, at her full retirement age of 66, that's when she would have received $1,000 a month that her work and earnings entitled her to receive.
Kurt Czarnowski (00:17:39):
Let's say she wanted to wait a little bit because that made sense for her. Wanted to wait one year, start at age 67. Well, at that point, by waiting that year, her payment would be 8% higher. Meaning her benefit wouldn't be a 1,000 a month. No, it would be 1080 per month and continuing. Let's say she wanted to wait all the way until age 70. Well, that four years that she deferred, she'd have seen her payment increased by 8% for each one of those four years. And it's simple interest, not compounded. Excuse me. But it would've meant starting at age 70, her payment would have been 32% higher than her full retirement age amount. In other words, at age 70, she wouldn't have gotten a 1,000 a month, no, she'd had gotten $1,320 per month and continuing. Let's say she wanted to wait and start at eight 72. Well, it would have been that same 1,320, right? Because no additional delayed retirement credits passed age 70.
Kurt Czarnowski (00:18:39):
2nd example. Now we've got somebody born 1960 or later. So her full retirement age is the month she turns age 67. So let's assume at age 67 she's going to get that same $1,000 a month. What were the options that are available to her? Well, even with a full retirement age of 67, you can still start to collect as early as age 62, if you choose to do so. But now with the full retirement age of 67, if you're starting at 62, that's a full five years prior to hitting retirement, your full retirement age, they're going to see your benefit reduced even more than the way the reduction factor works out. You start at age 62 with a full retirement age of 67, you get 70% of the amount you'd receive if you waited. So in this example, $1,000 at full retirement age of 67, she'd get $700 starting at age 62 and continuing. Yeah, 30% reduction. But the trade off now she's collecting for five years prior to reaching her full retirement age of 67.
Kurt Czarnowski (00:19:47):
At 67 she'd gotten that $1,000, but say she's decided she wants to wait all the way until age 70 before collecting. Here's the key thing, as I mentioned, delayed retirement credits only accrue from your full retirement age month until you turn age 70. So if you've got a full retirement age of 67, that's now only a three year period that elapses between then and age 70. So by waiting till then, you're still going to see your payment increased by 8% for each of those years, same two thirds percent per month. But now because it's only a three year period, the increase at age 70 is going to be 24% over your full retirement age amount. And so she'd be getting $1,240 per month. Another reason why it's just important to know what your social security full retirement age month is.
Kurt Czarnowski (00:20:46):
But the bottom in all of this, your choice, your decision. What are the things you got to be thinking about? Hell, you know them as well as I do. Your health for one, right? Longevity for a second factor. I always like to ask people, do you come from a family along livers or do you come from a family of short pancreas's? Hey, it's a line out of the movie Goodbye Columbus from 50 years or so ago. Can't take credit for it, although I might like to. But do you need the money. are you going to keep working? All those factors have been to play. The whole idea was based on that average life expectancy. It really wasn't supposed to matter when you started. But you know what? Life expectancy is increasing.
Kurt Czarnowski (00:21:28):
Social security numbers say 65 year old man today, on average you're going to live to age 84. 65 year old woman, on average, going to live to age 86. But even more telling to me, social security numbers say of today's 65 year-olds, one in three expected to live to 80 age 90, one in seven expected to live to age 95. So we boomers and those who come after us need to focus on the fact that retirement for us could be a period of 20, 25 or maybe even 30 or more years in length.
Kurt Czarnowski (00:22:05):
And so my personal view tends to be, because most of us as we head out the door in retirement, if we have any type of pension at all these days, is far more likely to be the defined contribution type, right? 401(k), 403(b), 457. We're walking out the door at retirement, not with a guaranteed stream of lifetime income like you used to get with that traditional defined benefit that pension, no, we're walking out the door with a pile of money and discovering the burden has been shifted onto us to figure out how to make that pile of money last through a potentially extended period of time in retirement.
Kurt Czarnowski (00:22:44):
So it seems likely to me that later in retirement, that pile of money will have diminished. Somewhat later in retirement, healthcare costs will likely be higher so you may have a greater need for a higher monthly income come later in retirement than when you make that initial transition. And one way you can help meet that need is by, perhaps, delaying the start of your social security benefits. But again, it's not for me to say, it's your choice, your decision. I just want you to be making an informed decision. And in its simplest form, you start sooner, you get a lower payment amount for the rest of your life. You wait longer before you start, you get a higher payment amount for the rest of your life.
Kurt Czarnowski (00:23:28):
But the thing to me is when Congress set that reduction rate increase rates so many years ago based on average life expectancy at the time, it was all supposed to come out about even. But these days, because life expectancy is increasing, I tend to think that good things come to who wait. But again, not for me to say. Your choice, your decision. I just want you to be making an informed decision and making a decision about what's best for you. There is no one single right answer for anyone and everyone.
Kurt Czarnowski (00:24:02):
All right. Second area I'll get questions about is, well, how do they figure out how much I'm getting anyway? And as I mentioned before, there is a relationship between your work and your earnings, and what you eventually collect each month. But we'll see in a second, it's not a perfect correlation. And in calculating benefits, social security simply uses a formula that Congress has written right into the Social Security Act. And the formula has a number of different steps in it. First step is that social security will go back and adjust your prior year earnings for inflation, bring them up to what they are in today's dollars, but then once they'd done that, they calculate your benefit by plucking out and averaging, wait for it, your highest 35 years of inflation adjusted work under the system.
Kurt Czarnowski (00:24:59):
Another one of those myths and misunderstandings. I don't know how many folks mistakenly think, oh, it's my high three, right? Or my last five years of earnings that are used, like some other pension systems. Uh-uh (negative). Benefits are calculated by averaging a lifetime of earnings, which these days defined as your highest 35 years of work under the system. So what happens if you don't happen to have 35 years where you've worked and paid into the social security program? Unfortunately, no provision for that. Your benefit's still going to be based on an average of your 35 highest years of work. But if you don't happen to have 35 years of something, zeros get added in for those additional years and those zeros lower your average monthly wage, and therefore lower your monthly benefit.
Kurt Czarnowski (00:26:02):
But again, it's your high 35, not your high three, not your last five. Your highest 35 years of work under the system. But here's another reminder about social security being that social insurance program that I reference. And putting that formula in place, Congress has recognized that people in lower paying jobs are less likely to have a pension of any type, less likely to be able to save for retirement during their working years, because they need their money for food, clothing, and shelter. So the system is set up to try and help people who've been in lower paying job by providing a monthly payment amount, which is intended to replace a higher percentage of that person's pre-retirement income. So somebody who's been a long time low wage earner, the benefit intended to replace around 55% of that person's pre-retirement income. Now, for somebody who's been a higher...
PART 1 OF 4 ENDS [00:27:04]
Kurt Czarnowski (00:27:03):
Persons pre-retirement income. Now, for somebody who's been a higher earner throughout his or her working years, by all means he or she gets more each month in absolute terms than that lower earner does. But if you look what that payment represents, it's designed to replace a smaller percentage of that person's pre-retirement income, somewhere in the neighborhood of about 34%. And the key take-away is for the average worker these days, a Social Security benefit is only intended to replace around 41% of what someone's making at retirement. In no case, higher earner, low earner or average earner, is your payment amount intended to replace 100% of the amount you're making at retirement, which leads us back to that first slide I showed you. And you got to recognize that the Social Security benefit is intended to provide you with this foundation, this base of income that you can count on being there for you, but it's a base of income you must take steps to supplement, because it was never intended to be anyone's sole source of income in retirement.
Kurt Czarnowski (00:28:08):
And the sooner you recognize that, work with your advisor at milestone, the more likely you are to have that comfortable retirement we all hope to enjoy. Two numbers for you to think about this evening, in the year 2020, the average Social Security retirement benefit being paid is $1,503 per month, 1503 average Social Security retirement benefit being paid this year. I frequently get asked the question. "Well, is there a maximum payment that social security makes?" Well, qualify it by saying in the year 2020 someone who was at his or her full retirement age of 66 this year, and who for each of the past 35 consecutive years has had earnings at or above whatever the taxable maximum has been for each of those 35 years, because that's an important point, each year there's a maximum level of earnings that are subject to Social Security tax.
Kurt Czarnowski (00:29:19):
This year, you can make a half a million dollars, but you're only going to pay that 6.2% Social Security payroll tax on the first $137, 700 that you make. Anything you make above that, sure, you'll pay a 1.45% Medicare tax, you'll pay income tax on it, but you don't pay that Social Security payroll tax. So when it comes time to average your earnings to calculate your Social Security retirement benefit, Social Security only averages in the earnings that have been subject to Social Security tax. So again, to recap, in the year 2020, someone in his or her full retirement age of 66 this year, and who for each of the past 35 years has had earnings at or above whatever the taxable maximum has been for each of those years, this year he or she receives, drum roll please, $3,011 per month. $3,011 per month, or a little over $36,000 a year. A good solid base, good solid foundation.
Kurt Czarnowski (00:30:28):
But that $1, 500 average, $18,000 average payment, that $3,000 monthly maximum, 36,000 or so annual maximum, it's a base, it's a foundation, and you've got to find ways to supplement that because I keep repeating, it was never intended to be your only source of income in retirement. By the way, if I had been given the full eight hours I was originally promised, we'd be going through this in excruciatingly painful detail. But I realized there may be some people out there in the audience who are sorely disappointed because you love that kind of stuff, but you want to learn more about benefit calculations and computations, I always like to direct you to the Social Security administration's website, www.social security.gov/OACT, which is an abbreviation for the Social Security Administration Office of the Actuary, great deal of information available at the office of the actuary.
Kurt Czarnowski (00:31:42):
Everybody knows what an actuary is, right? An actuary is somebody who doesn't have enough personality to be an accountant. Hey, I can tell that joke because it was told to me by the social security administration's chief actuary, who used to tell it about himself. Anyway, 35 highest years. So what happens if you slow down prior to retirement? Well, always get asked. "Does that mean I'm going to get a lower benefit?" Well, technically not, but it more likely means you're not going to have as high a benefit as you might if you continue to work at that higher level of earnings that typically come prior to retirement. So, it's always based on