MMM Newsletter and Website Header 10.2.15

I hope you had a great weekend! Baseball is back, but not Spring!

LRPC’s Monday Morning Minute for this week, “Nine Social Security Myths Worth Busting” (presented below) comes to you courtesy of ThinkAdvisor. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share the most relevant information with you each week. If you are short on time, try and take a quick look at each of the nine Social Security myths in bold below.

The Monday Morning Minutes on Social Security are some of the most popular I share. Get the correct answers on the top Social Security myths and learn more about your Social Security benefits by reading this short piece.

Have a wonderful week!

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Nine Social Security Myths Worth Busting

 
By Janet Levaux, Editor in Chief, Research Magazine, appearing in ThinkAdvisor
 

Deciding when to begin taking Social Security is not an easy feat – even for financial advisors. There are many factors to consider, such as health, wealth and family situations.

Naturally, the devil’s in the details. And, as with any government program, there are lots of them. ThinkAdvisor spoke with Michael Lonier, retirement management analyst and head of Lonier Financial Advisory near Sarasota, Florida, about the ins and outs of Social Security planning. Lonier gave his views on misconceptions, Social Security myths and flawed – or at least confused – thinking on the best time to take Social Security benefits. Read on for a discussion of nine Social Security myths worth busting:

1. You should claim early, before your full retirement age, in order to “get back what you put in”

This is a fallacious argument, says Lonier. “The basic issue you are dealing with is that people want money sooner rather than later and find reasons to justify that.” Blame human nature, he says. “It has to do with the declining utility theory and the diminishing value of returns, I guess.” While sooner may seem better, there are lots of reasons it may not be the best retirement scenario. For example, if you retire at age 62 in 2016, the maximum monthly benefit would be $2,102, according to the Social Security Administration. However, those waiting until their full retirement age, 67, receive a maximum benefit of $2,639 in 2016. And those retiring at age 70 in 2016 have a maximum benefit of $3,576.

2. It’s best to take it early, since you don’t know how long you will live

This is one of the most frequent Social Security myths. Longevity continues to increase. According to a recent study conducted by the University of Michigan published in The American Journal of Public Health, the average woman can expect to live to 85.5. For men, that figure has “risen significantly” to 83. Yet, few people “delay getting their Social Security to age 70, which is unfortunate,” explained Lonier. “The longer you wait, the greater amount you get each month.” This amount significantly affects retirement, “since Social Security is a big part of people’s incomes,” he adds. The rate at age 70 can be almost double that of age 62, which “is terrific,” the advisor states. “Those who have not worked or saved as much as others would most benefit from waiting, but most don’t have income to spend while waiting,” explained Lonier. “Thus, many are forced to go and take Social Security early, as it is their only source of income.” Unfortunately, by taking it early, “You are not able to get more over time,” the advisor explained.

3. By taking benefits early, you will be able to pay less in taxes

One of the biggest Social Security myths is that retirees should first tap into Social Security and then begin withdrawing funds from their IRAs and other private savings vehicles. However, by reversing that strategy, some retirees may be able to lower the taxes they pay over their lifetime. Consider that Social Security benefits are taxed at a preferred rate. This means at least 15% of Social Security income is tax-free. With a traditional IRA, 100% of withdrawals are taxed at ordinary income tax rates. Plus, some retirees taking both Social Security and IRA withdrawals find themselves facing a so-called “tax torpedo.” This is when Social Security benefits get taxed and retirees move into higher tax brackets. “There really are some things that are in the realm of control of retirees — and that really matter,” explained Lonier, like using some savings early on to increase the tax-advantaged benefit you get in later years. “Thus, if you can tap some savings first, retirees can boost their Social Security income later in retirement and lower their taxes,” the advisor said.

4. With political gridlock and other problems in Washington, you can’t expect Social Security to stay solvent forever, so you should take benefits as soon as you can

Of all Social Security myths, this is one most American’s fear the most. A report by the Social Security trustees say the program’s trust funds will be depleted in 2034. Once that happens, payroll taxes will be its sole source of funding. Researchers estimate that the taxes would cover between 75% and 79% of benefits. Voters concerned about the stability of Social Security should elect those to office who share their views, says Lonier. Perhaps, if the majority of voters give politicians in Washington a clear message on what they want for the program in the future, their elected representatives will protect it or adopt specific reforms, he adds. The advisor reminds retirees and investors that there are no guarantees. “Anything can happen,” Lonier said. “And you have to have the same assumption with Treasury bonds. There are no risk-free investments.”

5. You understand the Social Security breakeven point, and it still seems best to take Social Security before age 70

The breakeven point, generally speaking, represents the age at which a retiree taking benefits before age 70 would begin to have less money over their lifetime than if that same retiree had waited. The reverse is also true: The breakeven point represents the age at which a retiree waiting until age 70 begins to have more money over their lifetime than if he or she had elected to take benefits earlier. “Most people I talk with get the breakeven point and the tradeoff between taking money now and getting a lower amount forever vs. waiting and getting a higher amount — with the breakeven point representing the crossover [or intersection] of the two strategies,” Lonier explained. Lots of people, he says, believe they won’t live to the breakeven year. However, many are on the high side of the life-expectancy spectrum, even if they have a chronic illness, the advisor adds. “And it’s worth factoring in the benefits of tax-advantaged dollars from Social Security into the breakeven analysis. That could move the breakeven closer to age 80, for some people,” he explained. “Those who think they will just live to 82 and get to 85 or 90 really will get less money than they expected if they took Social Security too early,” Lonier said. “They will then really need longevity insurance or another source of income.”

6. You don’t need to maximize monthly Social Security benefits because you’ll be spending less in retirement

Some retirees expect to spend less, since they have paid off their mortgage, are not paying college tuition for children and can even turn to their kids for support if needed. “Retirement planning is more complicated than this,” Lonier said. “You have two components — cash flow and income, which is Social Security and maybe a pension and financial capital.” For each retiree, of course, the income and expenses vary. “Some people can live frugally, have lower expenses than income and will do fine,” he explained. “But if they are leveraged, meaning they spend furiously and run up credit-card debt — and that their spending exceeds their income — they will do poorly.” When retirees’ spending exceeds their income, there’s trouble. “It’s that simple,” Lonier said. “Again, this is why we advise people to wait longer to get more money from Social Security to cover expenses with higher income. It’s worthwhile to try and delay Social Security.” As for spending, even retirees have paid off their principal residence, there are other costs to consider for cars, pets, other homes and so on.

7. Getting Social Security means you don’t have to worry about spending a lot of money on health care since you’ll be getting Medicare, too

While acknowledging that health care spending and expenses are “a complex subject,” Lonier says: “The bottom line is that they are going up. For example, Medicare Part B premiums increased this year.” Of course, Social Security payments do get adjusted for inflation, “but those increases can get eaten up by the Medicare increase,” he explains. Retiree health care costs depend on a variety of factors, of course, including whether or not someone has a chronic condition such as diabetes. The current cap on out-of-pocket expenses for those with Medicare Advantage plans, for instance, is $6,700 a year (or as little as $3,400 under some plans). “We say to people that it’s a good idea to get a cap on your expenses, to get a plan that allows you to know the maximum you can expect to pay out for health care each year,” the advisor stated. He cautions that those who don’t take care of themselves and suffer from associated health problems will likely pay more out of pocket for health care costs. At the same time, those who do take care of themselves can expect to live longer and should plan accordingly, Lonier says.

8. You don’t need to worry about Social Security, because your kids or other family members can always help support you and even let you live with them, if needed

 “As with other sources of support, you can’t completely count on children,” Lonier explained. “Of course, nobody knows the future.” It’s important to get away from the notion that it is acceptable to not plan for the future and assume someone else will fix your problems, he adds. If children can help out or take care of their parents in the 62-to-70 age range, then the parents can take Social Security at a later age and get higher monthly payments. “This is what we refer to as multigenerational financial planning,” the advisor stated. If, for instance, the parents don’t have much savings, but their kids have good-paying jobs, the family can work together on a financial plan. “They can learn what could cost them less in the long term,” Lonier said. “You can plan holistically and figure out how to fund the early stage of retirement. It all depends on the circumstances.”

9. You can never get the right information on Social Security benefits

The Social Security Administration website provides pre-retirees and those in retirement with a large quantity of information, fact sheets and more. It does take a few minutes to create a My Social Security account online, but the account gives you full details on your benefits at different ages. See www.SocialSecurity.gov or https://www.ssa.gov/myaccount. For those who want to get some details on benefits before doing creating an official SSA account, there’s a quick calculator of benefits online that can be used. See https://www.ssa.gov/oact/quickcalc/index.html. “You can also Google lots of this,” said Lonier. “There is Social Security information everywhere.” While the SSA now offers most services online, including requests for replacement Social Security cards, it maintains a network of offices nationwide for face-to-face assistance.

The general toll-free number, 800-772-1213, can be reached 12 hours a day from Monday through Friday.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC’s) Monday Morning Minute is crafted to provide decision-maker’s with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.