The Atomic Retirement

8. Is Social Security the Best Annuity for Your Money?

• Ryan Kilkenny

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Is Social Security the Best Annuity for Your Money? That's what I'm talking about on this episode of The Atomic Retirement Podcast. 

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Ryan Kilkenny  0:00  
Hi everyone, and welcome to The Atomic Retirement. I'm your host, Ryan Kilkenny, the founder of Atomic Planning, an independent, veteran-owned, fee-only financial planning firm, bringing tax and retirement planning to families over age 50. Atomic Planning is a virtual financial planning practice in Kansas City, serving families from coast to coast, from California to North Carolina. Thank you for joining me and welcome to episode 8 of The Atomic Retirement. 

Ryan Kilkenny  0:29  
Today we're talking about Social Security, and why I think it may be the best annuity your money can buy. I believe Social Security is incredibly underrated, and that we don't give it near enough credit. My goal with our time today, is that you'll walk away from it with a much better appreciation of the potential impact that Social Security may have on your own retirement. 

Ryan Kilkenny  0:51  
Approximately 70 million Americans receive benefits from programs administered by the Social Security Administration. 

Ryan Kilkenny  0:59  
And just a minute ago, I said I believe Social Security may be the best annuity your money can buy. What did I mean? Well, a payroll tax is known as FICA, which stands for the Federal Insurance Contributions Act helps to fund Social Security and Medicare. And if you look at your pay stub, you might see the words FICA on it, or you might see OASDI, and that stands for old age survivors and disability insurance. You know it better as social security. 

Ryan Kilkenny  1:31  
6.2% of your gross wages goes to Social Security tax. 1.45% of your gross wages goes to Medicare tax. Remember, Medicare is the other part of your FICA tax, so in total, you pay 7.65% in FICA taxes. Now, the 6.2% that you paid a Social Security taxes only applies to your first $147,000 in wages for 2022. You do not pay Social Security taxes on wages above $147,000. 

Ryan Kilkenny  2:08  
Did you know that you aren't the only one paying money into Social Security? Your employer matches your percentages so that a total of 15.3% is paid in. And if you're self employed like I am, you'll pay the entire 15.3% yourself, but you'll get a self employment tax deduction on the back end when you file your tax return. 

Ryan Kilkenny  2:32  
Okay, now that we know that 6.2% of our wages goes to fund Social Security, let's get to the reasons that I believe it may be the best annuity your money can buy. As you may recall from last week, and annuity is an agreement with an insurance company. You hand the insurance company a lump sum of money, or a series of payments, and they agree to provide you with a guaranteed income stream for a specific amount of time, perhaps for as long as you or your spouse are alive. Do you know what that sounds like? To me? It sounds like Social Security. 

Ryan Kilkenny  3:09  
Social Security is a guaranteed lifetime annuity that is designed to pay you an inflation protected sum of money for as long as you live. Social Security will guarantee you a pay raise if you delay your benefits past your full retirement age. It can even pay you a spousal, divorcee, or survivor benefit for as long as you live, regardless of whether you've ever paid a penny into the Social Security Trust Fund. Furthermore, it's backed by the full faith and credit of the United States government, not an insurance company. Social Security is a social contract we have with our government. It's a promise originally signed into law by President Franklin D. Roosevelt in 1935. 

Ryan Kilkenny  3:55  
Just a bit ago, Isaid that Social Security is designed to pay you and inflation protected sum of money for as long as you live. That wasn't always the case. The first monthly Social Security beneficiaries received fixed monthly payments for life. It wasn't until 1950 that the very first cost of living adjustment took place, and for the next 25 years, up until 1975, monthly benefits only increased when Congress took action. 

Ryan Kilkenny  4:27  
1975 was a game changer, and it was the very first year for automatic annual cost of living adjustments, essentially inflation protection to ensure the purchasing power of Social Security is not eroded by inflation. 

Ryan Kilkenny  4:44  
Automatic annual cost of living adjustments are tied to annual increases in the Consumer Pricing Index for Urban Wage Earners and Clerical Workers. It's known as CPI-W. 

Ryan Kilkenny  4:56  
CPI-W is determined by the Bureau of Labor Statistics, and by law, it is the official measure the Social Security Administration uses to calculate cost of living adjustments. For example, it's 2022, and Social Security beneficiaries got a 5.9% cost of living adjustment in January of this year. Now, that increase was based on the change in the consumer pricing index from the end of the third quarter of 2020 to the end of the third quarter of 2021, essentially a change in inflation over a 12 month period. If there's no increase in the consumer pricing index, there's no cost of living adjustment. And so cost of living adjustments are a huge win for Social Security beneficiaries over time. Would you like to know that average annual cost of living adjustment from 1975 to 2022? It's 3.6% a year. 

Ryan Kilkenny  5:59  
Now, it goes without saying that these annual cost of living adjustments vary from year to year. For example, the cost of living adjustment in 1980 was 14.3%. On the flip side, I see four years with no cost of living adjustments. And that just means no change in the consumer pricing index or inflation during that time. 3.6% is just the average annual cost of living adjustment over the past 48 years. And while it might not sound like much at the moment, when we turn on the news and hear that headline inflation increased 8.5% over the past year, but get this. 

Ryan Kilkenny  6:40  
Let's say a 65 year old retiree in 1974 received $100 Social Security check every month. Their check today would be a little over $537, more than five times their original starting amount. And, I'm willing to concede that our hypothetical retiree from 1974 probably isn't alive today. After all, they'd be north of 110 years old, but hear me out. Inflation was running wild in their early retirement years. Sound kind of familiar? From 1975 to 1984, Social Security had their backs with an average annual cost of living adjustment of 7.31%. For them, that meant that their $100 monthly check doubled to $201 over a 10 year period. I don't know about you, but I believe that Social Security's inflation protection is incredible. And better yet, you don't have to pay extra for it like you would with an annuity. 

Ryan Kilkenny  7:46  
Have you heard that Social Security will guarantee you a pay raise if you delay your benefits past your full retirement age? This is known as delayed retirement credits. For each month you delay past your full retirement age, you'll get an increase of two thirds of 1%. That works out to an 8% increase for each year you delay. 

Ryan Kilkenny  8:07  
Take me for example. My full retirement age, as determined by the year I was born, is 67. Oh by the way, if you were born in 1960, or later, your full retirement age is also 67. And so 67 is the age when I qualify for 100% of my Social Security benefit. If I delay until age 68, I'll get an 8% pay raise. If I delay until age 69, I'll get a 16% pay raise. And if I delay until age 70, I'll get a 24% pay raise. These guaranteed 8% annual increases stop when you turn 70, so there's no benefit in waiting past age 70 to claim your Social Security benefits. 

Ryan Kilkenny  8:55  
Now, many retirees elect to begin their Social Security benefits as soon as they can, at age 62. Perhaps they have a good reason for doing so, but in my opinion, they are paying a pretty hefty price tag in the form of a permanently reduced benefit. Let's use me again and my full retirement age of 67. Now, my retirement benefit would be reduced by 30% for the rest of my life if I claim Social Security at age 62. 

Ryan Kilkenny  9:28  
Now, here's what I never recommend. I never recommend taking Social Security early because you believe it will run out or that your benefits will be cut. Believe me. I'm aware of the headlines about the Social Security trust fund, but here's what I know to be true. These headlines are not new. Generations of Americans have heard the same darn thing, and in my opinion, the trust fund freakout is much like the debt ceiling debates. It's much to do about nothing, and Congress will likely address the problem at the midnight hour. 

Ryan Kilkenny  10:04  
What did we start with today? We talked about payroll taxes, more specifically FICA taxes. And as you'll recall, 6.2% of our wages go to Social Security taxes. My point is that generations of Americans to come will continue to pay into the Social Security trust fund to pay out your entitlements. It's not something that I think you should lose any sleep about. 

Ryan Kilkenny  10:30  
Now, how would I approach social security if I was in my early 60s? Assuming I'm in good health, I would delay my benefit past my full retirement age for as long as I could, preferably up to age 70. And why would I do that? Well, every year I delay pass my full retirement age of 67, I earn that guaranteed 8% bump in my benefit. 

Ryan Kilkenny  10:54  
If I delay until age 70, I get a guaranteed 24% increase in my social security checks. For example, let's say my benefit at age 67, my full retirement age, would be $1,000 a month. If I claim early at age 62, my benefit will be $700 a month, that's a reduction of 30%. If I delay until 70, my benefit would be $1,240 a month. I could take a reduced benefit at 62, but for me, I'd rather pass up that smaller social security check and delay eight years, knowing that my check at 70 will be 77% larger than at age 62. And so my break even would be just shy of about my 79th birthday. So if I'm in good health, and I live past that milestone, I would receive more from Social Security over my lifetime by delaying until 70. 

Ryan Kilkenny  10:54  
If I'm the higher earning spouse, delaying my benefit until 70, would also increase my spouse's Survivor Benefit, whenever I pass away. And get this, delaying Social Security until 70 opens up tax planning opportunities, and buys me more room inside my marginal tax bracket to spend down my pre tax retirement accounts, like a traditional IRA, and to do strategic Roth conversions, lowering my expected required minimum distributions when I turned 72. It helps me lessen the chances that I get hit upside the head with income taxes and pay more than I should for Medicare during retirement. It puts me in the driver's seat and in control of my tax situation in retirement. 

Ryan Kilkenny  12:47  
Putting this all together, what's the average Social Security benefit in 2022? Well, the average monthly benefit for a retired worker is $1,657 a month, or just under $20,000 a year. The average monthly benefit for a retired couple that both worked is $2,753 a month, a little over $33,000 a year. 

Ryan Kilkenny  13:16  
Have you ever stopped to think about your possible lifetime Social Security benefit, and what that number adds up to? Well, let's say that we have a 65 year old married couple, and they're combined Social Security checks total $33,000 a year. They get the average monthly benefit of a retired couple. Well, statistically, there's a 49% chance that one of them will live to age 90. But, let's say they just live 20 years in retirement, and they both pass away together at age 85. What's the possible lifetime value of their Social Security? Well, $33,000 multiplied by 20 years equals a little over $660,000. But if we apply the historical cost of living adjustment of 3.6%, their projected lifetime benefit gross to $977,000, an increase of $317,000. 

Ryan Kilkenny  14:23  
What if they live longer, and both pass on their 90th birthday? Well $33,000 multiplied by 25 years equals $825,000. With a historical annual cost of living adjustment of 3.6%, their projected lifetime benefit grows to $1.35 million dollars, an increase of $525,000. 

Ryan Kilkenny  14:51  
I've said it before, and I'll say it again, I believe Social Security may be the best annuity your money can buy. It's guaranteed lifetime annuity designed to pay you and inflation protected sum of money for as long as you live. Social Security will guarantee you a pay raise if you delay your benefits past your full retirement age. It can even pay you a spousal, divorcee, or survivor benefit for as long as you live, regardless of whether you've ever paid a penny into the Social Security Trust Fund. Furthermore, it's backed by the full faith and credit of the United States government, not an insurance company. 

Ryan Kilkenny  15:31  
Okay, we've covered a lot today. So what now? Well, I'd encourage you to check out your own social security record. You can go to ssa.gov/my account or just go to ssa.gov and scroll down a little bit until you see a button that says my Social Security. From there, you can either register for an account, or sign into your existing account to review your eligibility and earnings record, and estimate your future monthly benefits. 

Ryan Kilkenny  16:03  
That's it for today. Be sure to check out the show notes for helpful links and resources mentioned in today's episode. 

Ryan Kilkenny  16:10  
Are you over 50 and in or near retirement? Taxes might be your single biggest retirement expense, especially if you have mid six or seven figures in pre tax retirement accounts, like 401k's and traditional IRAs. What is your plan to ensure you aren't overpaying the IRS in retirement? If I can find legal and ethical opportunities to help you lower your retirement tax bill, would you like me to show you? I'm offering a free retirement tax assessment. If you're interested, please go to atomicplanning.com and hit the "Contact Us" button in the upper right hand corner of the website. There's an option to book a free meeting with me, and I'd love to see if I can deliver massive value to you. 

Ryan Kilkenny  16:55  
Do you love the podcast and find it helpful? If so, I'd really appreciate it if you hit the subscribe button, leave a five star review, and a short comment. It really helps people find me. And spread the word. Please share this episode with someone you think may enjoy it too. 

Ryan Kilkenny  17:12  
This podcast is for informational and educational purposes only, and it is not investment, tax, or legal advice. Clients of Atomic Planning may maintain positions in the securities discussed in this communication. I try my very best to bring you valuable information, but I may not know anything about you or your personal situation. So please talk with your fee-only financial planner, tax, and or legal professionals before taking any action or making any decisions about your own financial plan. Atomic Planning is a veteran-owned Kansas state registered investment advisor providing independent tax and retirement planning.