are you planning on delaying your social security benefit until age 70 because you've been told to break even age for doing so is around age 80 or 81 well you may want to think again in today's video I'm going to share with you a real client example to show you how most people make the wrong decision around Social Security and how that wrong decision can ultimately cost you upwards of $100,000 you don't want to make this mistake and in today's video I'm going to show you how you can avoid it hey everybody I'm James canol founder of root financial and I'm here to teach you the most out of life with your money so to illustrate these principles let's actually walk through a real life client example now the names of course are different to protect any sensitive information but this is an actual case study that can show you how the right decision or the wrong decision could impact the trajectory of your plan to the tune of hundreds of thousands of dollars or more so let's take a look at Greg and Sherry right here Greg and Sherry came to me and they were both 62 years old and they wanted to retire today when we looked at their assets here was a list of what they had Greg had $492,000 in his 401k Sherry had a little over 400,000 in her 401k and Sherry had about 60,000 call 58,000 in her Roth IRA on top of that they had Savings of $25,000 they had a joint investment account of $132,000 and they had their primary home that they had just finished paying off worth about $650,000 so this was their snapshot but the goal that they had was to retire today so both Greg and Sherry wanted to be done working today and they wanted to be able ble to spend $6,000 per month throughout retirement net of any medical expenses and taxes so 6,000 is what would allow them to do the things that they wanted to do both pay the bills so put food on the table pay utilities do the basics and also have a little bit of fun and do things and explore like they wanted to be able to do in retirement on top of that they had their health insurance cost that we were estimating because they were retiring at 62 we needed to show One cost from age 62 to 65 So based upon where they lived and the plans they were looking to enroll in that was about $88,000 per year of Prem Medicare health care expenses they had and after Medicare we're still showing another $3,500 estimated for each of them so$ 7,000 combined of outof pocket costs so this is an addition to Medicare Part B Part D all the other costs they're going to have so they came to me they're 62 years old they want to retire today they want to live on $6,000 per month of course we need to adjust that for taxes and inflation and add-on medical expenses but here was a really important detail of their plan it was their investment mix now I'm going to come back to this this isn't saying everyone that 62 with these assets and these income sources should be invested this way but here was the investment allocation that worked for their plan and that they were comfortable with so this is really important component of this plan and I'm going to come back in a bit and show you why but they were pretty aggressive they had 90% of their portfolio and diversified stocks int 10% Diversified across different types of bonds and because of that the return projection that we were showing was 88.8% per year now we always stress test this and we always look at what if we don't get that because there's absolutely no guarantee that that allocation is going to continue going forward or that return based on this allocation will continue going forward but this was at least a starting point that we could then stress test using different assumptions from here but bottom line just keep in mind that we are showing a fairly high growth rate for their assets going forward so once we've established all those details how old they are what their assets are what their income sources in retirement are how much they want to spend to have a fun and fulfilling retirement what their projected growth rate on their assets is going to be then we can come here those assumptions allow us to now project out the next 30 plus years of their life one thing I should note here is Greg and Sherry both have a lot of longevity in their families their parents lived nice long Liv so we're projecting each of them to live until age 95 and what we did is we came here and we said what is your cash flow going to look like well Year bye starting at 62 and then beyond we start by understanding what are your Social Security benefits going to be and we adjust that for inflation and of course we project out each of their benefits once we have an understanding of what their projected income is going to be just from Social Security so before we even dip into their portfolio we want to compare that to their expenses well what are their expenses their expenses are their living expenses of $6,000 per month which is $72,000 per year but then we're adjusting that for inflation so that's going to cover their needs today but everything's going to get more and more expensive so we factor in an inflation adjustment on top of that we have Healthcare expenses so we're assuming the extra $8,000 for each of them between age 62 and Medicare and then those expenses drop a bit once Medicare kicks in but we still are planning on Medicare Part B and Part D premium as well as an extra outof cost EXP expense so when we look at both living expenses and Healthcare we then want to assume a tax rate on top of that now here's the thing with Greg and Sherry now this isn't huge detail for this part of their plan that we're looking at but it did have other implications with their tax strategy they had a joint account and we determined that would be the most efficient account to spend down first because when you look at the taxation of that plus Social Security it's incredibly low you can see their tax brackets essentially zero at this point so there's some tax strategy that we can Circle back here to time in review but for now we want to look at their income plan specifically with regards to Social Security and the way in which they're collecting it but bottom line is that their income is$ 49,28334 their net flows are $ 38,768 net flow is essentially telling us how much do you need to pull from your portfolio so you can pay taxes pay health insurance and end up with the equivalent of $6,000 per month month and today's dollars so here's where we went next with this analysis we determined how much are you pulling out of your portfolio each year we wanted to translate that into a withdrawal rate so not necessarily what's the dollar amount that you're pulling out but what is it as a withdrawal percentage is that 2% of your account is that 8% of your account that really gives us a strong sense of is this withdrawal sustainable over the course of 30 plus years so here's what that looks like as we translate those dollar amount withdrawals into a withdrawal percentage year byye we could look at this and we could tell them you're projected to take out 3.2% your first year of retirement then that drops a 2.8 2.8 down to 2.4 starts to increase later on as we're no longer spending down your taxable account which has very little tax impact and we're now taken from IRAs which are going to be taxed a bit more you see it bumps up here at age 75 when required distributions start and they have to take more just because of forc withdrawals not necessarily because they need to but as we look at these this gives us a very strong sense of these withdrawal rates being very sustainable depending on your withdrawal strategy you might want to look to take out somewhere between 4 to 5% maybe a little bit more maybe a little bit less depending on how you're doing this but as we look at this these were very sustainable withdrawal rates in so much so that when we look at their portfolio as a whole not just today not just next year but as we project this out from age 62 to age 95 this is what that looks like here is their portfolio balance today Greg and Sherry have about $1.1 million in their port folio but even though they're starting to draw down their portfolio if they're only taking 3% a year or 2% per year keep in mind we're still assuming a high growth rate and you're not going to get that high growth rate every single year but if on average they get that growth rate that we're projecting over time then here's a general trajectory of their portfolio in other words they're meeting all of their needs between Social Security in their withdrawal from their plan and all the while their portfolio balance is actually continuing to grow to the point point that they're projected to have about $7.1 million just in their liquid portfolio by the time they reach age 95 and that does not even include the equity value in their home now here's where things started to get interesting Greg and Sher said James this is amazing look at this we're in a great position to meet all of our needs and there's a few takeaways there so there's some tax opportunities there's actually some spending opportunities hey do you want to spend more or do more but they then came to me and said this they said James this is all great and you know what James before we started to work with you we went to one of those stake dinners where we go to see a presentation and we get a a free retirement analysis or free social security analysis and they put together Social Security analysis for us and that other firm showed us that they said look if you're going to live to age 95 you're much better off collecting social security at age 70 let's take a look at what that analysis actually looked like I modeled out for them a similar scenario or a similar analysis based upon the numbers they gave me from this presentation they received or this free analysis that they had received and essentially what was we looked at and remember they have about the same social security benefit both Greg and Sher we looked at this we said you could collect Social Security age 62 or you could collect it at age 67 now technically you could collect it anywhere between age 62 and 70 but the decision point they were wrestling with was do we go at 62 or do we go at 67 and this free analysis that they received showed them these numbers they said look if you collect age 62 this is your full retirement age benefit $3,200 per month if you collect at 62 you're taking a 70% or I should say a 30% reduction in your full retirement age benefit so it essentially comes out to 70% of what you would have received at age 67 so in their case that was $2,240 per month so they ran the numbers and they said okay well if we start collecting $2,240 per month here's the annual benefit assuming an inflation adjustment every year that we could expect to receive by collecting early versus here's what it would be if we collected at full retirement age so age 67 for each of them now in this analysis they're collecting $0 those first several years so what you can see is by the time they start their benefit it's higher but there's 5 years of no income coming in from Social Security so here's what that analysis looks like their cumulative benefit if they start at age 62 $26,800 versus 0 if they were to wait so in other words if they were to die at age 63 they would have been better off by almost $27,000 to collect at age 62 versus waiting if they were to die at the end of their 63rd year so age 64 they would have been almost $55,000 better off and so on and so forth so what you see is they're much better off if they know for certain they're going to pass away within the first few years this is quantifying how much more could you get from Social Security by collecting early versus waiting until age 67 now we run those numbers year by year and what you can start to see is the first several years these numbers are rising but then as soon as your benefit starts at age 67 here the difference starts to diminish and it diminishes all the way to the point that at age 74 in this particular comparison they were actually better off by waiting until age 67 and if you go all the way to age 95 what this other group told them is they said look you're almost $400,000 better off collecting at age 67 than if you collected at age 62 so Greg and Sherry they came back to me they said James your plan is wonderful this is great we can do everything we want to do look at this analysis as other firm did for us What If instead of collecting an age 62 and the plan you ran for us what if we waited until 70 because again there's almost a $400,000 swing in terms of how much our lifetime social security benefit would be if we did so now I knew right off the bat the analysis they did was technically accurate but it was entirely incomplete but instead of just telling them that I wanted to show that to them so to do so we came back to this plan here instead of looking at Social Security in a vacuum and just comparing the numbers I said let me actually illustrate to you the impact of collecting social security at age 70 versus at age 62 here's what your projected portfolio balance is going to look like based upon the assumptions we made Let's now change your Social Security strategy and instead of collecting at age 62 let's collect at age 70 and let's see what impact that has you would think that would be positive based upon the last analysis that we did but here's what actually happened the new plan has over $400,000 fewer dollars at the end of their life time than they otherwise would have had they collected Social Security early so they were confused they said James what gives was the old plan wrong the Social Security analysis was that wrong or is your plan wrong because they're both numbers it should just be math how is one saying one thing and the other is saying another thing I said Greg and Sher you're absolutely right the the math Works in both cases the math is technically correct in both cases but let me show you what your Social Security analysis gets wrong or let me show you at least words it's incomplete let's go back to their cash flows so this was the page I initially walked them through this ISS what if you collect Social Security at age 62 here's your total expenses here's how much you need to take from your portfolio well now let's compare that to what I'm calling the proposed plan which is what if you now collect Social Security at age 70 well in that case even though you will get more lifetime Social Security benefits look what that means for your cash flows you now have no income sources between age 62 and age 70 yes at age 70 you have a much higher benefit but look at the strain that puts on your portfolio in the meantime now you're taking out $888,000 the first year of retirement previously that was about $38,000 then that increases to 90,000 then over $100,000 and so what you start to see is you're burning down some of your portfolio assets this is the concept of opportunity cost yes delaying Social Security absolutely increases your benefit and for many people it may be the right to decision but while you're doing so you're spending down these portfolio assets and there's an opportunity cost that now that's an extra significant amount an extra tens of thousands of dollars per year that will no longer be growing for you over the next 30 plus years of your lifetime and that's why if we come back to this screen right here collecting Social Security age 70 under the assumptions we are using for them actually cost them over $400,000 instead of saving them $400,000 but before we go any further this is not always the case I do not want to be misleading and say that everyone should collect Social Security age 62 instead of 70 there's many instances where waiting actually makes more sense one of the key factors here there's several factors that impact this but one of the key factors that I want to highlight and I did highlight previously was we are assuming an 88.8% rate of return on their assets for many people I would not project their portfolio balance to grow that much over the course of retirement because most people aren't invested in this type of a growth portfolio over the course of their retirement let me illustrate what that actually looks like in a real practical example let's go back to Greg and Sherry let's assume they still have the same exact situation same balance in Greg's 401K same balance in Sherry's 401K same balance in Roth savings joint account everything's the exact same goals are the same income's the same here's the single difference though what I've done is now I'm illustrating what if their rate of return is only 6.3% over the course of retirement and by the way that might be a much more realistic or reasonable growth rate for most people to project depending upon the makeup of their assets so all else is the same but now let's look at the impact of only growing at 6.3% instead of 8.8% I'm going to skip over a lot of the actual analysis that we did so still the same cash flow still the same Social Security age 62 still the same goal of $6,000 per month living expenses here's what their updated projection looks like the first thing you'll note is their portfolio balance isn't projected to continue growing like it did in the previous example previously their final balance at age 95 was closer to7 million now it's still a healthy amount but it's closer to$ 1.7 $1.8 million here's the thing though all else being equal except for the growth rate now let me update the Social Security strategy and now instead of selecting age 62 what if in this case they both did wait until age 70 to collect their benefits how does that change things what changes things in a dramatic way what you can see here is now that proposed strategy instead of costing them $400,000 is projected to put an extra $850,000 plus dollar into their pocket over the course of their retirement well how on Earth could that be all else is the same except for the assumed growth rate on their assets well here's how you should think about it because these assets are now projected to grow by less there's less of an opportunity cost to spend them down one way of thinking of it is it's almost like you're spending down less productive Assets in order to maximize your social security benefit so I'm highlighting this here because your growth rate on your assets is a very underappreciated aspect of your specific Social Security strategy most people do the analysis that I showed you on the spreadsheet of just Social Security break even at what point does collecting later give you more money over the course of your lifetime than collecting earlier it's an entirely incomplete way of looking at it there's so many other factors one of which is the growth rate that you can get on your assets that are going to continue growing if you collect Social Security early versus waiting now obviously big disclaimer you can't guarantee any of that growth rate you could have a much lower growth rate than we're actually projecting here so that's part of the planning process and understand the risks of financial planning and investing but it at least needs to be part of the comparison when you're running these numbers for yourself the second thing that I want to note here number one is your rate of return your projected rate of return will have a huge impact on on determining what Social Security is right for you what Social Security strategy the second thing is even with this assumption that says look you're going to have over $850,000 more doll in your pocket by delaying Social Security under these growth rate assumptions the break even age is still around age 86 so when people tell you hey the break even age of Social Security is somewhere in your mid 70s or maybe 80 or 81 even it's an incomplete analysis it's a very simplistic way of looking at Social Security that just looks at Social Security it's not considering other factors like your rate of return on your Investments like your tax situation like your other income options so to do a true analysis you really need to look at the big picture to see how will various decisions impact My overall plan and the decision of when you collect Social Security probably has a much bigger impact on your overall plan than you might otherwise think so the next time you hear someone say collect Social Security a soon as possible or maybe you hear someone else say absolutely delay until 70 it's the best way to maximize your benefit understand there's not a one-size fits-all solution because it's not enough just to know when should I collect Social Security based on my other planning factors we also want to know how can I maximize Social Security so this next video on the end screen is going to walk you through that so you can understand how to maximize Social Security in your financial plan once again I'm James canol founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.ro Financial Partners com
