Power Up Wealth podcast – episode 2 transcript:
Sharla Jessop 0:00
Many people believe Social Security is doomed. But will we see the end of the program during our lifetime? I’m Sharla Jessop and today we’re going to discuss the future of the Social Security program with our expert, Jordan Hadfield.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Jordan, thank you for joining us today.
Jordan Hadfield 0:47
Thank you for having me. I’m excited to be here.
Sharla Jessop 0:49
Jordan is one of the private wealth managers at Smedley Financial Services. He’s a certified financial planner, and also has a degree in personal financial planning from Utah Valley University. Jordan, I was interested as I was reading your article about Social Security, there’s a lot of talk around it. What made you want to write this article?
Jordan Hadfield 1:07
Yeah, that’s a good question. So as you can imagine, I meet with a lot of different people and a lot of different financial situations. But a large amount of clients that I meet with are people who are preparing for retirement. And whenever I’m talking about retirement planning, or people who are in retirement, Social Security is a topic that’s almost always brought up. And there’s a number of reasons for that. But one thing that I find particularly interesting is that there’s a lot of fear surrounding Social Security. And I understand why if someone is about to retire, and give up their income, and become on a fixed income, Social Security makes up a large portion of that. And so if there’s fear that that’s going to be reduced or go away entirely, that’s a scary place to be. So I understand why there’s a lot of fear surrounding Social Security. However, it’s my job to provide facts. And there’s a lot of misinformation out there. You know, people get information from, from the news from their friends from social media, and a lot of it is myth, a lot of it is misrepresented. And a lot of it’s just, frankly, wrong. And so it’s my job to provide the facts so that people I’m working with can make wise financial decisions regarding Social Security. That was my motivation for the article.
Sharla Jessop 2:18
Tell us a little bit more about Social Security, because people are really worried about, you know, is Social Security going to be there for me? You touched on that. Tell us a little bit more about that?
Jordan Hadfield 2:26
Absolutely. So the number one question I get is, can I rely on Social Security? You know, and in my answer to that, my short answer to that is yes. And let me let me expound on that a little bit. So Social Security is a massive program. 25% of all federal spending is allocated towards social security and a huge amount of the population depend on Social Security. 37% of men in retirement, and 42% of women receive more than 50% of their income through social security. So it’s a massive program on on federal budgets. And it’s also a program that the American people depend on when we talk about is it going away? Number one, if it did, we would have some major problems in this country. But as long as employees and employers are paying payroll tax, Social Security will, will exist. And that’s because Social Security is very much a pay as you go program. There’s a lot of misconception, a lot of misunderstanding about Social Security being going bankrupt, we see in the news that it’s projected to go bankrupt by the year 2034. In fact, I think that might even have been reduced recently to 2033, or even 2032. What does that mean Social Security going bankrupt? What happened was Social Security many, many years ago started receiving revenue, and they were receiving more than they were spending. And so they started to invest this money into a trust fund. And that trust fund has grown over time. But we’ve reached a point where we’re actually now spending more in the Social Security program than the revenue is bringing in. And there’s a number of reasons for that. But long story short, the Social Security program is now spending more than it brings in on a yearly basis. But the trust fund only accounts for about 22% of Social Security. I mentioned it’s a pay as you go program, employers, employees paying the payroll tax into Social Security. It’s that money that goes out to Social Security. Social Security itself isn’t going to go bankrupt. It’s the trust fund. It’s the the extra money that had been saved up that’s going bankrupt if there are no changes made to the program at all. Social Security would continue to pay out roughly 78% of its benefits. Now, does that mean we should plan on receiving only 78% of what we’re receiving now? No, it doesn’t. I very much think that the problem with Social Security will be fixed. And there’s a number of reasons why lie I have that opinion. Number one, this isn’t the first time Social Security has been in trouble. In the early 80s, Social Security was going bankrupt. And in the late 70s, Congress got together and they passed legislation to protect the program in 1983, they passed further legislation with the trust fund going bankrupt in 2034. That is not a surprise to anyone. It’s not a surprise to me as an advisor, it is not a surprise to anyone at Washington, when they passed legislation in the 80s. They expected this, the reason why they haven’t fixed it yet, is because in their point of view, from their perspective, they still have 12 years before the trust fund goes bankrupt, plenty of time from politicians perspective, to fix this problem, I believe it will be fixed.
Sharla Jessop 5:44
And there are a lot of tools, I’ve heard of many different tools they could engage to help protect Social Security. And to build that back up.
Jordan Hadfield 5:52
Yes, and some of these tools might not be appealing. Let’s talk about what some of those are what I expect to happen. And I don’t know nothing has been passed yet, we don’t know. But what I expect to happen is they will increase the full retirement age for the younger generations, they may even cut benefits to retirees for the younger generations. I do not expect them to cut benefits to current retirees or people who are very close to retirement. As a politician, if you want to be re-elected, the worst thing you can do is tamper with the income of your base.
Sharla Jessop 6:26
True.
Jordan Hadfield 6:26
Right. And so if they start making adjustments that hurt people who are voting for them, they’re not going to get votes, they’re far more likely to pass legislation and kick the can down the road a ways. So I don’t expect people who are currently in retirement, or people who are very close to retirement to have any negative effects, changes to the program. Another thing that Congress has explored is taxation on Social Security. Currently, as of your 2022, workers only pay into the Social Security program up to $147,000 of their income. In other words, if you make $148,000, that last thousand you made doesn’t go towards Social Security at all, one thing they’ve discussed, they’ve they flirted with the idea of either raising that limit to a significant degree or creating what’s called a doughnut hole, which is, you’ll hit an income limit, and you will not pay into Social Security until you make a significant amount of money more than that limit. In other words, someone pays into Social Security for the first $147,000 they make. And then if they make over $400,000, their money, again, starts to be taxed to go into the program. So there’s a number of different tools that Congress can use. I’m not sure what they will use, and they’ll probably use a combination of several different tools. But ultimately, I think changes will be made. But it’s I don’t think it’s something that the current retirement generation or those facing retirement need to worry too much about.
Sharla Jessop 7:52
Okay, so if Social Security is pretty secure, which you’re sharing your comments that it is, and I appreciate that, how do people use it in planning? What does it mean to them when they’re putting together their plans?
Jordan Hadfield 8:03
That’s a good question. So in order to answer that accurately, I would need to know a lot more information about the individual. What is their age? What is their income? What are their expenses? What is their retirement plans, there’s Social Security is a large program. And there’s a lot of different facets to the program that can make the program very difficult to understand for someone who isn’t involved in the minor details. So there’s a lot there to unpack. In fact, we could have another another Podcast where we explore some of these issues in a more detailed level. But to answer your question, we do include Social Security income in our retirement plans, both for individuals who are looking towards retirement and the younger generation.
Sharla Jessop 8:47
What about somebody who is at retirement or maybe within 10 years of retirement? They’re planning for retirement. What things do they need to know about Social Security? Or how do you incorporate it into their plan?
Jordan Hadfield 8:58
So let’s talk about how Social Security works a little bit, because there’s a lot of a lot of confusion there. You have a full retirement age, if you were born in 1960 or later, your full retirement age is 67. The earliest you can take Social Security in most situations is age 62. The question is, do we want to take it at 62? Or do we want to wait to our full retirement age. If we take Social Security before our full retirement age, there’s actually a decrease in monthly benefit, okay, and that decreases about 6% every single year. There are some reasons maybe someone would want to take it early. But if fear is driving that decision, fear that the program is not going to be around I think that is an unwise decision. There are some reasons why one would want to take it early. However, we can also delay Social Security, one can wait until after their full retirement age. And there are some real benefits to that. Social Security will grow at 8% a year, every year after your full retirement age until you hit the Age of 70. So if we take it early, there’s a decrease in benefit. And if we wait, there’s an increase in benefit. And by the way, 8% a year, that is a fantastic return on investment. I don’t know of any other investment out there, that can that can produce close to a guaranteed 8% of return. The reason why I say close to guaranteed is because nothing is guaranteed, but the United States government is saying they will pay you an extra 8%, that’s as close to guaranteed as I need to wait till age, you know, to delay that I can, I can count on that. And so there is some significant planning involved. As far as to Social Security optimization. If we’re trying to maximize Social Security, it’s easy, we wait until age 70, I hear people talk about maxing Social Security all the time, that’s wait till 70, you’re gonna receive a total benefit of close to 32%. If you wait from your full retirement age of 67, to age 70, optimization is a little different thing. And that’s going to depend on the individual as far as when they should take it.
Sharla Jessop 10:59
So everybody’s situation might be a little bit different. Some people might be in a position to take it early. And some people might want to wait longer. Tell us about some of those specific situations where somebody might want to wait or take it.
Jordan Hadfield 11:10
I had a client a number of years ago who was diagnosed with a terminal illness, and we weren’t sure how long they’d be with us. And in a situation like that it makes sense to take it as early as possible. Luckily, they’re still with us. But if they weren’t, they would have left significant amount of income on the table if they had delayed to age 70. And so there’s, that’s just one of many examples, I could provide why someone would want to take it early. However, if you don’t have a need for Social Security, or you’re still working, and you’re under full retirement age, I would not I would not take it, I would I would wait, there’s a number of reasons why I would recommend to wait to age 70 besides just the a percent increase, inflation is an issue. And that’s a that’s an inflation protection. Right? If you receive 132% of your your full retirement age benefit for the rest of your life, that can help protect you against rising rising costs. Social Security does have a COLA, a cost of living increase, but it often doesn’t keep up with inflation, particularly in years where inflation is quite high. So that’s that’s another benefit to waiting. Third reason that I’d mention is if a spouse passes. If the working spouse passes, their surviving spouse will continue to receive the benefit the working spouse had coming in. And so that extra money coming in would would provide a benefit to the surviving spouse for the long term.
Sharla Jessop 12:39
That’s a good point. I think a lot of people don’t even understand this, some of the nuances around spousal benefits and divorce benefits and things like that. Maybe you could touch on that quickly.
Jordan Hadfield 12:49
Yeah, again, there’s a lot here a question I’m asked is I’ve been divorced, I don’t have a social security benefit under my own record, meaning my spouse was the one working, I was working from home, maybe I was the homemaker. And now I’m divorced, my retirement is looking scary, because I don’t have social security, Social Security benefit. But the truth is, a divorce spouse can still qualify for their ex spouse’s Social Security. And let me tell you a little bit how that works. First of all, you have to be married for 10 years. So if you’re married less than 10 years, then you wouldn’t qualify for an ex to, to file for an under an ex spouse. But if you’re married for more than 10 years, you can qualify, you have to be at least age 62. To file and you have to be single. So if you’ve, if you’ve been divorced, and you’ve remarried, you’re no longer going to qualify for benefit on your ex spouse’s record. So as long as you meet that criteria, you you will receive Social Security. Another thing I want to mention is, you don’t need to have this conversation with your ex spouse. A lot of people marriages don’t end great and they don’t want to go to their ex spouse and ask for Social Security information. It doesn’t affect your ex spouse’s Social Security whatsoever. It’s completely independent of there’s no reason to have a conversation with them. But you do qualify for a spousal benefit.
Sharla Jessop 14:06
And I understand that widowers actually, can receive a benefit earlier.
Jordan Hadfield 14:13
That’s true and whether or not they decide to exercise that option is very dependent on their situation. Typically speaking, you can’t file for Social Security until age 62. Unless you’re a widower, then you can file up to age 60. So they give you an extra two years. In some situations that makes sense and others that doesn’t. We would want to analyze an individual’s situation before we, before we give any recommendations specifically on that.
Sharla Jessop 14:37
Jordan, there’s so much to consider when thinking about Social Security, and some of the options that are available. What’s your advice?
Jordan Hadfield 14:44
My advice is speak with someone who you trust and who is an expert about Social Security. And I want to mention here that the Social security administration doesn’t give the entire picture when questions are asked A lot of the people that work for the Social Security Administration don’t understand the complexities of the program. And I’ve had clients call in thinking, they’re the experts. They’re the one to talk to, and they’ll get a new hire on the phone, who maybe doesn’t understand the intricacies of the program, or just have different opinions, right? Speak to someone who you trust, and it never hurts to get a second opinion.
Sharla Jessop 15:21
And how about as far as planning, when people are looking at Social Security? What do you tell them about including it as part of their plan going forward? What would your recommendation be there?
Jordan Hadfield 15:31
We always include it in the plan. Again, it depends on the the age of the individual, there are a number of things to consider when we’re making projections for retirement planning. And the further away those projections are, the more gray area there is. But I hear a lot of people say, I’m 35 years old, Social Security isn’t gonna be around for me. And I think that’s wrong. I think that’s, that’s inaccurate, I think it will be around the situation may be different. But we shouldn’t be making decisions based on what could be what might happen. We can only work with the facts in front of us. And the facts in front of us are, if you’re close to retirement, Social Security will be there, we will include it in your plan. If you’re young, I believe Social Security will be there, we will include it in your plan. It will change for the younger generations, as I’ve mentioned. And so I think the best thing you can do for the younger generations is save more. I’m typically speaking, you know, people are saving around 10% is kind of the general rule 10% towards retirement. I think that might not be enough, particularly with pensions going away. And we’re seeing that happen. Individuals are going to be responsible, more responsible for their own retirement income. I think to push those numbers up to 15% for the younger generation is smart, but Social Security will be there for them.
Sharla Jessop 16:50
You know, it’s a very individual situation. I can tell by what you’re saying. There isn’t a rule of thumb for everybody and everyone’s situation is different. It seems like they would benefit from talking with an advisor before they move forward doing anything.
Jordan Hadfield 17:04
Absolutely. Again, speak to someone you trust. The advisors at Smedley Financial Services are experts on the subject. They’re passionate about the subject. They’re up to date with Social Security numbers and information. We’re paying very close attention to changes to the program.
Sharla Jessop 17:20
Jordan, thank you so much for joining us today.
Jordan Hadfield 17:22
My pleasure. I look forward to joining you again.
Shane Thomas 17:28
Thank you for joining the SFS Power Up Wealth podcast. Smedley Financial is located at 102 South 200 East Suite 100 in Salt Lake City, Utah 84010. Call us today at 800-748-4788. You can also find us on the web at SmedleyFinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly, as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
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