085: Making Sense of Social Security with Mary Beth Franklin *

[INTERVIEW]

Casey Weade: Mary Beth, welcome to the podcast.

Mary Beth Franklin: Thank you. I do appreciate it.

Casey Weade: I am excited to have our first Social Security expert here on the podcast. You know, we always reach out to all of our fans who have signed up to get notified of upcoming guests, as well of our weekend reading we send out every Friday. And we always ask if they want to ask questions for the upcoming guests we have, and you receive more questions than any other guests that we have ever had.

Mary Beth Franklin: Wow. That's a badge of honor. Thank you so much.

Casey Weade: Well, you know, I think our audience they're in the midst of making these Social Security decisions and Social Security seems to be so complex and a little overwhelming. And I just think it's so strange that we've got this decision that shouldn't be that complex that really is. Can you tell us why do you think the Social Security decision is so difficult and so complex?

Mary Beth Franklin: Well, first of all, you're not imagining it. There are more than 2,700 rules that govern Social Security benefits. Just think about that. Now, back up and think when did it start? 1935, thanks to FDR, following the Great Depression, there was virtually no sort of pension in the country and he wanted to create what he called an earned benefit for workers. In other words, they contributed part of their payroll each week and they would look forward to a retirement where they would have some security and dignity. But over the 80 plus years that Social Security has been in existence, extra rules have been added on and a lot of times, the underlying rules weren't taken away. It's a bit like trying to read the US tax code, not a lot of fun. Then also what happens is as a society we have changed. When Social Security started, it was virtually unheard of to have women in the workplace. It was essentially one breadwinner, a stay-at-home spouse and a family. It was designed for Ozzie and Harriet, except Ozzie and Harriet is no longer the standard of marriage and family. So, now we have often two spouses in the workplace, both paying payroll taxes, known as FICA taxes, and depending how much they pay in and how long they're going to live is going to affect how much they get.

But now comes the big decision. It used to be pretty simple, retire at 65, collect your pension, collect Social Security, enroll on Medicare, sit on your porch and rock away. Not the look of today's retirement. People are working longer but the age to enroll in Medicare is still 65, but the age to get your full retirement benefits from Social Security is 66 or older depending on your birth year. So, the decisions of how to maximize those benefits gets more complicated.

Casey Weade: Yeah. Those decisions are getting more important, which makes them a little bit more complicated because we realize just how important they are when you have a 20 or 30-year retirement. Retirement’s just changed a little bit. You mentioned the IRS, the Social Security administration and I always like to make the joke if there's an easy way to do something in a difficult way, well, the IRS typically chooses a difficult way and it seems like Social Security has started to get that way over time as well with over, as you said, nearly 3,000 different rules out there. That makes it pretty darn complex. So, I’m interested…

Mary Beth Franklin: And keep in mind, those federal agencies are just implementing the rules that Congress has approved. So, if you have a beef in Washington, go back to Congress. That's where it starts.

Casey Weade: Well, and I know you live in Washington. You said something funny when we kicked it off this show. There's something that you say about Washington.

Mary Beth Franklin: Yeah, it's a bit like Disneyland surrounded by reality where you do not have reality checks here and I spent more than a decade as a Capitol Hill reporter, all through the Reagan administration. So, I actually watched the Social Security reforms of 1983. I watched that sausage being made. And I certainly have ideas of how they could fix it going forward.

Casey Weade: Wow. You know, I can't wait until you're going to have some really great insight into talking about Social Security funding and what it's going to look like in the future. I want to get to that in a little bit, but I've got to kick it off with the question that most people have in their mind. And I get this question all the time and I'm sure you do as well. This is a loaded question. But I don't think most people recognize how loaded it actually is. So, if someone asks you, "When should I file for Social Security?” what do you say?

Mary Beth Franklin: The answer is always the same. It depends. It depends on your health, your wealth, and your marital status. There is a big trend of recommending that people delay benefits up until age 70 because there's a huge bonus. For every year you are willing to postpone your Social Security benefits beyond your full retirement age, you get an extra 8% per year. So, that means if you delay from taking benefits at your full retirement age of 66 until 70, you're going to get an extra 32% in Social Security benefits for the rest of your life. Now, one more comparison, I can collect benefits as early as 62 but if I claim benefits four years early, I'm going to get a 25% haircut the rest of my life. So, I could collect 75% at 62 versus 132% at 70. That's an increase in Social Security benefits of 76% for the rest of my life. What other investment can you recommend where someone is going to guarantee to increase their benefits by 76% over an eight-year period? And there's the big question, how long you're going to live? And if you can answer that, lots of luck.

Casey Weade: Yeah. Well, it seems like that's the key factor. You needed to really determine at the core, well, how long are you get to live and that is something we just can't determine. But there are things that we can take into consideration while we're determining that. And as you said, there's a couple things you said there. One is that return, that 8% return every year. And I really want to dig into that first because I think some people look at that, and I've had them say, “I'm getting an 8% return on my money,” and it's not necessarily an 8% return on your investment. How do you help people understand that 8% growth on your benefit every year?

Mary Beth Franklin: Well, I think you have to look into the context of because a lot of people say, "Oh, Social Security is going broke. I'm going to grab my money as soon as I can even if I don't need it.” And my reaction is, "Okay, what are you going to do with it?” “Oh, well, I'm going to invest it in the stock market. I can make better than 8%.” “You're right. You might. Or you might lose 20%.” If you're talking about taking your Social Security and investing it on your own to beat what the government will give you, you have to look at a risk-free return, which is essentially what do you get when you stick it in the bank? And until recently, that's been about zero and it's been about zero for a decade. So, the reason we talk about the value of delaying Social Security benefits is that 8% per year guarantee in a virtually zero interest rate environment. Now, if interest rates really take off, they get above 4%, well, then I would agree with you. Maybe you should take the money and run. But at this extremely low-interest-rate environment, it is in the words of the chief actuary of the Social Security Administration, a smoking hot deal. And if you like, I'll tell you a story how we got to that ludicrous rate of 8% in a zero interest rate environment.

Casey Weade: Yeah, I'd love to hear that.

Mary Beth Franklin: Well, back in 1983, when Social Security was really going broke, and in danger of not being able to pay benefits, Congress was in a bit of disarray, like we are right now. And to refresh your memory or if you weren't around in 1983, we had Ronald Reagan in the White House, the great Republican communicator, great conservative, and we had Tip O'Neill, Democrat in Massachusetts, the lion of the Democratic Party, as Speaker of the House. Two great politicians who did not agree on anything. But there was this concern that Social Security couldn't pay benefits, full benefits. AAP and their retired members were going crazy and these two politicians said, “Social Security is the most important and popular federal program in history.” What they didn't say is old people vote in higher numbers than anybody else. “We're going to fix this.” So, they did what they usually do in Washington, when you've got a really tough problem. You punt. You create a bipartisan commission to come up with the heavy lifting of what we should do, and then they send that recommendation to Congress. Well, that's what they did.

They appointed a bipartisan Social Security Commission in 1983 but they needed someone to chair this commission. And they picked someone who most people had probably never heard of at the time, but his name is more familiar today. Alan Greenspan, long before he was Chairman of the Federal Reserve Board, chaired the bipartisan commission on Social Security. And the Greenspan commission did a lot of really smart things. And one of the smartest things they did was they said, “Wow, look at this. Americans are living so much longer but everybody is collecting benefits at 62. What can we do to get Americans to delay collecting their benefits until they're worth more, so they'll have bigger Social Security benefits the rest of their lives?” Well, I talked about this 8% per year delayed retirement credit. The problem was in 1983, it wasn’t 8% a year. It was a measly 3% a year, and another back to the future, Interest rates were 18%. So, who in their right mind would delay collecting Social Security for a measly 3%? Didn't make any sense. Nobody did it.

So, one of the things the Greenspan Commission did was saying, “Let's gradually increase this delayed retirement credit. Let's boost it by a half a percentage point each year, until it gets to a cap. What do you think, guys? 8% sounds pretty conservative to me. Okay. When it gets the 8%, we're going to stop it, we're going to apply it to anyone born in 1943 or afterwards when they reach their full retirement age.” So, here's your first math quiz. 1943 plus full retirement age of 66 heads up to what? 2009. That was the first year Americans could earn 8% per year for delayed retirement credit. At the same time, we had the worst stock market crash since the Great Depression, and interest rates went to zero. And for the first time, the government said, “I'll give you 8% a year.” That's where this idea of Social Security claiming strategies were born. It was a result of this outside 8% guaranteed in the context of a zero interest rate environment.

And for people whose full retirement age is 66 and that applies to anyone born from 1943 to 1954, that means people who turn 66 through next year, who are healthy enough, because the whole idea of delaying benefits, until they're worth more is a bit like the lottery. You must be present to win. If you don't think you're going to be around for a long time, maybe you should wait. And also, wealthy enough. If I'm going to wait until 70 what do I do for money in between? Now, for people who plan to keep working, problem solved. For people who plan to retire, but still want to delay, well, then you look at what am I doing for money. It might make sense to start drawing down those IRAs, 401(k)s or if you're lucky enough to have a pension, to rely on those sources of income to essentially buy yourself an 8% per year boost in Social Security benefits later.

Casey Weade: And so, there's some people out there that are going to say, "It sounds like you're a really strong supporter of delaying Social Security, in general. And some people are going to say, "I've heard this before.” Let's just say it's 100,000 a year. “We know we're not getting $100,000 annual benefit.” Well, let’s say that I could file the day for 100,000. Next year, if I wait, I'll get 108,000. So, I got an 8% return but really, if I would have filed last year, I'd have 200,000 now. Not $108,000. And so, I think that leads right into a question from one of our fans. Doug Kruger asked the question, "Everyone talks about waiting as long as possible to take Social Security. I would like to know Mary Beth’s take on if or when there are times when it makes sense to start Social Security early?”

Mary Beth Franklin: Absolutely. Again, it talks about health and wealth. If you're in poor health, you might not want to delay. However, my big emphasis on who should delay really focuses on married couples. And I really think one spouse, the one with the bigger benefit is the one who should delay because what a lot of people don't realize is when one spouse dies, the biggest Social Security benefit continues as the survivor benefit. So, by having one spouse maximize the retirement benefit, you're virtually guaranteeing that there's this bigger benefit that will continue after one spouse dies. Now, actuarily, typically, the men are going to die first. They often tend to be the bigger earners. So, it does make sense in many cases for the husband to delay benefits up until age 70. Having said that, many times it makes sense for the wife to go ahead and claim benefits early if she's not working because people who claim benefits before their full retirement age and who continue to work are subject to earnings restrictions.

But let's say we have the husband delayed until 70. The wife who's not working collects at 62. Yes, her retirement benefits are reduced for the rest of her life, but it will have no impact on her survivor benefit. If her husband dies first and she's at least full retirement age at the time, she is still going to step up to this full survivor benefit and the smaller benefit goes way. But in the meantime, she brought some income into the household, takes away a bit of the sting of having the other spouse wait until 70 and if nothing else, it’s helping to pay their Medicare premiums.

Casey Weade: So, we can see if we're married, if we're lucky enough to get married, we're lucky enough to end up having a more complex Social Security decision to make. In the end, there's more things to consider but it really still comes down to life expectancy, life expectancy of the spouse, life expectancy of the other spouse, who's going to live the longest, and how long are we going to live. And so, if it comes down to life expectancy, I've got a fan question from Paul Slippets. And he said, I assume that the decision on when to take Social Security is based on life expectancy, which you just explained it is, what is the best method for calculating this age?

Mary Beth Franklin: Don't get hit by a bus prematurely. Social Security website actually has a life expectancy calculator you can use. It's pretty basic. Otherwise, if you google on the internet, there are some more sophisticated life expectancy calculators based on your current health status and a bit of family history. There's an organization called HealthViewServices.com, which basically creates a lot of the algorithms that insurance companies, etcetera, use but they have a function that you can use to get a rough idea of your life expectancy. Now, let me back up again. Yes, life expectancy is important but let's say we have the main breadwinner who is diagnosed with a terminal illness at say 65. He’s not likely to live more than a year or two. Well, certainly if the family needs the money, he may want to collect the Social Security benefits. But if they're really not in dire need of that money, he may want to delay. Because if he claims early and dies, that will be the basis of his widow's Social Security benefit and if he's claiming before his full retirement age, he will get a reduced retirement benefit, she will get a reduced survivor benefit.

There are some cases where people are terminally ill, that they're better off not claiming because what they were entitled to a time of death is likely to be a bigger benefit that's going to give a bigger survivor benefit to their remaining spouse. So, yeah, it gets really complicated and there are other issues. We talked about married couples. The other thing to keep in mind is that people who were married at least 10 years, who are divorced and currently single, meaning not married to someone else at the moment, even if they were married to someone else before, they are eligible to claim Social Security benefits just as if they're still married. You can imagine there's complications there with divorced couples. And if you want to get into some more complicated strategies, 2019 is the last year that people who turn 66 this year have an added claiming strategy if they're married or if they are considered an eligible divorced spouse who was married at 10 years.

Casey Weade: Yeah. We were able to do some fancy planning there with my mom. My parents’ divorced and so we were able to take advantage of some of those strategies, which were really are going to work out fantastically for my mom. Unfortunately, that there's divorce, but that does open up some unique opportunities at the same time. And so, another thing I think was important to point out is on that terminally ill individual. And if they're married, I think it's important also recognize that extra benefit means even more once you factor in the fact that the surviving spouse is now going to be a single filer eventually, and they may pay more in taxes. So, they should get that a little additional more in Social Security benefits as well. Now, Mary Beth, you are married and you're of Social Security age. I think everybody would love to hear the Social Security expert’s strategy on their Social Security benefit.

Mary Beth Franklin: Well, it probably depends if you asked me before or after Congress changed the rules. Back in 2015, when Congress was passing some critical financial legislation to raise the debt ceiling, they had to do it or the government couldn't pay the bills that had already incurred. Without any public hearing or discussion, they attached amendments to that bill, that changed the way we can claim our Social Security benefits, these two creative claiming strategies. One was known as file and suspend. It meant that if I waited until my full retirement age, to file for my Social Security benefits, I could file for them, which would trigger benefits for my eligible family members, generally a spouse, and then I could immediately suspend them so I wouldn't actually get a check but my benefits would keep growing. That was one creative claiming strategy. Congress shut it down on six months’ notice. They passed this law in November 2015 and said, "Six months from now, April 2016, anybody who's 66 or older can use this strategy. After that, nobody else can.” But people who used it were grandfathered under the old rules. Then they gave us a four-year phase-in for another valuable claiming strategy and that's what's so important this year.

It says that people who are married or eligible divorced spouses, when they reach their full retirement age of 66, could say to Social Security, "Don't pay me my benefit on my work record. Pay me only as a spouse. That means give me half of my husband's full retirement age benefit or give me half of my wife's full retirement age benefit while my own benefit continues to grow by 8% a year, and at 70, I will switch to my own maximum retirement benefit.” For married couples, this strategy can boost their lifetime benefits in terms of what they both get while they're alive, and what the remaining spouse gets in terms of a survivor benefit by $50,000, $60,000, $70,000 a year or more. Lifetime benefits, not pre-term.

Casey Weade: Sure.

Mary Beth Franklin: You know, very, very valuable strategy. But the key is now only people who turned 66 by this year, technically by January 1, 2020, means they can use this strategy. People born January 2, 1954 or later, which includes me, cannot do this. Now, I always joke that my face is on a dartboard at the Social Security Administration and they do know what my birthday is so I don't think this is real accident. And I do apologize to anyone born in 1954 or later. It's obviously my fault and I'm really sorry. So, I can't use this double fancy strategy that my husband and I had planned to use initially. So, our plan B is my husband is now 67 years old. He has not yet claimed Social Security. I turned 65 December this year. I will wait until I turn 66. In December 2020, I will claim my full retirement age benefit, at which point that triggers a spousal benefit for my husband. He will be 68 at the time. He will use this strategy known as filing a restricted claim for spousal benefits. That means I'm not claiming all my benefits. I am restricting my claim to just spousal benefits. He will get half of my full retirement age benefit for two years and then at 70, he will claim his own maximum benefit, which will be 32% higher than it would have been when he was 66. And then depending on which one of us is the survivor, the bigger Social Security benefit will continue and the smaller one will go away.

Casey Weade: Well, you're using a similar strategy as we're doing with my mom. She's using her spousal benefit, delaying her own benefit until it's maxed out at age 70 and for some of these rules will still persist after this year for people like divorcees for instance, correct?

Mary Beth Franklin: Well, people whether they're married or divorced, the key is you must be born on or before January 1, 1954. If you're born after that date, you will never be able to use this fancy strategy. It goes away.

Casey Weade: So, are there any fancy strategies left? Widows? What options do we have?

Mary Beth Franklin: Yes. Widows and widowers, regardless of their birth date, will still have the ability to collect a retirement benefit first and switch to a survivor benefit later, or vice versa, whichever would benefit them more. You have to understand that retirement benefits on your own work record and survivor benefits on your late spouse or your late ex-spouse’s work record are two different pots of money. And you are entitled to choose when to claim them. So, I'm going to give you an example from my own family. My brother Bobby died 10 years ago this month, much too young and when his widow, Lillian, turned 62 a few years ago, she asked me which Social Security benefit could she collect? Should she collect her own retirement benefit or should she collect a survivor benefit? And I said, “Well, you know, I know you're still working. Are you making much money?” “No, no, not really. Since Bobby died, I just haven't felt like it”. “Okay, whose benefit is bigger, your own retirement benefit or Bobby’s survivor benefit?” “Oh, his is much better than mine.” “All right, I want you to claim at 62 your own reduced retirement benefit. You would get 75% of your full retirement age amount and if you make more than the earnings restrictions, which in 2019, believe it or not, is $17,640 a year, you make more than that, you start losing some benefits.”

I said, "Collect your own retirement benefit at 62. Even if you lose some money to the earnings restrictions, don't worry about it because when you reach your full retirement age of 66, you are going to switch to your survivor benefits. And even though your retirement benefits were permanently reduced, it has no impact on your survivor benefits.” And that's what she did. But in those interim 10 years, she became a very successful real estate agent making more than $100,000 a year. Had she asked me that same question when she was making so much money, I would have said, "Don't claim any benefits before your full retirement age. You're making too much money. You would lose them all, at least temporarily, to the earnings restrictions. Don't do it. But when you reach your full retirement age of 66, I still want you to collect your survivor benefits because survivor benefits are worth the maximum amount at your full retirement age. They do not earn delayed retirement credits of 8% a year but your retirement benefit does. I want you to collect only your survivor benefits at 66. Let your own retirement benefits keep growing and if at age 70, your retirement benefits are bigger, you're going to switch.”

Now, the reason this is so important is the Social Security Administration did an internal random sample about a year-and-a-half ago, where they looked at the advice that Social Security claims reps were giving people who are entitled to both the retirement benefit and a survivor benefit and that random sample found out that in 82% of the cases, the claims rep did not give the best advice. So, it's really important for you to know what you're entitled to.

Casey Weade: So, we've got still some creative or fancy strategies out there for widows and widowers. Are there still going to be any fancy strategies left out there for any other demographics or individuals? Or is the Social Security decision going to get much more simplified after this year?

Mary Beth Franklin: I will say there won't be any creative claiming strategies left other than for survivors. But it will still remain an important piece of your decision when you look at your overall retirement income plan, particularly for so many people who no longer have access to a pension. And my belief is it's really important to have some sort of guaranteed or predictable income in retirement to at least cover those fixed costs you're going to see, your health insurance, your taxes, your mortgage if you still have one, your rent if you don't, so that you know your needs are covered and that your other savings can perhaps go to your wants. And I do like the idea that if I have a pension and I have Social Security, maybe that covers all my needs. If I don't have enough money, I might want to create some form of guaranteed income, whether I'm building a bond ladder, whether I'm buying an annuity, just so I have a predictable stream of income coming in so I know those fixed costs are covered. And then the rest, I can have more flexibility because it's going towards my wants rather than my needs.

Casey Weade: And do you find that the biggest regret among individuals have already filed for Social Security is that they filed too early or is it something else?

Mary Beth Franklin: It depends on who you talk to. There are several studies that say people are very satisfied with their Social Security claiming decision regardless when they made it. Most people who claim early at 62 do it because they had to either they had an illness or were taking care of a spouse that they had to retire earlier than they expected, and they needed the money or they had planned to work a whole long time and they lost their job. My bottom line is you have worked long and hard and paid a lot of money in payroll taxes for this benefit. If you need the money, take it but if you have some flexibility, you probably want to work with a financial advisor to figure out what works best for you. The thing is, with your higher income clients, their biggest surprise in retirement is not Social Security, but how much they're paying in Medicare premiums. A lot of people go into retirement thinking, "Hey, great. I qualify for Medicare. My health care is going to be free the rest of my life,” and nothing is further from the truth. Your Medicare Part A that covers hospitalization is “free” because you paid for it your whole life through payroll taxes.

Your Medicare Part B, you pay a monthly premium and how much you pay depends on your income in retirement. Yes, it's true that most retirees are paying $135.50 a month for Part B in 2019 but depending on your income, you could be paying more than $450 a month per person for the exact same service. And you're also paying extra for Medicare Part D prescription drug coverage, and then you still need a Medigap policy. So, I talked to financial advisors about what can they do when their clients are in their 60s maybe to shift some money from their traditional sources of retirement income, like IRAs and 401(k)s that are fully taxable when that money comes out in retirement to perhaps a Roth IRA where, yes, you pay taxes upfront on the converted amount but it's tax-free going forward. That strategy alone may be able to help you not only reduce your future income taxes and retirement, but how much you're paying for Medicare premiums.

Casey Weade: Yeah. I find that's an overlooked area.

Mary Beth Franklin: Right. And you mentioned early on about widows and widowers. And when you go from a joint filer to a single filer, now you have a higher tax bill. Well, guess what, the same thing happens to Medicare because your Medicare premiums, while you're married, are based on your joint income. If you're suddenly single, because you're widowed, now you're subject to Medicare premiums based on that single threshold. And while a lot of married couples say, "Well, I'll never pay that higher Medicare premium because the threshold level is $470,000 of joint income. We don't have that much money in retirement.” Well, that's true. But what happens when one of you die? I bet you're surviving spouse’s income is over $85,000 and that's the trigger for high-income surcharges of Medicare.

Casey Weade: Yeah. I think sometimes we just look at our tax situation, our tax planning as if we're always going to be married. And if we need to look beyond that, what if we end up single someday? We've lost our spouse or we divorce for that matter or we end up ultimately passing away at the same time. We leave these assets to somebody else and that needs to be taken into consideration as well. So, if some people have made mistakes, I think that leads us right into another one of our fan questions from Jenny Hitchens. She said, "If a person who is currently drawing Social Security changes his or her mind, maybe they made a mistake and filing and decide that they want to draw it later, can we do that?” I think you have to pay it back what you have received, and you can only do it once and it can't be more than a year. Is that correct? Or what should somebody be thinking about here?

Mary Beth Franklin: There were actually two different opportunities. Jenny is correct that if you are collecting a Social Security benefit, and you decide, “Gee, I was too hasty. I made a mistake.” You have 12 months from when you first filed to withdraw your application for benefits, but it comes with a hitch. You have to pay all your benefits back and if someone was collecting on your records, such as a spouse or a minor dependent child or a permanently disabled adult child, you have to pay their benefits back too. Now, why would you do it? It wipes the slate clean as if you have never claimed Social Security so at a later date when you're older and your benefits are worth more, you claim as if for the first time and you're getting a bigger benefit. Now, if you missed that 12-month window, now you have another opportunity, but you have to wait until your full retirement age. At that point, you can suspend your benefits. You don't pay anything back. You are suspending your benefits and that means your benefits stop. And if anyone's collecting on your record, like a spouse or a child, their benefits stop. But in the meantime, your benefits now start earning delayed retirement credits of 8% a year. So, if you suspend it at 66, you don't get any money up until age 70, it starts again at 70, you would have increased your benefits by 32%.

And the math works like this. Let's say you claim benefits at 62 so you’ve got 75% of your full retirement age amount. If you were entitled to $2,000 a month at 66 and you claim to 62, you effectively got $1,500 dollars a month. You get that for four years. You suspend your benefits. Now, you're getting nothing, but they're growing by 8% a year. That's 32%. If I multiply that 75% I got at 62 times 1.32, I come out with 99%. I have effectively restored my full retirement age benefit by age 70 and if I die first, that's the larger benefit I'm going to leave my surviving spouse. So, particularly the breadwinner who claimed at 62, because he could and didn't realize that he was unintentionally reducing a future survivor benefit for his wife may want to suspend his benefits at 66 and continue to have them grow up until age 70. So, he's locking in a bigger retirement benefit while he's alive and a bigger survivor benefit if he dies first.

Casey Weade: Well, I can just see people going down the road kind of mind boggled at the same time trying to take notes as fast as they can. So, don't worry, we're going to put all this in the transcript. We've got links to everything that Mary Beth has mentioned. We're also going to have an offer for a free e-book at the end as well, so you aren't going to want to miss that. So, you talk about one angle, so we make a mistake and then we want to go back, then there's kind of this inverse decision we have to make, which is retroactive benefits. So, let's say we're 62. Now, we're 62 and three months, and we wish we would have filed at 62 but what are your thoughts on retroactive benefits and what kind of decisions people should be making there or questions they should be asking themselves?

Mary Beth Franklin: Well, people who claim Social Security benefits after their full retirement age, this only applies to people who are older than 66 at the moment, have the right when they claim Social Security to get a lump sum payout of retroactive benefits up to six months. But that could not start before their full retirement age. So, let's say I'm 66 and six months old, and I file for Social Security, Social Security is going to give me a choice. They can either pay me as if I claimed at 66 and six months, that gives me 100% of my full retirement age benefit.

Casey Weade: Getting a 4% increase, effectively.

Mary Beth Franklin: A 4% increase. So, I'm getting 104% of my benefits, because I claimed at 66 and six months, or they could pay me as if I claimed at 66 and give me six months of retroactive benefits and a lump sum. That's the maximum retroactive benefit. If I claimed at 67, I still can't get more than six months retroactive benefits in a lump sum but they're giving it to me instead of the delayed retirement credits. So, I'm getting smaller benefits every month for the rest of my life than I would have gotten if I accepted the lump sum. So, I generally don't recommend people take that lump sum unless they are collecting a spousal benefit or survivor benefit after their full retirement age because those benefits max out at my full retirement age. So, if I'm claiming survivor benefits at 66 and six months, yes, I should request that retroactive lump sum because my biggest monthly benefit is going to be based on my age 66.

Casey Weade: So, what if I'm not full retirement age? What if I'm 62 and three months, 62-and-a-half? What's it look like in that scenario?

Mary Beth Franklin: I do not have the option to collect retroactive lump sum benefits if I'm under full retirement age.

Casey Weade: But I'm still going to get those increases monthly?

Mary Beth Franklin: Well, the monthly increases say between 62 and 62-and-a-half are less than the increases that start at age 66. The real big bump of the 8% a year starts at your full retirement age. Prior to full retirement age, it's a smaller amount between 62. I think in 64, it's about 6.5% a year, then it bumps up a little more between say 64 and your full retirement age but the biggest bump up, the 8% a year starts at your full retirement age.

Casey Weade: Great. I think that's just another thing that a lot of people aren't aware of, so I appreciate you sharing that with us. And another thing that you say a lot of individuals aren't aware of is the Social Security benefit they're ultimately going to receive. One of the articles you wrote was titled Future Retirees Often Overestimate Social Security Benefits. Why do you say that?

Mary Beth Franklin: A lot of people are just guessing at how much they'll get and the other thing is when you get your estimated benefit statement from Social Security, which I highly recommend every single adult who is covered by Social Security should be setting up their personal security account at SSA.gov. One, you want to make sure you're the one setting it up and not someone trying to hack into your account. So, you're just protecting your identity by setting up your own account and that way you can access your estimated future benefits 24/7. In the old days, they used to mail it to us once a year before our birthday but frankly, that costs $70 million a year to do it. So, Social Security stopped doing it except in very limited cases for people who are nearing retirement age. That estimated benefit statement is assuming you continue earning your current wages through full retirement age. So, say you stop working at 55 but you don't plan to collect until 66 or 67, you're not going to get as much on that estimated benefit statement suggested because you haven't worked through full retirement age.

Now, people don't understand what their benefits are based on. Yes, it's true, you have to work at least 10 years essentially to earn four credits per year to get the minimum necessary 40 credits to be eligible for Social Security, but the actual benefit amount you receive is based on your average lifetime income and your age when you claim them. You get 100% of your benefits if you wait to full retirement age. You can collect them early, but they will be permanently reduced. And your benefits are based on your taxable wage base. This year, people earning $132,400 are paying the full FICA taxes. They're the maximum taxable wage base. And if they are at the maximum wage base every year, during their 35 years it's based on, they're going to get the maximum benefit. But there are people maybe, “I stay home with my kids for 15 years.” They’re still going to base my benefit on my top 35 years of earnings. But what happens if I only have 20 years of earnings? Well, they're going to plug in zeros for every year of those other 15 years, and the average is going to be much smaller.

So, for people who have a spotty work record, if they continue to work, regardless of their age, even if it's older than their full retirement age, they are going to replace those zero earnings year with earnings and create a bigger future retirement benefit for themselves. People have worked their entire career at fairly high levels probably aren't going to see a huge benefit difference. Because money you make that’s over the taxable wage base doesn't count towards your benefit. So, whether you make $150,000 a year or $5 million a year, you're both paying the same FICA taxes this year.

Casey Weade: So, go to SSA.gov, set up your login, look at your earnings record and that’ll help you determine how many more years you should work. Maybe you need to fill in some of those zeros and you can figure out what the impact might be from there. I think that's really good advice, especially since a lot of people come in and go, “I don't even know how to get my statement these days.” Well, that's how you get that statement and stay on top of things. Yeah, I want to go back to something you pointed out earlier and that was something you alluded to that the Social Security reps are giving poor advice, potentially. And you had actually written an article you said Rectifying Social Security’s Flawed Advice. So, what kind of bad advice our Social Security reps have given? I think the majority of people are probably going to a Social Security representative or going to the Social Security Office and that's where they're getting their advice. So, what types of things should they be looking out for?

Mary Beth Franklin: I think the problem stems back to these law changes in 2015, that Social Security rules are so complicated to start with. And here Congress made two significant changes in the way people could claim their benefits with two different start dates. So, it's understandable that there was a lot of miscommunication. I don't think it was ever intentionally bad advice. It was just confusion sometimes on the part of the reps who were giving the advice and sometimes on the part of the consumers of what they thought they heard, or what they thought they were entitled to. My solution for this is for anybody who can claim benefits online, do it. Basically, you can file for your benefits at SSA.gov. If you're filing for your own benefits or if you're married and you're lucky enough to be born by January 1, 1954, you can claim that restricted claim for spousal benefits right online. Because when you enter your information, the computer program will recognize that you're married and you're born before the cutoff date and it will say right on your application if you're entitled to your own benefits on your own earnings record or that as a spouse, do you want to collect spousal benefits only? Just check yes.

And don't worry. People panic, "Oh, it's an irrevocable decision.” No, you're basically pre-populating your application and someone from Social Security is going to call you probably within a few days to a week to verify everything on your application. It just streamlines the process. But not everybody can apply for benefits online. If you're a divorced spouse, if you're a widow or widower, you're going to have to go in-person.

Casey Weade: So, if we have all these other things to take into consideration, taxes, Medicare, longevity, yet we might be able to go to the Social Security website and figure out some things there that'll help us figure out all of our options for filing but where should we go get our advice if we need to take all these other things into consideration? Because it doesn't sound like some of these online calculators might do it. I'm concerned with some individuals that will come in with a printout of a Social Security proposal says this is how you get the maximum out of Social Security over your lifetime and they haven't actually taken the big picture into consideration yet. It seemed like there's some danger in those.

Mary Beth Franklin: Well, I think it's very important to think of Social Security as a very important piece of the retirement income puzzle but it's certainly only a piece. You have to look at what are your other sources of income. Do you have a pension? Do you have an IRA? Do you have a 401(k)? If so, how do you plan to draw down those other sources of savings? I think it always helps to work with a financial professional to able to put all those pieces together. I also have an e-book that you mentioned earlier that outlines all these different Social Security rules and claiming strategies based on your birth date and your marital status.

Casey Weade: Yeah. I think it's important to get yourself educated. Don't just seek a so-called Social Security expert. It looks like we've got somebody here that knows everything about Social Security, but you still could make a mistake. It doesn't matter who you are. I think from an expert financial advisor, expert in Social Security, it's always good to get yourself educated. So, even if you get some of that advice, sure, you can look out for some things, but you're going to be much more confident that you're getting the right advice in the first place if you get yourself educated.

Mary Beth Franklin: Well, I think the Social Security website is a great source of information. Just going to SSA.gov and plugging right into their search box what you're looking for, spousal benefits, survivor benefits, retirement benefits, disability benefits, and they have a lot of wonderful, easy-to-read publications that really outline what your rules are. I really do encourage people to print those out and take it to the Social Security Administration with you. If for example, you are eligible to claim spousal benefits only because you were born on or before January 1, 1954 and you go to Social Security and it’s possible one of those reps may not realize you can do that. It's really helpful to have that printout to say, "Well, your own website says I can.” So, I think anytime you can have good resources like that is very helpful.

Casey Weade: Sure. Now, we've talked about a lot of different strategies and quite often someone might say, "Well, Social Security is not even going to be around in the future so I need to get it while I can.” I mean, really, a lot of these things become relatively new if Social Security is not around or if there's drastic changes in the future. The question that a lot of people have, is Social Security broke? Is it going to be around forever? And what's that look like for you versus myself being probably 30 years different in age?

Mary Beth Franklin: Yes, Social Security will be there. Yes, it does need to be fixed. Let me go back and explain how it's funded. Those payroll taxes, those FICA taxes that they take out of our paycheck is what funds Social Security benefits, but our taxes today as current workers are funding the benefits of today's retirees. It does not go into a special personal account to fund my retirement sometime in the future. It's a pay-as-you-go system.

Casey Weade: I think we call it a Ponzi scheme.

Mary Beth Franklin: Well, I don't agree with that, because it's a demographic problem right now. We have a whole lot of baby boomers who are there in retirement and starting to retire and we have a smaller generation, Gen X, behind us in the workforce. So, we have fewer workers now paying the benefits for more retirees. That will eventually reverse itself as the millennials, which are bigger than the baby boomers will be funding retirement benefits. But in the meantime, we have to tweak the system. There are generally two ways to fix it. You either adjust benefits or you raise taxes, but more logically would be a combination of the two, which is what they did in 1983. The smartest thing they did in 1983, in my opinion, was to give us a long, long time to get used to future changes. For example, the 1983 Social Security reforms gradually raised the full retirement age from what it was back then, 65, until ultimately 67. That will apply to people born in 1960 or later. That change has not taken effect and will not take effect until 2027. That's a long time nearly 40 years to get used to those changes. I think that's a much better method, than this 2015 rule changes that said, "We're going to change two rules. We’ll give you six months’ notice on one and four years on the other.” I think that's very hard for people to adjust to.

So, one, the sooner Congress acts, the better off we will be because we'll have a long time to get used to it. I think they will do things like, yeah, they'll probably gradually raise the full retirement age even higher to 69 or 70. But we're talking for today's two-year-olds. They're probably going to live to 120. We’ll get it this way. Full retirement age of 65 was in in 1935. Our longevity has increased enormously but we've only raised the full retirement age to 67 and that hasn't even affected yet. I also think you're going to see perhaps gradually raising the FICA tax higher than it is right now. Right now, we pay 7.65% of our wages and so do our employers for combined tax of 15.3%. That's for Social Security, a little bit for Medicare. There have been some proposals of raising that by one-tenth of 1% per year for 24 years. That goes a long way to solving the problem. Other people say, and this is back in 1983, the Greenspan Commission said, "As long as at least 90% of US wages were being taxed for FICA purposes, Social Security is good in perpetuity.” The problem is so many people make so much more than the taxable wage base in 2019 that $132,000 in change that they're not paying FICA taxes on top of that maximum amount, that only 83% of US wages are being taxed.

If we gradually raise that taxable wage based back to that 90% rate, which frankly would probably be incomes of about $250,000, that solves a whole lot of the problem. With a few tweaks, we can fix this problem but the sooner we do it, the better. And I think the best thing we can do as citizens is to contact our members of Congress and say, "It's okay to talk about it. I'm not going to fire you. We know we need to fix this and the sooner you do it, the better off you're going to be.” But Congress has no incentive at this point because the trust funds, those surplus taxes have been collected over the last 30 years, we are going to start tapping into those in 2020 and they're expected to run out in 2034. It doesn't mean there would be no money to pay Social Security benefits. We could pay probably about 75% of promised benefits, just from the FICA taxes. But that's not good enough. We want 100% of our benefits and the only way you can do it is by instituting changes now that are gradually going to bring enough money into the system so all of us, regardless of our age, will get benefits when we're entitled.

Casey Weade: Well, we know it'd be good if they acted sooner than later but they don't necessarily have a track record of doing that. That's not exactly what happened back in 1983. You experienced that. You saw what happened. Do you really think this is going to happen sooner than later?

Mary Beth Franklin: Not the way we're going at the moment because again, from the Congress’ standpoint, what's their incentive? They're giving you bad news and the way they look at it, "Hey, we're going to increase your taxes and we’re going to cut your benefits or both.” I think as citizens if we say, "We know changes have to come and we're okay with that as long as you tell us what you're going to do, and you give us enough notice, and we want to be part of the process,” I think it should be imperative that our 2020 presidential elections, at least raise the topic of Social Security and how to fix it and I think as voters, we should be demanding those answers.

Casey Weade: You know, as you mentioned, that individuals, if we had more individuals paying more Social Security taxes, then we should be okay. And then I've got a lot of self-employed individuals that I work with that are either they’re trying to make the decision what they're going to do or they're trying to avoid paying Social Security taxes. So, they're trying to minimize the amount of W2 wages that they have so that they can take distributions, or they're trying to maximize it, go all the way up to the wage base to make sure that they're getting their maximum benefit someday. What’s your advice to a self-employed individual that's trying to make that decision?

Mary Beth Franklin: Well, I am one of those self-employed individuals, so I also pay that 15.3% tax. And let me say right upfront, I am not an accountant. I know a lot of self-employed individuals who follow their accountant’s advice to, "Let's minimize your payroll taxes. Let's structure your small business in such a way that you're taking dividends rather than the salary and you're paying very little self-employment tax.” Well, that's one way to do it but a lot of times those people get to retirement, and they have virtually no Social Security benefits. And unless they created a fairly generous pension for themselves or some sort of self-employed retirement plan, that can be difficult. And it's often when it's a married couple, where maybe the wife works for the business sort of off the books, and she doesn't get any benefit. Well, you know, as long as they remain married, she's going to get benefits as a spouse but oftentimes, there's a late-life divorce and these women are in really bad shape. So, I think it makes sense for people to be paying up to the taxable wage base. And if they're finding ways to get fancy beyond that with the help with their accountants, I can't pass judgment on that. But I do think it's short-sighted for people to intentionally minimize the self-employment taxes they're paying without fully realizing what their retirement income might look like.

Casey Weade: So, you feel like those Social Security taxes can be a pretty good investment in your future retirement?

Mary Beth Franklin: I think it's a very important part of my retirement income plan.

Casey Weade: All right. Well, I know we need to wrap things up but I've got to ask you one more Social Security question and this is one that I see a lot of people being frustrated about and that's the cost-of-living adjustment they've been receiving over the last several years. What are your thoughts on COLAs currently? Currently, 2019, we're sitting here in 2019, get a 2.8% bump and we go, “Boy, that just doesn't seem like enough.” There's been studies that have been released saying that the COLAs have not kept up with the average expenses that a retiree actually has at the rate that they're increasing. What are your thoughts on COLAs? What kind of numbers should we be using when we're doing retirement projections?

Mary Beth Franklin: Well, the 2.8% that Social Security benefits received for 2019 was actually the largest increase in seven years. There were several years over during that time period where there was no cost-of-living adjustment at all and people think this is a political plot. It really isn't. It's a mathematical calculation, the way the Social Security COLAs are awarded is they look at the standard consumer price index for the third quarter of the year, compared to the same index for the previous year. And it measures cost of living adjustment for the average urban wage earner and their budgets tend to be different than retirees who tend to spend more of their budgets on health care and housing, which aren't necessarily reflected in the standard consumer price index. So, there's been a lot of push to say that we should be using a specialized inflation metric. There's one called the CPIE which is the consumer price index for the elderly, that more heavily weights the type of products and services that retirees tend to spend their money on. That too is imperfect. That would require an act of Congress to change that. It would result in a slightly higher cost of living adjustment, than the standard CPI does.

Right now, it's too early to tell what that official COLA will be, which will be announced in October, but it's looking like it may be less than this year's anywhere from about 1.2 to 1.8%. We’ll officially know that in October. Part of the problem is so much of seniors’ expenses are often health care expenses, particularly drug costs. And that's where people who need specialty drugs are paying enormous amount of money and that's certainly really not reflected in the COLAs that we see in Social Security benefits.

Casey Weade: So, another thing I think we need to recognize, we should feel pretty lucky that we're getting that Social Security COLA at all, because it hasn't always been around. I remember 40 years went by when we didn't have a cost-of-living adjustment at all until 1975. And now we're getting cost-of-living adjustments and to change it to say CPIE, CPI the elderly, if that increases our cost-of-living adjustments on average, that just puts Social Security in a more difficult position moving forward from a funding standpoint.

Mary Beth Franklin: Right. It's true that cost of living adjustments prior to 1977 were on a year-by-year basis. Congress would have to act on it. Now, they are automatic based on this formula.

Casey Weade: Yeah. And we should feel good about that. 2.8% is better than nothing and we should feel good about that. Hopefully, we've got some other assets around that can generate some additional income, help keep us up with inflation. Mary Beth, you are what I would call job optional and that is an individual that could retire at any time but you're busy. I mean, you are doing a lot of different things. You're writing for InvestmentNews. You're traveling the country. Why do you continue to work at this stage in life when you don't have to? What does retirement mean to Mary Beth?

Mary Beth Franklin: Well, I love what I do, and I get great feedback both from my readers of InvestmentNews and from audience members when I go around the country talking about these topics of Social Security and Medicare. Often, consumers are so frustrated, they can't get these basic answers to their questions and they feel like I can help them. So, as long as I'm helping people, I want to keep doing it. I love the interaction with the audience. At some point, I would probably like to slow down on the travel and frankly, I think once this last claiming strategy goes away, 2019 is the last year for people who turned 66 this year, who can claim only spousal benefits. Now, they can claim those benefits next year and the year after that, the year after that, but it's people who turn 66 in 2020 and later won't have this option. Consequently, I think a lot of the demand for my speeches may just naturally drop off and that may be a good time to start slowing down. But in the meantime, I love the report with my InvestmentNews readers who are primarily financial advisors, and they write to me with their questions of their individual clients and I try to help them out.

Casey Weade: Well, you run your own little podcast as well. I don't know if I should use the word little, but you've got a successful podcast out there and as well as the e-book. Can you just tell our listeners a little bit about our podcast, where they can listen, where they can find you, and maybe give us a little idea about the e-book as well?

Mary Beth Franklin: Great. Well, the podcast is called Retirement Repair Shop. And the idea is, even the best-laid retirement plans might hit a speed bump. Maybe you lose a job late in your life that you hadn't expected. Maybe you get sick or you have to take time off to care for a spouse. Maybe you're widowed unexpectedly. All these can affect your best-laid retirement plans. I take one issue like that each episode. I discuss it with an expert to see if we can come up with strategies of how to recover from these hiccups along the way. You can just Google my name, Mary Beth Franklin Retirement Repair Shop. You can go to Apple iTunes, or whatever they're calling their iPod app these days, or Google Play and you'll find me there.

Casey Weade: All right. And we will definitely provide a link to that in the show notes if somebody wants to reach out and start listening. What about the e-book? Can you tell us what to expect out of the e-book?

Mary Beth Franklin: The e-book outlines everything that you and I just talked about here. Do a little visual here. It's called Maximizing Your Social Security Retirement Benefits. This is actually a printed-out copy. What listeners would get would be a digital copy, they can download and print out if they want. But it lists all the basic claiming rules based on your marital status and age. So, you can turn to the section that says married couples, divorced spouses, survivors, families with young children, or for those public employees who in 15 states don't pay into the Social Security system because their state has their own retirement system. There are special rules that would affect their benefits if they're trying to claim on their own record, or as a spouse or as a survivor. All that's laid out in my e-book.

Casey Weade: Well, this is a serious resource and we want to make sure we provide it to our fans and Mary Beth has been so gracious to provide us with 10 free copies of the digital e-book which he sells for $29.95. InvestmentNews is going to help out as well here and we're going to provide that with the first 10 individuals that write a review for the podcast and shoot us an email at [email protected]. Just scroll on down on your Apple device or go to RetireWithPurpose.com/Podcast and you'll be able to click on Leave A Review there. Leave a review. We’ll get you out a free copy of the e-book at no cost. Mary Beth, thank you so much for joining us here. It's been a wonderful conversation and I look forward to diving in deeper in the future.

Mary Beth Franklin: Thank you, Casey. I really appreciate the opportunity to share this great conversation with you and your listeners.

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