Ready For Retirement
Ready For Retirement
Why many retirees REGRET relying on Social Security Income
Relying too much on Social Security? You’re not alone—over 40% of retirees count on it for at least half their income. But that safety net has some major gaps. In this video, I break down four key reasons why Social Security isn’t enough—and what you can do to secure a more stable retirement.
Questions answered:
1. Why is it a mistake to rely too heavily on Social Security for retirement income?
2. What are some strategies to supplement Social Security income in retirement?
Submit your request to join James:
On the Ready For Retirement podcast: Apply Here
On a Retirement Makeover episode: Apply Here
Timestamps:
0:00 - One-off expenses
1:34 - Inflation & CPIW
4:21 - Tax on provisional income
7:33 - Peace of mind
8:33 - Maximize your benefit
9:22 - Supplement SS
10:24 - Leverage your home
Create Your Custom Strategy ⬇️
It's estimated that over 40% of retirees rely on Social Security income to meet at least half of their income needs in retirement, but Social Security was never intended to fully fund your retirement needs, and in today's video, I'm going to share why it's a mistake to rely too heavily on Social Security. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. There are four reasons this is a mistake, and the first reason is it will not help you with your one-time expenses. Let's use an extreme example. Let's assume that you have exactly $2,000 per month of expenses in retirement, and your Social Security benefit is also exactly $2,000 per month. All seems good your monthly bills, your utilities, your food everything is covered until there's a one-time expense. This one-time expense could be a trip you want to take. This one-time expense could be property taxes. This one-time expense could be gifts you want to get. This one-time expense could be an emergency that comes up that was unplanned for. Regardless of what it is, though, your social security benefit is a consistent monthly income, which is great for those consistent monthly income needs, but it's not going to help you account for those one-off expenses.
Speaker 1:Now, as obvious as this probably sounds, I see too many people who, when they're planning for their retirement, they look at their monthly expenses. They look at credit card statements or bank statements and say here's how much I need in order to retire, and as soon as they come up with a way of supporting that income, they go ahead and retire. So you can see how it might be easy for someone to say this is the amount I need to fully retire and they've worked to the point that their social security benefit now meets that need. Well, they retire, but then they forget those one-time expenses and when those one-time expenses come along, all they can do is put that on a credit card or go into debt to afford it, and they're not going to have the means of paying that off while still maintaining their monthly standard of living. The second reason you shouldn't rely too heavily on social security is it might not fully index for inflation. Now, every year you do get a cost of living adjustment from social security, and the methodology by which you do was created in 1973.
Speaker 1:Social security cost of living adjustments are tied to something called CPI-W. Now, the first issue with this is CPI-W is tied to the average spending of people who are employed. So we'll get to that in a second how that's different than someone who's retired. But the second issue is with CPI-W, what they do is, every single year between the months of July and September, they say how is this basket of goods the average spending of people who are employed in the US? How does this compare to the average spending on that same basket of goods from the previous year? Well, when you do that, you divide the year over year change and that gives you a percentage increase, and that percentage increase is what becomes the social security cost of living adjustment the following year.
Speaker 1:So two issues here. The first is the cost of living adjustment that you actually get. There's a lag there. You are getting a cost of living adjustment the following year. So two issues here. The first is the cost of living adjustment that you actually get. There's a lag there. You are getting a cost of living adjustment 12 months after the actual increase in many of the prices you experienced. Think of this in 2022. In 2022, inflation was very high. So what happens? Over the course of 2022, retirees were gradually paying more and more and more for everything that they were buying, but their social security income in 2022 was fixed. Now there was a cost of living adjustment, but every single year that goes into effect on the first of the next year. So in 2023, you receive the adjustment, but that adjustment at the beginning of 2023 doesn't help you with all the expenses you already paid money for in 2022. So it's a lagging indicator, and this is natural. This is how it always works, but this is why it feels so difficult sometimes is the cost of living adjustment actually comes several months after the increase in some of these prices, and that happens every single year.
Speaker 1:Now, the second issue I mentioned is what the cost of living adjustment is actually tied to CPI-W. Now, cpi-w does contain many similar expenses that people who are retired spend versus people who are still working, but it doesn't account as heavily for things like housing and healthcare. Now, housing and healthcare for retirees are two of the biggest expenses that you're going to have. So when housing increases at a faster rate than the rest of inflation, or when healthcare increases at a faster rate than the rest of inflation, the cost of living adjustment that you are getting doesn't fully account for that, because the spending pattern of retirees doesn't exactly mimic the spending patterns of people who are still working. Now that might just be a small difference year to year, but after several years decades even those small differences add up and if you account for that over the course of retirement, you might not want to rely too heavily on Social Security because it might not fully account for the actual inflation adjustments you're seeing with your spending patterns.
Speaker 1:The third reason you should not rely too heavily on Social Security is because, depending upon your financial situation, more and more of your Social Security benefit might be taxed each year. So let's assume that you have just enough coming in from Social Security to cover the needs that you have from your Social Security benefit. Well, to understand how Social Security is taxed, you have to understand something called provisional income. Now I made this video right here where I explain in depth how Social Security is taxed, so take a look at that if you want to see. But provisional income determines how much of your Social Security benefit is going to be included in the income that you pay taxes on. Now, every year, as Social Security receives a cost of living adjustment, as maybe you're receiving more in dividends or interest or pulling more out of other investment accounts to keep up with inflation. Provisional income levels are fixed so as your provisional income increases, more and more of your Social Security benefit is pulled into the income that you pay taxes on, up to a maximum of 85% of your Social Security benefit being pulled into the income that you pay taxes on, up to a maximum of 85% of your Social Security benefit being pulled into the income that you pay taxes on.
Speaker 1:This can be a little bit confusing, so let's look at an example to show you exactly how this plays out. If you are single and your provisional income is less than $25,000, you don't actually pay taxes on any of your Social Security income. So let's assume that you are living on Social Security, which I'm going to assume you have a $2,500 per month benefit for the sake of this example and you're also pulling $10,000 per year from your traditional IRA, and those are your only two sources of income. The way provisional income works is that $10,000 from your IRA that's going to be pulled in. So so far we have $10,000 of provisional income. Provisional income also pulls in half of your social security income. So $2,500 per month, that's $30,000 per year. Half of that is $15,000. So $15,000 is pulled in. So your total income is $40,000, $30,000 from social security, $10,000 from your IRA, but your provisional income is $25,000 because half of your social security benefit is included. Because your provisional income is $25,000, none of your Social Security is included in your taxable income. So that's great. This year you're not paying any taxes on that Social Security benefit.
Speaker 1:But what happens after a few years go by and your Social Security gets cost of living adjustments. Maybe that $2,500 per month is now $2,700 per month, $2,800 per month, whatever it might be. Now, during that time, you're probably also starting to pull more money out of your IRA to keep up with the cost of inflation. So what happens is, instead of pulling $10,000 out of your IRA and having $30,000 per year in Social Security, each of those numbers are higher. Well, because each of those numbers are higher, but provisional income, the thresholds are fixed. Your provisional income is now above $25,000 in the same example and because of that, now part of your Social Security benefit is being taxed. So even though your spending increases are just to keep up with inflation, you're pulling more out of your IRA and your Social Security benefit is getting cost of living adjustments. What's happening is because provisional income thresholds are fixed. More and more of your Social Security benefit is taxed each year. So why do you not want to rely on it too heavily? Because even if the gross amount of social security is at least partially keeping up with inflation, the net amount after taxes and this again depends upon your financial situation might be less and less each year as your provisional income is increasing.
Speaker 1:And then, finally, the fourth reason you don't want to rely too heavily on social security isn't necessarily for financial reasons, as much as it is for your peace of mind. How much anxiety would you feel if too much of your benefit, if too much of your income in retirement, was coming from Social Security? It's not too difficult to turn on the news or to go online and hear how Social Security is projected to run out, to hear how benefits are projected to be cut by 20% or more, to hear news about how retirement is going to change for millions of people collecting Social. How is that going to make you feel? Let's even assume that we know that there's going to be some solution to social security. It's going to be extended. Are you going to feel okay? Are you going to feel confident, knowing that that's completely out of your control? The answer is probably not.
Speaker 1:Retirement is not just about having enough income to do what you want to do. Ideally, you want to have that peace of mind too. Ideally, you want to have the confidence of knowing that you're not too dependent upon one thing that's fully out of your control and you have different ways of creating the income you need to create to live the retirement you want. So what can you do instead? Well, number one maximize your Social Security benefit. If you can maximize your Social Security benefit, then you can put some of your monthly benefit away each month for those one-time expenses. If you maximize your Social Security benefit, then the inflation adjustments don't hurt as much because you've got some margin built in. If you maximize your benefit, then even as more and more is taxed, it's still not dipping into the part of that benefit, the part of that income that you truly need each month for your living expenses. If you maximize your benefit, you're going to have more confidence, knowing that, whatever does come with Social Security, you've got some margin. You have some excess built in between what you absolutely have to have to live and what your income is from Social Security, so that some of those changes won't have such a significant impact on you if and when they do happen. So maximize your Social Security benefit is one of the best things that you can do to overcome some of these.
Speaker 1:The second thing you should do, of course, is don't just have Social Security, have savings, have investments. Build up a portfolio that can also create income for you to help supplement your Social Security income. Now, the goal of your portfolio in many ways is to do exactly what Social Security is doing, which is to say, can you generate income from the time that you retire to last you for the rest of your life? Well, that's what Social Security does. That's what your portfolio should do. The difference is this With your portfolio, there's far more flexibility. If you need to temporarily increase your income because you just retired and you want to travel and you want to do fun things, go ahead and increase your income. If you need to decrease your income for a period of time because the market's down or you're not spending as much, go ahead and decrease your income. Maybe you have these one-off expenses or an emergency or a trip you want to take. Take out one-time amounts from your portfolio. So your portfolio, yes, should be creating that income, just like social security is. But in addition to that, there's far more flexibility and it gives you more options to choose from, so you're not so dependent upon just one income source in retirement.
Speaker 1:And then the third thing that you can do is think about how you might leverage your home. For most people, their home is their largest single asset. That asset is wonderful, unless you're thinking about it from the standpoint of how can you create income in retirement. I don't care how valuable your home is if you're living there, you're not going to create income from your home. Your home is an asset. That's a wonderful asset. But think about that for contingencies. If you are too dependent upon social security, if something were to happen to your benefit, if you were to run out of resources, how can you leverage your home and your plan to be okay? Now, typically this is better done as a contingency than as part of your normal financial plan, as part of your core strategy.
Speaker 1:But what are some things that you can do? Could you downsize your home, unlock some of that equity to create the income you need to live the life you want to live? Could you relocate to a different state In doing that? That's a version of downsizing, of unlocking some of the equity, but maybe it's also moving to a place that's a lower cost of living. Could you potentially get a reverse mortgage? And again, I'm not necessarily recommending this as plan A of the starting point, but knowing that you have this in case, knowing that you have this in the event that things don't go as planned, a reverse mortgage can potentially be a great tool. It can also potentially be a horrible tool, so be careful how you use it, but these are options that you need to have as you're looking at your retirement, to say how can I create the retirement I want to create without being too dependent upon just my social security benefit?
Speaker 1:Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey, everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner.
Speaker 1:Nothing in this podcast should be construed as investment tax, legal or other financial advice. It is for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
