Becoming Educated for Retirement. Paul Breaks Down 30 Years of Lessons (Part 2)

Paul Winkler: All right. We are back here, right here at SuperTalk 99.7 WTN. Paul Winkler, along with Evan Barnard, talking money and investing and getting into a little bit of just an overview of the getting ready to retirement type of thing we talked a little bit about earlier.

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When Do You Take Social Security?

But let me just talk a little bit about … because what we started with was this idea of how retirement calculators can give you either a false sense of confidence or maybe they just get you not to spend as much money as you can spend in retirement and get you to be a little bit too conservative. We talked a little bit about spending patterns in the first segment, of how people spend in retirement.

They typically spend more in the beginning, a little bit less as time goes on, maybe a little bit of a spike toward the end because they’ve got healthcare expenses. But we call that a smile retirement. The research has been pretty clear about how people’s spending patterns change as they get older.

Then Social Security. When do you take it? You take it early, man. You have basically set that benefit in stone at a lower level for life, but there are times that you might take it early.

You have to because of health purposes or health reasons, or maybe your longevity isn’t as high because you have a situation where your life expectancy is much shorter. So sometimes I’ll have people give me an estimate of what you think your life expectancy is, and we can get an idea of what your breakeven is.

There are software programs out there that are really great at helping us determine what’s optimal for a person’s situation. But that being said, you might have a husband and wife, and one takes it at a different time than the other.

Evan Barnard: I find that that’s actually pretty common for what we do.

PW: I agree.

EB: Some of that is because the spouses are retiring at different times.

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For most people, at least until you hit full retirement age, it doesn’t make any sense to take it while you’re still working. 

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That’s another one of those easy decisions.

PW: Yeah, right, right.

EB: If I’m going to lose it all, I’ll get it back later. But if I’m not going to get my benefit, I’ll wait till I quit work, at least till you hit full retirement age.

Spousal Benefit

EB: But we always look at spousal benefit, and one of the things that’s kind of a catch-22 for us, my wife is older than me. And so, she won’t get a spousal benefit until I —

PW: Until you file.

EB: — take Social Security.

PW: Yeah, until you file. Yeah.

EB: Well, at a minimum, I’m not going to take it till 67, because I wouldn’t get my benefit.

PW: Right.

EB: And I probably won’t take it until 70, and that will swerve into that at some point. But to me the reason I’m doing that is that’s one of the reasons I’m a big fan, in these cases, of filing later.

PW: So what Evan’s talking about right there is let’s say that we have a situation where there is a benefit of $2,000. That’s the main breadwinner’s benefit. And the spouse didn’t have a big work history.

Maybe their benefit is only … let’s say I’m going to use $400 a month. Let me just use that because that’ll make the math a little bit easier for you to follow.

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So one person’s benefit’s $2,000 a month. The other one has a $400 a month benefit. 

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Because that person’s benefit is less than half the higher earning spouse, you might have a situation where they file early to get their $400 benefit.

Now if they file before their full retirement age, their benefit will be further reduced from that $400 down to, let’s say, $300 or something like that. Now when they file, they will get that lower benefit for life. But when the other spouse files, and let’s say it’s at their full retirement age, they will get whatever it would have taken to get them back up to half if they had filed on time.

Reasons To Delay Benefits

PW: So let me use those numbers again. Let’s say that the one person’s benefit is $400 a month.

The other one’s $2,000. What’s half of $2,000? It’s $1,000.

Now they’re going to get the $400, their benefit, the lower-income-earning spouse, then plus another $600. And that’s what’s called the spousal benefit. That’s what Evan was referring to is the spousal benefit.

Now if they filed early, they only got $300; they’re going to still get the $600. So their benefit will be $900 instead of a full thousand.

But actuarilly, many times that works out better to do that where they file early, and then when the other person files, and if it’s at age 70, you’re going to actually end up with a 24% increase on top of that $2,000, which was the number I was giving you a little bit earlier, $2,480 per month. But you’re not going to get any more than the thousand as the other spouse.

EB: Right.

PW: So we just want to make sure you get that that’s how that works.

EB: Yeah. Kind of thinking about the start of the show, talking about calculators.

PW: Yes.

EB: 

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As we’re going through this, taking Social Security isn’t really just a calculation, period. I don’t care how good the calculator actually is.

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PW: That is so true. That is so true. Yeah.

EB: And so, in my case, looking at a big reason to delay my benefit is survivorship.

PW: Exactly.

EB: Spousal is half of my work record, but Cindy would get 100% of my benefit. And so, when you run across situations where the high earner in a couple maybe has health issues and they can’t get life insurance or they can’t protect things, there’s some real impetus to delay taking Social Security, even if it means spending some of your assets early on, so that you can get the “free” insurance from the government by delaying your Social Security.

PW: Because the higher benefit goes to the survivor.

EB: Right.

PW: Yeah.

EB: And 100% of that.

PW: Yeah, exactly.

EB: So, yeah, it’s not a calculation to decide.

PW: No.

EB: It’s life priorities. Do I want to leave things to the kids or not? There’s a lot that goes into it that isn’t math.

PW: Yeah, for sure. Sometimes what you’re thinking about is in terms of, let’s say, taxation of the benefits, like Evan was referring to a little bit earlier.

EB: Yeah.

Taxation vs. Penalty

PW: You’ll have a situation where you’re still working and you take it earlier than your full retirement age. You end up with taxation on the benefits and then you have the penalty. You have taxation, which people confuse those two quite often, is what I find.

EB: Yes, for sure.

PW: The taxation versus the penalty. So let me explain that.

So you’ll have these thresholds, $25,000, $34,000 for single people. If you have, let’s say, your provisional income, which is your income from work, plus one-half of your Social Security, if that exceeds $25,000, you can have up to 50% of your Social Security subject to taxes.

It doesn’t mean 50% of your Social Security goes away. It just means it’s part of your taxable income.

Then if that number exceeds $34,000 … And this is the thing that the government did. They’re really sneaky dudes. They never increase that due to inflation.

It used to be that people would be like, “I’ll never earn $34,000. I never earn that much money.” So people wouldn’t worry about it so much.

But now, of course, that’s not as big an amount of income for people. So you can have up to 85% of your Social Security subject to taxes when you’re above that second threshold, and it’s graduated and it moves up as the income goes up.

Then for married people, you’re looking at different thresholds, the $32,000 and $44,000. So you have different thresholds for the 50% taxation versus 85% taxation.

Then you have, if you actually draw income and you’re actually, let’s say, taking Social Security, and you file for it before your full retirement age and your income, if it goes above about $24,500 — it’s pretty close to that number; it’s like 24,480 or something like that for 2026 — if it exceeds that, they’re going to take away $1 of your Social Security for every $2 that you earn over that threshold. So it may not make sense. Now it doesn’t mean that you’ll never get that money back.

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They recalculate it based on life expectancies later on, and they act like you’re older later on so your benefit can go up a little bit. 

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But just be very, very conscious of taking Social Security too early for that particular reason.

EB: Yeah, for sure.

How Planners Estimate Taxes in Retirement

PW: So that’s one thing. Then the other thing I want to do is let’s take a quick break because I want to come back and talk a little bit about taxation, how planners estimate taxes in retirement, because sometimes the estimates for taxation have been just wrong.

I mean, I’m just going to be quite frank. Some of the information I hear about taxation and how to control taxes in retirement can just be bad information.

EB: Yeah.

PW: We’re just talking a little bit about just an overview, going through planning for retirement, getting close to retirement. We talked a little bit about how spending changes. How we adjust our spending as we get older, typically down. Then we come back up toward the tail end, and the implications of that.

Social Security, when you take Social Security. Another thing, Evan: Taxes. This is one of your areas.

EB: Woo-hoo!

PW: Yeah, this is Evan. Evan, he’s an enrolled agent as well as being a certified financial planner, so this is something he knows an awful lot about.

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But I often see that planners overestimate taxes in many instances in retirement to try to sell products. 

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I remember trying to sell life insurance as an investment vehicle, and how they would calculate your tax rate in retirement could be 30%.

EB: Right.

PW: And they ignore how the tax system really works. Explain that for people.

EB: Well, yeah. Number one, we have a progressive or a graduated tax system. And so if all you make is $20,000 a year, or even just, say, a couple, and your Social Security is … well, your Social Security could be $50,000. You’re not going to pay any taxes at all.

PW: Yeah, you could have a situation where the tax rate’s nothing. Yeah.

EB: And so you really do. You want to use what’s called the effective tax rate to make some of these decisions.

PW: Yes.

EB: And what’s the effective tax rate?

PW: Yeah.

EB: That means if I make, whatever, $100,000, some of it’s taxed at 0%. Some of it’s taxed at 12%. And whether you’re single or married, some of those numbers change.

The Limitations of Software Programs

EB: But the average tax rate of what you’re actually paying, then the effective rate is a better number, at least for what we use, for forecasting taxes. The software in general still doesn’t … you still have to monkey with the numbers.

PW: You do, yeah.

EB: 

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I don’t care how good the computer is, humans still have to constrain it. And I don’t think AI is ever going to change that either, frankly. 

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PW: And let’s just say for a second why that is, because sometimes there are things that are going to happen in a person’s situation, the software would have no way of knowing. An inheritance that might be coming in, or something that might be changing in the future.

EB: Yes.

PW: Or the person doesn’t know to input something and, because they leave something out, it’s garbage in, garbage out.

EB: Oh, yeah. Well, if someone’s doing it on their own, there’s all kinds of perils.

PW: Exactly.

EB: But even if I’m doing the input, the computers can’t handle qualified charitable distributions yet.

PW: Right.

EB: And so if I know it’s calculating a required minimum distribution of the software …

PW: Isn’t that funny?

EB: With the growth rate.

PW: That’s been around for a long time, and there’s still not.

EB: Yeah.

PW: Yeah.

EB: And so if you have a client that, they’re doing $12,000 of charitable contributions out of their IRA, that lowers, immediately, their tax rate, and then it typically lowers the amount of Social Security that’s taxable. And so, again, it’s overestimating the tax burden if you don’t pay attention to it.

PW: Yeah. And what he’s talking about right there, Evan’s talking about, is when we’re dealing with qualified charitable distributions, being able to give to a charity over the age of 70.5, where people would lose their charitable deduction before, it’s a way of getting that back. So in the software land, you may actually have an overestimate of what your actual tax rate will be, as he was saying.

EB: Right.

PW: Yeah. Yeah. For sure.

And the other thing that I find, Evan, is that quite often I hear people, planners do this all the time: over-recommend Roth IRA conversions. Not that they’re bad, but you may over-recommend these things in the name and, ironically, driving up taxes inappropriately in an effect to try to do something that’s supposed to reduce taxes.

EB: Right.

PW: It’s in the name of reducing taxes. They actually increase taxation and trigger taxation on Social Security or trigger IRMAA taxation or something like that, IRMAA premiums with Medicare.

EB: Yeah.

PW: And you end up in a situation. They’re not necessarily thinking about it, but it’s all in the name of, you’re going to be in a higher tax rate in the future, and scaring people into doing something. And I believe that the planners actually believe that’s the case.

EB: Yeah.

Falling Into Bad Math Traps

PW: Now, we had one situation that I’ll tell this story on because I’ve heard this many times. And multiple times where they’ll say, “Oh, if you have $1,000 …” Let’s just use this as a nice, round, easy number.

Let’s use a more realistic number. You have $10,000, and you’re going to convert that to a Roth IRA, let’s say. So you convert it. And let’s say that there is such a thing as a 20% tax rate.

If I convert that to a Roth IRA, I pay $2,000 in taxes, 20% on the $10,000. And then what they’ll do is they’ll say, “Well, you know what that $10,000 would’ve grown to.”

It would’ve grown to, let’s say $50,000. It would’ve grown to $50,000 in the future. And if you’re in a 10% tax bracket, your tax on a $50,000 distribution is going to be $5,000.

Wouldn’t it be better just to pay $2,000 right now in taxes than $5,000 in the future? And it boggles the mind that a financial planner would be that bad at math, not recognizing that once that $2,000 goes out of the account, it’s no longer there to grow for the investor.

EB: Right.

PW: And if you had a five-fold increase in the account value from $10,000 to $50,000, in my example, the $2,000 would’ve grown to $10,000.

EB: To $40,000.

PW: The $2,000 would’ve grown —

EB: The $2,000 would have grown —

PW: The $2,000 would’ve grown to $10,000. Right.

And so you look at that and go, “Oh, wait a minute. That is really bad math right there.”

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So you’ve got to watch out for the calculations and the assumptions used in the software programs. 

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Yeah. Go ahead.

EB: And just to add to that, it’s easy. Advisors can fall into traps with all the best of intentions, so it’s not that they’re all crooks or anything. We’re never saying that. Some are.

PW: I agree. I just believe it’s just ignorance.

EB: Yeah.

PW: They’re told something …

EB: But it’s very easy to ask your client, “Well, do you think tax rates are going to go up or down?”

PW: Right.

EB: Well, they’re going to go up because the debt’s 38 trillion. You know? Whatever.

PW: Mm-hmm.

EB: Well, yeah. Okay. The tax rate may go up, but if I’m making $250,000 now and in retirement I’m making $100,000, I’m not even in the same tax bracket anyway if that bracket goes up.

PW: Right. And you may not be the target for the tax increase.

EB: Right.

PW: You know?

EB: Yeah.

PW: The government’s really good at going, “Hey, let’s look at what Europe’s doing. They’re doing value-added taxes. Let’s not increase the income tax rate. Let’s go to a VAT or something like that.”

And you’ve just got to be really, really wary because if you increase the taxes too much on people, guess what? They vote.

EB: They leave New York.

PW: And then they leave New York. That’s right. They leave California, too, man.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.