It's Friday here at Radical Personal Finance, and on Fridays, we do live Q&A. Welcome to the Radical Personal Finance podcast. My name is Joshua Sheets, and I'm your host. Thank you for being with me. This is the show where we work hard to give you the tools and tactics and strategies and information and inspiration that you need to live a rich life now while also building and then pursuing your plan for financial freedom in 10 years or less.

Fridays is where you ask me questions. We open up the phone line, and you can ask me anything that you want. Most Friday Q&A calls are a benefit which is open to patrons of the show at a certain level of subscription. For details on that, go to RadicalPersonalFinance.com/patron. If you sign up as a patron of the show, you can call in, and you can ask me anything that you want.

It might be a good and relatively inexpensive way for you to – well, if you want to get my opinion or advice on something, this is a good way to do it. So let's go immediately to Paul in Hawaii. Paul, go ahead and let me know what's on your mind, and let me know how I can serve you today, please.

Thanks, Josh, and aloha. My wife is looking to retire, and she'll reach full retirement age in about a year. We're looking then at delaying Social Security until 70, and I wanted to see what the break-even point would be from taking Social Security at 70 versus 66. All right. So this one is interesting, and I will be able to give you some generalized advice, but I'll also – ultimately, I'm going to point you to a book and the very best book that is written on this subject.

The reason I'm pointing you to a book is because it's not a simple answer. There are many extenuating factors, and it'll be more that I can do just simply off the cuff with my – I'll practice in this area every day. I can give you a generalized idea, but the book that you need is a book called Social Security Strategies, and the authors are William Reichenstein, R-E-I-C-H-E-N-S-T-E-I-N, and William Meyer, and I will link it in the show notes for today's episode for any other listeners.

But this book, Social Security Strategies, is the best resource that I have found to help people walk through this decision tree and to pull out some of the misconceptions that people have about their different situation and give some useful ideas. This really is the best place to go, and if you're going through this situation and you'd like to work your way through it yourself, go first to this book, Social Security Strategies.

Now, there are a couple of different extenuating factors that you'll want to consider. The first is going to be the idea of the payment, and as you said, we often talk about, "Okay, what's the break-even point?" We'll get to that in a minute, but some of the other ideas can often be even more important, so we'll get to those in just a couple minutes.

So she is currently—how old right now? William Meyer, MD 65. And how old are you? William Meyer, MD I'm 67. Okay. So you guys are similar in age, and that is important because when it comes to different strategies, there's a dramatic difference of strategy you would pursue if you're similar in age versus if you are significantly different in age.

Next question. With regard to your earnings record and her earnings record, the first ideal question is do you know what her primary insurance amount is and what your primary insurance amount is on your Social Security earnings record? William Meyer, MD Yes. Okay. What are those numbers, please? William Meyer, MD Okay.

I drew at 62 for medical reasons. At 66, her numbers will be $1568. At 70, it will be $2169. That's what they're estimating right now. Okay. And what is your current Social Security benefit? William Meyer, MD $1500. $1500. Okay. So the key with—it's going to be difficult for me to answer the question because I can't do it off the top of my head.

This is more of kind of a consultation where you've got to go through and look at some different strategies. Let me just give you a couple of things to think about and I'm just going to frankly just refer you right to the Social Security Strategies book that I mentioned for you.

The key with thinking about the benefit is to think partly about the actual benefit amount. Now, there is a compelling case to be made for waiting until full retirement age and also for late retirement age. When you actually look at the increase of the benefits—let me pull this up here.

I'll read this to you here so you get an idea. So here we go. I'm just going to read you a couple of paragraphs from the very beginning here of the Social Security Strategies book which is going to partly answer your age question and it will be useful for you to consider this.

Someone who begins benefits at full retirement age receives full benefits, that is, the primary insurance amount. Someone who begins benefits before attaining full retirement age receives reduced benefits while someone who delays benefits until after the full retirement age receives a higher level of benefits. So the reductions and increases for someone with a full retirement age of 66 are important because this affects most individuals who will be deciding when to begin Social Security benefits in the next several years.

If this individual begins Social Security benefits before attaining full retirement age, the reduction is 5/9 of a percent per month for the first 36 months plus 5/12 of a percent per month for months 37 through 48. So if benefits are begun at 62, 63, 64, or 65, the reduction is 25%, 20%, 13.33%, and 6.67% respectively below the primary insurance amount.

If benefits are begun at 63 years and one month, then the reduction is 19.44% where the latter is 35 months times 5/9 of a percent reduction per month. Now that's a bunch of numbers that are very hard for listeners to follow in audio form, but it's important that people actually look at the actual numbers because they change depending on how early you take the benefit.

Now to your situation, Paul, let's continue here. If benefits are begun after the full retirement age, the increase is 2/3 of a percent per month for each month benefits are delayed until age 70. So if benefits are begun at 67, 68, 69, or 70, the increases in benefits called delayed retirement credits are 8%, 16%, 24%, and 32% respectively above the primary insurance amount.

If benefits are begun three months after attaining full retirement age, then the delayed retirement credit is 2%. That's three months times 2/3 of a percent per month. So the monthly benefits level is 102% of the primary insurance amount. This example and a prior one emphasizes that someone does not need to wait a full year, for example from 63 to 64 or 66 to 67, to get a higher benefit amount.

The benefit amount increases each month that benefits are delayed from age 62 to 70. For someone with a full retirement age of 66 and primary insurance amount of $1,000, the levels of benefits if started at 62 through 70 would be $750 at 62, $800, $866, $933, $1,000 at 66, $1,080, $1,160, $1,240, and $1,320 at 70.

All amounts are adjusted for annual cost of living adjustments. So one of the key things to recognize is that there is a substantial increase in actual benefits by waiting from the full retirement age up through the age of 70. To duplicate these results with any other kind of investment is very, very difficult.

Just compare this example here of going from $1,000 a month of benefit at 66 to $1,320 a month of benefit at age 70 and go back and run the math on how much of an investment account you would need to have to approximate that result of a 32% increase over four years.

So four years of delay and a 32% increase in benefit. As the author points out here, that's very, very valuable because of the increase but also because of the fact that that increase now benefits from all of the cost of living adjustments going forward into the future. So those things are – it's an extremely valuable benefit.

Now it's not necessarily the biggest thing that you have to focus on but most people should probably delay for as long as possible. Now, Paul, tell me a little bit more about your other financial situation, other resources, things like that, please. We've got a fully paid four-house. So we have no mortgage.

We have no debt. We've got about 300K in IRA and 401K. And that's emergency fund about 80K. And that's kind of our situation right now. Okay, great. So the good thing is you are in great shape as far as no debt and you have some assets which is fantastic.

With regard to your income, you're living on your social security income and then her earned income up until now, are you currently taking income from the investments? No. No, we're putting about 30%, 40% towards savings each month. So our expenses are very much in line. Great. Awesome. So the reason the amount of assets are important is if you had – if you have millions and millions of dollars of assets, then the social security benefit is not going to be a major part of your or your wife's retirement picture.

If you have fewer assets, then the social security benefit begins to form a really important foundation of the overall plan of how you're actually going to receive income. You mentioned that you took social security early for health reasons. Do you expect to live to a normal age or do you expect to die early?

Probably a normal age. I'm going to say probably a normal age. And is your wife in good health? Does she expect to have a long life expectancy? Yeah, she has some good family genes. Okay. So under these circumstances, you asked in your original question about break-even point. And the basic break-even points are pretty easy to calculate.

I'm just looking here in the book here to read you a paragraph. So if we were just talking about a single person and the way that these strategies are broken apart is strategies for single people versus strategies for couples. I'm going there in just a moment. But if we were just going for a single person, here would be the implications here as far as the break-even point.

Let's consider the implications for single individuals who are only concerned about maximizing expected cumulative lifetime benefits. If a 62-year-old expects to live to age 77, i.e. die in the month of his 77th birthday, he maximizes cumulative benefits by starting benefits at age 64. The reductions in benefits for starting benefits before the full retirement age are five-ninth of a percent per month for the first 36 months and five-twelfths of a percent per month for each additional month benefits begin before age 63.

Since five-ninth of a percent is larger than five-twelfths of a percent, the benefit of delaying benefits one more month increases at age 63. This pattern encourages individuals to delay the start of benefits until at least 64 unless they are confident they will not live to at least 77. Now let's consider the implications for singles of delaying the start of benefits beyond full retirement age.

The break-even age between starting benefits at age 66 and 67 is 79.5 years. This relatively low break-even age reflects the two-thirds of a percent per month delayed retirement credits for delaying the start of benefits beyond the full retirement age. Because this two-thirds of a percent is larger than the five-ninth of a percent reduction in benefits for starting benefits before full retirement age, the break-even age between starting benefits at 66 and 67 is lower than the break-even age between starting benefits at 65 and 68.

If a 62-year-old expects to live until 82 and a half, then she would maximize expected lifetime benefits by delaying benefits until age 68. However, if she is also concerned about longevity risk, she may rationally opt to delay benefits beyond age 68. So skipping down here, the break-even ages are 80 or lower for delaying Social Security benefits one more year at ages 62, 63, 64, 65, and 66, but the break-even ages are above 80 for delaying benefits one more year at ages 67, 68, and 69.

Therefore, it is easier to justify delaying the start of benefits from age 62 to 67 than from age 67 to 70. So this is very wordy, but the reason I'm reading it is to demonstrate this is partly why I can't just answer the question for you without more detailed analysis, but I do encourage you to go to Social Security strategies and get the book and read through it carefully.

Now when you get to couples strategies, one of the important things about couples strategies is to recognize that there are a few different types of risks that we've got to figure out. And when you have a couple, you have your Social Security benefits and then also your wife's Social Security benefits.

And we need to plan for both your benefits continuing for a long life and then what happens if you die early. And we also need to plan for your wife's benefits continuing for a long life and what happens if she dies early. So if you expect a long life expectancy, then usually it's good to just push it about as late as you can.

And there are benefits with those increases beyond the full retirement age. Those are benefits because if you look at somebody's last decade of their life, how big of a difference having that higher Social Security benefit can be over the last decade, and especially recognizing that it's a benefit that you can't outlive, it's a huge, huge benefit.

The other thing that you've got to consider is you've got to say, "Okay, what would be the benefit for you if your wife died early?" And so when you look at it, you look at the benefit at age 70 and you say, because in your situation, Paul, you've been living on your Social Security benefit and then your wife's earned income.

So we've got to protect you in case your wife dies early and we want to make sure the spousal benefit for you is as high as possible. And then also we need to look at the flip side for your wife and say, "Well, if Paul dies early, how do we make sure that her benefit is as high as possible?" It's important, the variation in ages.

If you have a low ratio, and just a second, let me find that part of my book here to give it to you, and I'll get you here the example here for a low ratio couple. But you're going to need to go through this book and answer it specifically for yourself.

Is this helpful? I know I'm kind of walking around your question without giving it straightforward, but do you want to ask a follow-up question? Is this at all helpful for you? Overall, I've gone through this through my head and kind of worked out some, I worked it out on pencil.

Your help, it's nice to bounce back what I was initially thinking in terms of whether she goes or I go and what's available for either of us. A follow-up question to that then, if we decide not to collect and say delay because of that 8% increase each year thereafter, I'm also looking at an option of taking some cash out rather than taking Social Security, taking cash out, you know, every six months, whatever, to cover what she would receive on Social Security, take it from our 401(k) given our taxes will be much lower at that time.

Is that a reasonable option? Because my overall goal is to preserve capital and that's the primary goal, would be to preserve capital then with regards to our IRA and 401(k). Yeah, I think that's a reasonable goal. Is she committed certainly to actually retiring from her work regardless of whether she takes Social Security distribution or not?

You know, we've got some options and so to have these choices, it's really nice and so that's why I'm planning out ahead what those options might be because, you know, who knows, she might come home and say, "I've had it already. It's time to move on." Sure. And I just want to be prepared.

Absolutely. So if it were coming down to, given what you told me about, okay, $300,000, $300,000 of investments is a nice nest egg to have saved up. So $300,000 of investments, that's fantastic. As far as the income that you'll actually be able to build off of that, depending on how much you take on it, the income from that into perpetuity is going to be relatively low, meaning that if we just follow the 4% rule for example, 4% per year would be $12,000 per year of benefit.

So in order to do that, you'll need to compare the cost of waiting on Social Security of what actual figures you don't get in and compare it with the benefit coming in from the Social Security and kind of compare those two. The huge benefit of Social Security at your age bracket, I would expect that your age bracket, Social Security system to be relatively stable going forward into your retirement years.

I don't expect the same for me in my age bracket. But for you guys, I would expect it to be relatively stable. And if you can set up a pension income that is going to last for your entire lifetimes and it's adjusted with COLA, that is very, very powerful and it's in many ways more powerful than what you can have just simply by having your investments in a mutual fund.

So I would personally lean toward that and explore it with the actual numbers. I would make a spreadsheet and build it out. But my gut reaction is yes. If I needed to take $10,000 or $15,000 or $20,000 out of the retirement income to supplement while waiting for that Social Security income to increase, I would pursue that.

Do you have the paper there in front of you that tells you what her benefits would be at age 70 versus now at 66 or 65? Yes. I gave that to you earlier. Okay. I see it. 2169. Okay. Forgive me. So 2169 minus 1568. So that's $600 a month of additional benefit from waiting basically these four or five years.

Multiply that times 12. That comes out to be $7,212 per year of income, of benefit. That's a substantial increase in lifestyle. If you were to replace that, this is just rough and dirty, let's just multiply that times 2169 minus 1568, 601. Let's multiply that times 300. So that's a portfolio value.

To create something similar, you'd need in excess of $180,000 of savings. So even if you're looking at working and you're looking at the ability to defer that, it's going to be a good increase in savings. That's probably the extent I can do on a live call like here without building a spreadsheet and comparing options.

I do commend you to the book Social Security Strategies and I commend you to a spreadsheet to actually look at it. In that context as well, the last comment I would make is you need to look at her earnings record on the Social Security earnings. And let me just ask you, what's her current income right now?

About 50K. Okay. And is that the highest that she's earned in her past career? Yeah, she's gone up a bit but not much. So the other thing that you should check is you should check to see what happens in her earnings record if she replaces older years of lower income with current years of higher income.

So the way the Social Security calculation works is it takes the 35 years of highest income – is it highest income or the last 35 years? I think it's 35 years of highest income and it calculates from that the primary insurance amount. So sometimes if somebody's earnings record looked like $20,000 a year, $20,000 a year, a straight $20,000 a year for 20 years or 15 years and then after that it made a big jump in income, sometimes putting in five more years of earnings can make a big difference in the formula because for every year that she's getting rid of a $20,000 record and replacing with a $50,000 record, that can dramatically raise the amount.

So you should look at her earnings record and see if there are any benefits that would be accrued from that as well. Got you. Okay. It's also important – sorry. I know I'm going on and on but it's also important if she has any years of zero income. So what can often happen with women, especially if they've taken time out of the career workforce to stay at home with kids, is they'll have some years of zero dollars of income.

And so if she's working and she's getting rid of a zero in the amount and replacing it with a $50,000 per year number, that can make a substantial difference as well. That's an important consideration. I never looked at that part. I think I'll go back and take a closer look at that.

Yep. Go back and check it. You can actually build the entire formula yourself with a spreadsheet. If you get that book and you make a spreadsheet, if you're pretty proficient with spreadsheets, you can actually build an entire thing yourself. You put in the earnings record, you follow the formula to pull off the earnings record, and you can create the primary insurance amount off of that, and then you can take that and you can use some of the different estimators.

But you can actually build it. That's the best I got for you. Very good. I got a follow-up question. Okay. Go ahead. I got you on my – myself. I want to ask you this. I want to look at the issue of term insurance. We're getting up in age, and it's getting pricey.

But at the same time, when I look at the benefit amount, the fact that it's not taxable at the time that the benefits collect, I kind of – I bit the bullet and said, "We're going to just keep it because I'm looking at that benefit as a – I'm going to say investment because I can't get that type of return anywhere else by paying that monthly premium." You got where I'm coming from?

Yeah, absolutely. Do you already have coverage in force that you're trying to decide whether to keep or to get rid of, or would you be applying for new coverage? Well, no. We're looking at applying for new coverage. The renewable data is at 75, and I'm quite a ways away from that.

But I'm still – I'm trying to look at what the premium amount might be. And so, I'm trying to rationale. It may be, in fact, more reasonable for me to pay that increase knowing then that the return on that will be much greater than I can get anywhere else.

And so, that's why I'm looking at that term insurance policy as a policy, as an investment, rather than – I don't know how to explain that. That's kind of where I'm coming from. For me, I would not follow that path. And the reason I wouldn't is because it's very unlikely for you to actually collect a death benefit on a term insurance policy.

The insurance underwriters are really good. And in general, term insurance is just simply not going to pay out in general because you're going to outlive it. So, when you get up to your age, in about your mid-60s, something like that, you're going to be – in order to keep it cost-effective, you're going to be looking at pretty short-term rates.

You're going to be looking at 10-year term, maybe 15-year term. But there's going to be a huge difference in premium cost between a 10-year term policy and a 20-year term policy. And so, at your age bracket, you're going to be looking for a shorter-term policy. And if you get the coverage, you're getting it because the insurance company has underwritten your file and they do not find any medical risk factors of an early death.

So basically, you have to assume when you buy life insurance, term life insurance, if you get it from the insurance company, basically – although, hey, medical things change all the time. You could look totally healthy today and then a year from now be diagnosed with cancer and you never knew it.

That happens and that does happen. But when you actually look at it, it happens such a small percentage of the time that you basically have to think of it as protecting you from an accident. It would protect you from an accidental death and so it would protect you from an accidental death, not so much from the other types of death.

The insurance underwriting process, they're pretty good. So the way I would look at it is as risk management. If you look at your situation and let's say it would be on your wife's life right now because she's the one who's earning an income. You don't have any income other than your social security benefit.

Is that right? Michael Strong: Correct. Aaron Ross Powell: OK. So the major risk is of your wife dying early because your income – she would still have the paid-for house. She would still have the retirement assets and she's going to have a social security benefit for herself and even if you died now and she wasn't claiming, she can file for a spousal benefit and get a spousal benefit or she can get a widow benefit off of your record.

So the major risk is for you, the loss of her income and the loss of her probably higher social security benefit to you. If you needed to protect that for the next five years, that would be where I would look at life insurance. So if you assume that she's going to earn $50,000 per year for the next five years and that's going to give you guys $250,000 of earnings, some of that is going to be spent but some of it is also going to be saved.

Plus you're going to have that increase in social security benefits for you. I would consider putting some life insurance on her to protect that. But I wouldn't view term life insurance as an investment simply because it's very unlikely to ever pay a death benefit. There is protection. It would pay a death benefit if you died but you're unlikely to die, especially at your age bracket when you're going through medical underwriting.

Yeah, and that's the other side of insurance we don't talk about. When you need it, it's great that it's there. When you don't need it, it's money that's kind of gone. Yeah, term insurance especially because term insurance only pays you out if you die. It's great protection. Again, it's the perfect fit if you decide she's going to work five more years, you're not quite comfortable and you buy a five-year $250,000 term policy that would run you on her life, it would be somewhere between $1,000 and $1,500 a year.

So that might be a really reasonable risk thing to do but it's not going to be an investment because it's unlikely to pay out. It would be a shame to spend $1,500 a year and then it's all gone. You've always got to recognize that most likely the premium dollars are going to be gone.

Very good. Listen, you've been most helpful and I appreciate your feedback. Good. I'm so glad, Paul. And at the moment, that is going to be it for today's show. I just had one caller. So if you'd like to talk to me in the future, we've got plenty of room.

These calls have been varied. I thought they were going to be more popular but I guess, who knows, we've answered everyone's questions. Really appreciate those of you who do call in. If any of you are regular listeners of the show and you would like to call into a show like this, I set aside an hour for these things and so there's plenty of room for you to get on and be able to ask me any question that you want.

If you can make your opinion heard, I don't do any censorship of what you want to talk about. So I'd be glad to have you on a call like this. Become a patron at RadicalPersonalFinance.com/patron and you'll have access to these Q&A calls on a regular basis. Thank you all so much for listening.

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