Make the Most of Your Social Security

07/02/2013 7:45 am EST


Investors often leave their Social Security benefits out of their retirement planning, to their detriment, says Seth Stewart of Plan My Benefit.

Nancy Zambell: Good morning. My guest today is Seth Stewart, president of Plan My Benefit. Seth offers Social Security education and retirement income planning. I bet, Seth, that a lot of people don't even think they need Social Security education.

Seth Stewart: Unfortunately, I think most Americans make a shoot-from-the-hip election. The reality is we probably spend more time as a society planning or booking a flight for a vacation than we do making one of the largest financial decisions in our life.

Nancy Zambell: You're absolutely right. I know one of the things that many of my friends are starting to reach those ages when you have to consider when you want to take your Social Security.

Even people in the financial business don't even know how to figure it out. Should I take it at 62? Should I wait until I'm 66, or what? You can help with that.

Seth Stewart: Absolutely, our nationwide network of Social Security counselors can be found at

But there are some fairly alarming statistics. One of them recently changed. It used to be that the statistic was that less than 25% of financial advisors understand Social Security. That's recently been updated, and alarmingly it's now 22% understand Social Security benefits.

You have a tsunami of Baby Boomers nearing that age of election. They need help; they need advice.

Nancy Zambell: We were talking a little bit earlier about the internal rates of return, and the fact that people don't realize that with interest rates so low, they really need to start planning for this.

Seth Stewart: Well, pre-planning is key. Let's assume for a minute your full retirement age is 66. Every year you defer out to the age of 70, the federal government gives you an 8% simple interest increase on your benefit. Compounded, that's approximately a 7% compound rate of return guaranteed by the federal government.

It's very difficult, in such a low interest rate environment, to beat that in a safety of principal vehicle. In my opinion, deferring Social Security—in many cases—is the best choice, if there are other means to bridge that gap. Obviously, everyone's situation is different.

Nancy Zambell: You also mentioned taxation of the benefits. This, obviously, is a problem. Today, people at 70 and 75 can still be very young and want to continue working. I've heard that a lot because I live in a retirement area: "If I work too much, they're going to tax my benefit." Can you help people get around that or just figure out what to do?

Seth Stewart: Yes. We refer to that as the RMD, or required minimum distribution dilemma. At 70 1/2, you're forced into a distribution mode with your qualified retirement accounts like IRAs and 401(k)s. You have to take this minimum amount that's set by the federal government every year.

At that point, you're actually losing control of a taxable income stream, which can have some pretty substantial taxation effects on your Social Security benefits. The idea is to try to minimize future required minimum distributions or future taxation by maybe taking advantage of Roth conversions.

Another tool that we often use is cash-value life insurance, or simply paying the taxes now and converting to a brokerage account.

I've yet to find anyone that would agree that taxes are going down in the future. I say taxes are more than likely going up in the future, and the best time to shop is when things are on sale.

Nancy Zambell: I see a lot of people at the MoneyShows who tell me, "I'm 55; I guess I should start thinking about retirement now." But you are trying to get people even younger than that into some planning.

Seth Stewart: Sure, we work with all demographics—primarily the Baby Boomer demographic. The thing that the younger generation has to their advantage is time. They have more time to preplan.

Reform is a hot topic today. How can reform affect retiree benefits? While I see Social Security reform probably not having much of an impact on those 50 years of age or older, we can't necessarily count on 100% of our benefits, but yet we have time to preplan for that now.

Nancy Zambell: There has been so much talk about the Trust actually being exhausted in 2032 or so. You are an expert in this situation. Is that just talk or is that a reality?

Seth Stewart: It is a reality. Here's the one thing I like to clarify when talking about the Trustees Report. When Americans hear the term exhausted or depleted or zero, they assume at that point, they're going to receive zero benefits, which is alarming and can cause panic or hysteria.

The reality is the Social Security Trust Fund is scheduled to deplete in 2033. But even at that point, even if nothing was done between now and then—which is highly unlikely—FICA tax revenue alone would still support 77% of the benefits at that point, moving forward. It's not the zero that a lot of pre-retirees and retirees think that they may be facing in the future.

But again, is the system broke? Yes. Is it broken beyond repair? I'd say absolutely not.

Nancy Zambell: I always think to myself, take the benefits as soon as you can, because they may not be there. You're saying that people basically over 50 are probably going to be OK?

Seth Stewart: People over 50 are going to be OK. The reason is the Baby Boomers represent the largest voting bloc of the population.

Would you vote to extend your full retirement age or even delay your early retirement age? Chances are no. For a younger generation, possibly. Again, they have more time to make that up on the back end.

Nancy Zambell: Absolutely. Now at your Web site, you have a special report that people can download?

Seth Stewart: There is a free report, and we talk about various scenarios. We take a look at a married couple, a widow or widower, a divorced case, and single individuals. We talk about some of the strategies that may be available to them in the Social Security system, and why it may be a better idea to defer Social Security until later in life.

Here's how I view Social Security. It's the only income we're going to have in retirement that is guaranteed, inflation-adjusted, tax-preferred, and it pays for a lifetime. If you put it in the context of an annuity, it's the largest annuity that most Americans will ever receive, and it's backed by the federal government.

Make sure that you take the time to educate yourself before you make one of the largest financial decisions of your life. If you add up cumulative benefits, monthly benefits over life expectancy—and retirement is longer now than it was 15 to 20 years ago, on average—you're talking about a decision worth several hundreds of thousands of dollars.

Nancy Zambell: My husband's father retired at 62, and he's 93 now.

Seth Stewart: Yes, that's a good case.

Nancy Zambell: He's been collecting from the system for a very long time. We should only hope to live that long, right?

Seth Stewart: Yes. I will tell you one very, fairly alarming often overlooked aspect of Social Security: spousal protection-protecting a surviving spouse in the case of a married couple.

Put it in context of life insurance, because it is a form of life insurance in a way. It's protecting the surviving spouse, should one of them die young.

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