Wade Pfau Makes Case for Raising Top Social Security Claiming Age to 72

May 6, 2021

You can even do Roth conversions as part of that. It’s called the Social Security tax torpedo. If your income falls in the range where if you have just $1 of taxable income [more], that can also cause you to have to pay tax on another 85 cents of a Social Security dollar. So you might be in the 22% tax bracket, but really your marginal tax rate is over 40%. That’s what you really want to be focused on.

Also focus on Medicare: If you have $1 too much, depending on which threshold you’re at, you might have to pay another $800 in Medicare premiums as a single person just because you’ve hit that one extra dollar around $87,000, somewhere in that ballpark, this year. One more dollar and figure $800 more of Medicare premiums.

So try to avoid that. That’s where you don’t want to waste tax space. If you’re only in the 10% tax bracket, you might want to, at the very least, potentially fill up 12%. That just gets you better positioned later in life when you have Social Security. And then when you have RMDs, you don’t have as much in your IRA by that time. You’re better able to manage avoiding taxes.

Your book, then, is talking about retirement spending strategies. We just spoke with (York University professor) Moshe Milevsky, who discussed why decumulation advising should cost more. That is, it is more expensive going down than going up?

That’s absolutely right. Traditionally we’ve had wealth management, which is focused on growing wealth, and it’s only been in the last 10 or 15 years that there’s really this appreciation that retirement is different. And that mountain climbing analogy is used commonly, that it’s easier to climb up to the top of the mountain than it is to climb back down. Like with Mount Everest, most of the accidents happen when people are going down, not when they’re going up.

And it applies to retirement, where before we thought, just like people think the goal of climbing the mountain is to make it to the top, well, the goal of retirement planning is to get to that number where you have enough assets to retire. But no, the reality is it’s getting down the mountain. It’s not outliving your assets and meeting your retirement goals. That’s more complicated than just hitting that wealth target at the beginning.

Like at The American College, for example, we started the RICP [Retirement Income Certified Professional] designation for advisors in 2012. It started from this recognition. They had a conference to just discuss what’s different about retirement. And what should a retirement advisor know? What do they do post-retirement, not pre-retirement.

Should firms be set up, then, with specialists handling those in the decumulation stage?

It can be the same person for both. As long as that advisor recognizes how things changed, like in the five or 10 years before retirement, [and they] start thinking about matters differently and positioning people for retirement. It doesn’t have to be different [advisors], but there’s a growing trend of having teams of advisors. And in that regard, on a given team, someone might be more focused on the accumulation phase and someone else more on the distribution phase.

Q: What about Social Security — do you see changes in the future? 

I’ve been waiting for the new Social Security Trustees’ report to come out. Last year it came out [in late April], and this year it’s still not out yet. So we haven’t been able to see what the Social Security Administration believes the impact of COVID will be. But as of the 2020 report, they were expecting the trust fund to last till 2035. There’s reports [that] probably is going to [run out even earlier].

And a big factor is lower interest rates. We’re going to have less interest on the trust fund assets. That’s going to be the most important factor, not so much unemployment, which kind of has a mixed impact, but mainly the low interest rates.

How should a near-retiree deal with that?

For one thing, Social Security won’t disappear. If nothing’s done [by Congress], benefits may have to be cut across the board by 20% to 25% to be aligned with the incoming payroll taxes. So I don’t think people should change their claiming strategies. If somebody wants to check their plan by seeing how well it would work if their Social Security benefit was cut by 20% to 25%, that would be a reasonable approach.

A 25% cut in Social Security benefits is a lot for many people. Should advisors be looking at other options, such as recommending annuities, reverse mortgages, etc.?

Social Security is a reliable income asset where you’re not having to rely on the stock market to support your spending. If you have a particular spending goal that you want to support reliably without market risk, and feel that if the Social Security benefit goes down, you’d like to fill that gap [it could be] an annuity or the 10-year payment option on a reverse mortgage — something not having additional stock market exposure necessarily.

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