Today's post is about Social Security and retirement planning with the catalyst being a bunch of content this weekend that hopefully I can weave into a useful commentary. By planning I mean both financially but also lifestyle-wise too.
We'll start with an opinion piece in Barron's that argued for capping Social Security benefits at $100,000 per household or $50,000 for singles. Couples where both partners make the maximum salary (for purposes of payout calculations) will bring in $100,000+ from Social Security. Any sort of negative reaction you might have to a cap is fair but it is pretty clear that capping benefits is going to be part of the conversation. If nothing changes then every will get a 23% haircut starting in around 2033 or 2034. If they only take away from people perceived as being wealthy then that is probably more palatable to politicians in terms of votes. Tax/penalize the rich is often a popular argument.
The opinion piece didn't say this but they would obviously need to index any sort of cap for inflation. Oddly, the essay didn't quantify how much the cap would help address the problem so I went to Copilot A $100,000 cap would save $100-$190 billion over ten years out of about $300-$350 billion problem, again per Copilot. The way the full answer was worded, my follow up was would it be fair to conclude that just implementing a $100,000 cap would mean that instead of cutting everyone else by 23%, that the cut to everyone else would be just 20%. That would be a slight improvement and Copilot said yes, that would be plausible.
The comments seemed very hostile to capping the payout but more open to eliminating the cap on payroll taxes going in. So they were against getting less coming out but ok with paying more going in which surprises me. Eliminating the payroll tax cap would solve about half the problem. Stacking the capped benefits and eliminating the cap on payroll tax would plausibly mean that everyone else's benefit is only cut by 10%. Copilot called that defensible.
One reader had an interesting idea about not taxing RMDs. I'll tweak that to increasing the exemption on IRA distributions like maybe the first $50,000 (indexed for inflation) is exempt from taxes. Some sort of actuarial analysis could come up with a workable number.
If Congress tries to fix the problem then some people will be upset and believe they are being treated unfairly. If Congress does nothing then everyone will be upset and believe they are being treated unfairly. Any attempt to solve the problem is going to involve very difficult decisions. I don't know what I think is best, my comments above pick up on the idea from the essay and again, like it or not, some sort of cap is going to be part of the discussion. I continue to believe it makes sense to account for a reduced payout in your planning.
The Washington Post had a very downbeat article about men leaving the workforce.
Older men are being forced out for reasons we've talked about before and "young men who are disabled or in school" aren't entering the labor force. The implication for the young men is they can't seem to get started, many of them are living at home and feel no motivation to start their lives. These are statistics so maybe there is a grain of salt to be taken here but there were a handful of anecdotes that tried to give a broad perspective on the issue.
I don't have great insight into why younger people are having trouble getting started but over the years I have noticed when friends closer to my age on Facebook have had their hands forced at work. Some chose to retire while others maybe aren't working but don't think of themselves as retired. On the positive side, I have noticed more friends retire because they wanted to and presumably were financially able to do so.
If younger men are not entering the workforce then that would seem to be shorter term negative for Social Security as current workers pay for current retirees but it could be long term positive for the program because they will get smaller benefits when they hit retirement age. By positive, I mean for the viability of the program not for society overall.
Whether the problem is as serious as the WaPo portrays it or not, we know it is happening to some extent and again, I continue to believe it makes sense to account for being forced out of your primary career sooner than you hope for.
Barron's had an article with a three item check list for anyone retiring early, regardless of whether they want to or have to. The first item was healthcare costs. As we've looked at before, a couple earning $84,000 or less can still get insurance from healthcare.gov for essentially free which is a viable option for bridging to Medicare. It looks like if in this bridge period you take any qualified distributions from a Roth IRA, that does not count toward MAGI in determining eligibility for subsidies but taking from a traditional IRA account would count toward MAGI. Spending cash out of a taxable account would not add to MAGI either but long term capital gains would. Do some real research on that if it applies to your situation.
To the extent people retire early for health reasons, it won't be so simple as lift weights/cut carbs and solve all your problems. However, I do believe that many health problems can be improved with the right type of physical therapy/training but it would take some effort to figure out how and then to stick with it. And of course a better diet will not make it worse. The other two items in this article were portfolio readiness and having a sense of purpose which are both points we talk about here all the time.
The final Barron's article was about choosing where to live in retirement including whether or not to downsize. Downsizing has two components, downsizing square footage but also downsizing financially. It seems like it has gotten a little harder to downsize financially in the last few years but that is just an anecdotal observation. For someone wanting to downsize, going from 3000 square feet to 1500 and being able to take out a couple hundred thousand in the transaction is a no brainer.
If someone wants to downsize from 3000 to 1500 but needs to upsize financially, that becomes a more difficult decision. Someone who is somewhat behind where they need to be in terms of accumulated assets can't make that trade. They'd need to find somewhere else to downsize into.
The New York Times looked at several retired couples who downsized into some version of van life with some people literally making a go of it in vans and others in Class A motor homes. The people profiled seem to have some financial challenges without being desperate. At least one of them seemed to be in very good financial shape but who knows. A negative point about the article is that it seemed like all of them had big enough social media followings (Insta or TikTok) that they made incomes from posting about van life. It's negative from the standpoint of not everyone will find that kind of audience.
My wife and I have a bit about driving around the country solving mysteries but if some version of van life so appeals to you that you want to actually do it, rent something and go out for just a few months to make sure you actually like it before plunking down a bunch of money.
It certainly seems like being able to retire has gotten and continues to get more difficult. I saw firsthand when we first moved to Walker, it was not very affluent twenty whatever years ago, that people figured it out because they had to. Not everyone will figure it out but I have also learned in the last few years with my work at the Del E Webb Foundation that there are countless, non governmental resources to help with food, places to live and healthcare. And while those sorts of resources may not come into play for the typical blog reader, it is important to realize they exist.
Hopefully everyone reading this has a comfortable retirement sorted out for themselves but being even a little bit clued in how to help someone else figure it out because they have to will be important because I am skeptical that the government will help.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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