497 | Your Social Security Questions Answered | Mike Piper

24:40For instance, for me, I figured the break-even point, if I invest at 7 % returns, is 12 years. But you have to figure in that you might not live that long and you can pass on whatever you do have. So it is a mortality hedge. It could also be seen as a hedge against Social Security failing. At least you got something. So we did kind of address Social Security failing entirely on the episode 474. I find that dubious at best. That's my own personal opinion. That is not like a professional opinion by any means. But to imagine Social Security failing entirely, which to me suggests zero dollars, is very, very, very far-fetched.

25:17I can't imagine a political situation barring something zombie apocalypse-ish, which then at that point, do we really care? So I find that part a little outlandish. But let's start with, well, A, do you have any opinions on that? But B, let's start with Andrew's question. Yeah. On that topic, I agree with what you're just saying, what Dennis said in the prior episode. The idea that it would just go to zero, there's absolutely no reason to expect that. Even if no legislation is passed to improve the funding of the program, the trustees who are in charge of assessing the funding of the program still expect that based on the ongoing tax revenue every year, it'll be able to pay out about three quarters of the promised benefits.

25:54So it's not out of the question to say, well, what if there's a 25 %-ish cut in benefits, whether that'll happen or whether Congress will make some change, I don't know. But the idea that it's going to go to zero, that would take something really crazy happening. That would take Congress saying, hey, let's just get rid of Social Security. And that just seems extremely unlikely. For absolute giggles, let's just get rid of Social Security. I mean, yeah, the likelihood of that is approaching zero. So yeah, let's be clear. Nobody can prognosticate the future, obviously. But like Mike saying, 75%, I think the number that I used in the first episode was 70 % of benefits.

26:29So I mean, listen, if you want to take a 30 % haircut just for conservatism on this and figure, okay. I mean, I think that's reasonable, but to assume any lower than that just kind of like seems a bit outlandish to me. So anyway, I think we've covered that. Again, that's just our opinions. Obviously, nobody can foresee the future. So Andrew's question, why don't you jump off from there? Yeah. So the question of when to file for social security benefits, I think it makes sense to start with a situation like this where we're not thinking about spousal benefits or survivor benefits. Just start with a simpler case.

27:01Imagine somebody who is unmarried and then get a firm grasp on that situation. and then we add on the complicating factors. So for somebody who's unmarried, it's basically just this trade-off. You can file early or you can wait. And every month that you wait results in a slight increase in the monthly benefit from age 62 to age 70. There's no increase for waiting beyond age 70, so you don't really want to do that. And by the way, they don't automatically file for you at age 70. Some people just don't file and then they just miss out on months of benefits. And that's just lost forever. Yeah. You can file retroactively up to six months.

27:39So if you waited until 70 in three months, okay, you're fine. But don't wait past 70 is a generally good rule. Anyway, so there's this slight increase for every month that you wait. And essentially, if you wait all the way until age 70, your monthly benefit is about 75 % more than what it would have been if you had filed immediately at 62. So we have this trade-off of more benefits per month, but you've given up this income in the meantime. And just like Andrew's talking about, when we do this math, we have to account for two important things. Number one, we don't know when we're going to die.

28:13That's critical because the longer you live, the more beneficial it would be to have waited to file for benefits, right? Because you're receiving this higher monthly benefit for your whole life. And the longer your life turns out to be, the more helpful it is to have that high benefit. So we don't know how long we're going to live. And then the other thing that we need to account for is investment returns. And you can think of that in either of two ways. You can think about it in the way that Andrew was talking about it where, oh, I can take the money early and invest it. Okay. The other thing that a lot of people do naturally is they take the money early and they spend it.

28:42Well, even if you're spending it, what that means is then you're not spending as much from your portfolio per month. So it allows more of your portfolio to remain invested. And so in either case, whether you're spending or investing it, we still need to account for the fact that waiting to file means you're missing out on some investment returns. Now, this, by the way, is exactly the math that the Open Social Security calculator does. It basically just says, so in finance jargon, it looks at every single possible filing age, and it calculates the expected present value of what your total lifetime benefits would be at that filing age.

29:19So basically, it's looking at a mortality table and saying, okay, what's your probability of being alive this year? And then it multiplies that probability by what your benefit amount would be. And then it looks at the next year, it says, what's your probability of being alive this this year, and it multiplies that probability by the benefit amount in question. And it basically does that all the way out to age 110, by which point it's reasonably safe to assume that a person is no longer living. And it does that for every possible filing age. And then it also accounts for foregone investment returns, basically, in situations where you wait.

29:49And then it tells you which filing age gives the greatest total expected benefits over a person's lifetime. Okay. So that is opensocialsecurity.com, which we referenced at the beginning. That is the tool that you created. And yeah, this, I know I've seen dozens upon dozens of people reference this as just incredible, incredible resource. So obviously that will be linked up in the show notes. And yeah, it looks like it's pretty easy to just, you don't have to enter much information in here, right? Right. It is also important to note though, there's a little box at the top of the page for advanced options.

30:20So that's for, we haven't dug into these topics yet, but if somebody has a government pension, then there's other rules that come into play. Or if somebody's still working and they're younger than full retirement age. There's the earnings test that comes into play. And we'll talk about all of those things. I'm so glad you specified because honestly, I would have missed it. But yeah, it's at the very top. Certain situations require additional input. Click here to select those situations. So that is really important. I'm glad you clarified that. Yeah. And then that also lets you change various assumptions, like what mortality table is being used, for instance, if you want to reflect better than average health or something like that.

30:52Gotcha. Thanks for listening to Chooseify and for all your support of our mission here. The absolute best way to support Chooseify is when you sign up for your next rewards credit card to use our cards page at chooseify.com slash cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. So going back to social security itself, now I guess under the current format, you can start getting retirement benefits at 62, but your full retirement age is 67. Again, if you're born after X year, is it just a simple straight line?

31:30Like, Hey, if I hold off for a year, my benefits go up X percent. Like, can we just very simplistically look at what's the increase in benefits or is it just not, am I thinking about this fundamentally incorrectly? The increase from one year to the next, it's not the same. It's not a straight line increase. we can dig into that if you want. I love, I can see your mind working on this. There is an answer. I know, I know how much you like precision, but yeah, I was, I was just curious, just, is there a very simple answer? And if there's not, then that's wonderful. That's just, that is the answer.

32:04We don't have to worry about it. It's just arithmetic, but it's just hitting people with a lot of numbers real fast, basically. Yep. And it's very hard to do that, obviously on a, on a podcast, which thankfully you are aware of more so than I am here. So, okay. Where do we go from here. Okay. So the question of when to file for benefits. So there's a calculator that can help you with it, like I was talking about. But we're talking about investment returns, and we're talking about uncertainty in lifespan. Andrew had talked about filing early as a mortality hedge. Most financial planners who you talk to and most economists will point out that the exact opposite is true.

32:39Filing later is the mortality hedge. Because when we're talking about retirement planning, we're not scared about the cases where you retire at 60 and then die at 62. We're scared about the cases where you retire at 50 or whatever age and then live to 107. Those are the cases where you might run out of money in retirement. If you die shortly after retiring, you probably didn't run out of money. Right. Oh, that is so interesting, Mike. Because as I'm reading this question, that didn't even occur to me. But what you're trying to safeguard against is running out of money. You are going to die either way.

33:14Let's be clear. It's just a matter of when, but the actual calamitous issue is when you run out of money. Exactly. Okay. Keep going. Yeah. The long lifespans are the financially scary ones, even though that's, you know, in terms of just life in general, what we want is long lifespans, but financially that's the scary thing that we need to protect against. And so waiting to file for benefits protects you against those long lifespan, potentially running out of money scenarios. So anytime, broadly speaking, that you have, if the math happens to work out such that filing age A, which is earlier, and filing age B, which is later, happen to provide similar expected total amounts over your lifespan, the later filing age is the preferable one, because that's the one that's better from a risk perspective.

33:57Because again, the risk in retirement is running out of money. and the longer you live, the greater that risk becomes. And so later filing ages should in general be preferred to earlier filing ages, unless the math for this particular person happens to point strongly in favor of filing earlier. So then we can dig into the investment returns point. And Andrew used a 7 % hypothetical return. One thing, so if you're looking at open social security, you can plug in, if you check the box at the top of the page, you can plug in whatever you want for the discount rate, which is essentially, conceptually, it's the same thing as the investment return that you're giving up if you wait to file for benefits.

34:35Now, the important thing to understand here is that if you have bonds in your portfolio, the expected return from those bonds is the investment return that we're concerned with here. And there's a couple of reasons for that. One is that whenever we do present value calculations in finance, we want to look at something that has a similar level of risk. And so the thing that has the closest level of risk to Social Security, Social Security isn't a bond. It's a pension. It's an annuity. But it's more like a bond than it is like a stock, certainly. And so we want to use an investment return that's similar.

35:14And so TIPS, Treasury Inflation Protected Securities, they're inflation-adjusted bonds that you can buy from the Treasury. That is the thing that's most similar to Social Security in terms of risk because it's backed by the federal government, it's inflation adjusted, and it's fixed income. So in most cases, and this is what the default discount rate on Open Social Security is, in most cases, what we want to look at is the investment return that you would be getting from TIPS. So that's the kind of conceptual academic way to think about it. The real world reason why we're concerned about bond returns is simply because when we're talking about delaying social security.

35:47And again, when you delay social security, that means you're spending down the portfolio faster. Usually the thing you want to be spending down is your bonds. And there's been more and more research into this topic on the last 10 years. And now people sometimes refer to it as a social security bridge. And that is the idea that you, prior to retiring, you set aside a chunk of your portfolio for basically the additional spending that's going to be necessary while you wait to file for social security. And you put that in something safe, like a CD ladder or a tips ladder or something similar to that.

36:21And so in a very tangible, real life, not just academic, but real life way, when you delay social security, you should be spending down the bond part of the portfolio. You're basically trading in your bonds to get more social security. And most of the time, that's an advantageous thing to do. It varies. That's why we do analysis for every person and so on. But most of the time, that's helpful. And so usually the investment return that we want to be looking at is investment return for bonds. Now, if you have somebody who already just has a 100 % stock portfolio, that's the asset allocation they're using.

36:50That's the allocation they plan to stick with for the rest of their life. That's not super common, but there are people like that. In that case, then yes, now we are looking at if you have to spend down your portfolio sooner in order to delay social security, then yeah, if the only thing in the portfolio is stocks, then it does mean we're spending down stocks. Okay. And that makes sense. And like you said, on your site, you can just click that, click here, click discount rate and change it from, I guess, currently as we're recording this, it's 2.33 to whatever you want. So if in the case here, the question, Andrew said 7%, so you could just dump that in.

37:22And one other point, by the way, is that 2.33, so we're dealing with real returns, so returns above inflation, because right now tips provide 2.33 beyond inflation. So whatever figure you put in there, you want to make sure that it's after backing out inflation. Very important. So chances are that 7 % was more of a nominal amount, right? So maybe you back out 3 % or whatever you estimate. But yeah, I think historically 3 % is a reasonable amount to back out. So maybe you put 4 % in there as the real discount rate. So I guess the heart of Andrew's question, so might there be a difference for someone in the FI community?

38:01So I guess, because I think, sadly, and I'm trying to change this, honestly, Mike, but I think most people in their FI number count Social Security as zero, right? So I think most people are just hopelessly conservative when it comes to calculating their FI number. Like, they're calculating a way lower safe withdrawal rate. like they're calculating zero for social security. Like they're probably working way too many years, but I mean, that's sidebar obviously, but importantly here, let's just assume someone has reached FI and they have, I don't know,$80 ,000 in annual expenses. They have 2 million bucks in their investable portfolio.

38:37And realistically, they think using the 4 % rule of thumb that that's going to cover it. We're not going to adjudicate that. We're not going to, you know, but let's just assume that's the case. I think the heart of what Andrew is saying is like, hey, look, I could start taking this extra money every month at 62 and continue to invest that. Or just very simply, should I wait to 67? Should I wait to 70? Just at a high level? If the answer, honestly, Mike, is just simply go to open Social Security and you can see it in black and white. But is there just a high level for how someone in the FI community specifically should think about that?

39:10Yes. The answer is that FI are here doesn't matter, is the very short answer. because so Andrew's saying, oh, I don't need it immediately. True. And we're basically taking that as an assumption for all of these discussions, because if it is somebody who literally needs the money right now to spend it, well then yeah, take it right away and spend it. So we're mostly assuming by definition, if we're having this discussion of when to file that you don't need the money immediately. Okay. So the math is the same, regardless of whether they stopped working at 50 or at 62, or they haven't stopped working yet.

39:44Cool. Enough said. Fire doesn't matter. Fire doesn't matter. The math is the math. So hard stop, end of story. The math is the math. I think that's very, very important. So yeah, glad I asked because the clarification is important. So, okay. I think we've probably covered Andrew's question pretty good, but Crystal wrote in with a question that I think will be a real quick answer for you, but there might be some additional depth here, like a side tangent, but Crystal has, is there a maximum age to receive social security? As in, can you receive benefits for a maximum number of years to a point where they'll eventually cut you off?

40:18Or is it, I mean, we jokingly said 110 before, if you live to 126, you're the oldest person in the history of the world. Like, are you just going to continue getting your benefits? Yeah, you do. And that's exactly what we were getting at earlier, where the risk in retirement planning or one of the risks is not the only risk, but one of the key risks is longevity risk, the risk of a very long life. And social security pays out no matter how long you live, which is a compelling point in favor of waiting. Okay. That's awesome, Mike. That's kind of the answer I was figuring. But again, people are having these questions, so I'm glad you clarified.

40:49So I think a series of questions came in about filing decisions roughly related to married couples. And I know we have a lot of nuance here, so I suspect this is going to be a bit of a conversation here, but I guess let's just start at the highest level. Where would you start with that entire line of questioning? Yeah. So the most important things to know for a married couple with the filing decisions. Basically, if we have spouse A, who's the higher earner, and spouse B, who's the lower earner. If spouse A, if the higher earner waits to file for their retirement benefit, it increases the amount that the couple receives per month as long as either of the two people is still alive because it increases their own retirement benefit.

41:31But if that higher earner dies first, then that higher earner having waited to file will increase the survivor benefit that spouse B receives. So when we were doing all this math for the single person, basically what we're doing, when you delay social security, effectively, you're buying a pension, you're buying a lifetime annuity, you're giving up some benefits now, and you're getting this income for the rest of your life. And we're saying, okay, is that a good deal? Yes, no. And it depends on the inputs and assumptions we use. Now we're doing the exact same math, but what's different is that the income that's coming in, that pension that's coming in, it's a joint and survivor pension.

42:07It lasts for as long as either person is still alive. And so what that means is that it's a much better deal, just mathematically speaking, for the higher earner in a married couple to wait to take their benefits than it is for a single person. And there are some exceptions, very specific cases, but in the overwhelming majority of cases, the way this works out is that the higher earner should wait until age 70. The overwhelming majority of the time is that that's what the math tells us. And again, not only does the math tell us that, but from a risk point of view, that's the best option anyway.

42:45So then we get into the decision for the other person, the lower earner. Now, it's the opposite. When the lower earner waits to file for their benefit, it increases the amount that the couple receives for only as long as both people are still alive. Because if that lower earner dies, well, now their retirement benefit is no longer relevant because the higher earner is just going to keep receiving whatever the higher earner had already been getting. And if it's the higher earner who dies, well, then the lower earner is going to get a survivor benefit based on the higher earner's earning record.

43:16So the lower earner's own retirement benefits is no longer relevant anymore. So again, when the lower earner waits, it only increases the amount the couple gets for as long as both people are alive. So for the lower earner to wait is less advantageous than for a single person to wait. So basically, it's least advantageous for the lower earner to wait, medium advantageous for a single person to wait, and super duper advantageous for the higher earner and a married couple to wait is roughly how this all works out. And the details vary depending on the difference in ages and the difference in earnings history and what discount rate we assume and what mortality assumptions we use and on and on and on.

43:54But that broad structure of least advantageous for the lower earner to wait, kind of in the middle for a single person and most advantageous for the higher earner in a married couple to wait, that's always the case. That is incredibly clear. I love that. So right, as the back of the envelope, of course, we're not giving specific advice to you. as Mike said, there's always additional factors, but yeah, very high level. It sounds like the significantly higher earner, you said in many to most cases, waiting until 70. Does that suggest that the lower earner should consider 62? Frequently, yes. There's other things there, you know, tax planning comes in and so on.

44:31But in many cases, that's a good rough draft strategy. Lower earner files early, higher earner files later. Okay. So I think we're conceptually thinking here in terms of like a significantly higher earner and a significantly lower earner, but there are some cases where it's the higher earners 10 or 20 % higher. Like, is there some line of delineation where you're just kind of in your head thinking, all right, they basically earned the same versus like significantly higher, significantly lower? Yes. Basically, if they have, this is becoming less and less relevant, but if one person was also older, such that their full retirement age is different, then we have to account for that also in the math.

45:10But mostly it's, you know, higher earner is the higher earner. Okay. Easy enough. No, no, no. We don't need to dive into things when there's just a clear cut answer. So yeah, thank you for clarifying that. I guess one question that came up for me was, so we talked before about like actually having to file, right? So, you know, at 70 in that case, that was what we were talking about earlier, but it's stuck in my mind of actually having to file, as that being something critical here. So what about a situation here where we have the higher earner and the significantly lower earner in the couple, and the higher earner is going to wait until they're 70 to start claiming benefits.

45:51But let's say they pass away at 68 and they've never started actually claiming. What happens then for the surviving spouse, the lower earner in this case? Good question. So the lower earner, in this case, the surviving spouse, if they had already filed for their retirement benefit, they'll keep getting that. But basically the, so the maximum survivor benefit that a person can receive, if the person who had died had already filed, the maximum survivor benefit for the other person is basically the amount that that other person was receiving. There is one exception where if that other person filed very early, it can be a little bit more than that.

46:26But most of the time, the maximum survivor benefit for the surviving spouse is the amount that the other person is receiving. If the person who died had not yet filed, then in this example that you gave, where the higher earner dies at age 68, having not yet filed, then the surviving spouse, the lower earner, their maximum total benefit is going to be what the higher earner would have received if they had filed on their date of death. So it's their age 68 benefit. Okay. Now it's a little bit different. So if we throw in one more wrench into our machine here, If we assume that the higher earner, let's say they died at age 64, so before full retirement age, the key point is if the person dies before full retirement age without having filed, then now the surviving spouse or maximum survivor benefit, instead of it being whatever the person would have received if they had filed on their date of death, now it's the person's primary insurance amount.

47:12So it's higher because it's their full retirement. They were younger than full retirement age when they died. Wow. Okay. That's a very interesting point. Okay. Yeah. My brain obviously keeps spinning with all these things because there's so much detail here. But yeah, that's so right. There's essentially asymmetric upside there in that, right. You're not penalized in essence, if that person passed away before full retirement age. Exactly. Precisely. Yep. So, right. Obviously we're talking about death, never fun, but at the end of the day, we're talking about these are bets and how can you come up on the best side of the bet so that that I always like when you can see that a benefit that is very clear.

47:54And I think that's pretty clear in that case. So, okay. But the first kind of foray into spousal benefits. So where do you go from there? That's the biggest thing to know that when the higher earner waits, it's a very good deal because it increases the amount the couple receives as long as either person is alive. Whereas the opposite is true for the lower earner. It's a less good deal because it only increases the amount that the couple receives as long as both people are living. Another point that's relevant here is an age difference between the two. And the summary here is that the older that your spouse is relative to you, the less advantageous it is for you to wait to file for benefits.

48:28And the reason we can say this is that with married couples, we're always concerned with joint life expectancies, right? So when the higher earner is trying to make their decision, we're concerned with the second to die joint life expectancy. How long will it be until both of us have passed away? And when the lower earner is trying to make their decision, we're concerned with the first to die joint life expectancy. How likely or how long will it be until one of us has died? So we're concerned with these joint life expectancies. Now, imagine a couple where the two people are the same age. So at age 62, they're both age 62, and they're trying to make this decision.

49:06And those relevant joint life expectancies are whatever they are. Okay, now change it. And let's say that one of them is age 72. So let's say you're 62 and your spouse is 72. Well, now when you're 62 and your spouse is 72, those applicable joint life expectancies are naturally shorter than they would be if your spouse was also 62, right? With your spouse being 10 years older, both of those joint life expectancies are made somewhat shorter. So that makes it less advantageous for you to file. And then the opposite is true. So let's say when you're 62, your spouse is 52. Well, now those joint life expectancies are longer.

49:38And so that makes it more advantageous for you to wait to file. So that's the way that the age differences come into play. All right. So Mike, speaking of surviving spouses and spousal benefits and such, and ages specifically, we had two questions come in that are fairly similar here. And I'll just quickly read both of them. So Jill said, my spouse passed away in his mid forties. I've not remarried. Am I able to claim his benefit, his SSI benefit when I reach retirement age? If so, what age should I start? I plan to defer my own until age 70, trying to make sure I don't miss out on any benefits.

50:10And then Nick said, I was wondering if the two of you could go over a scenario of when a surviving spouse should claim survivor's benefits first while letting their own benefits increase with time versus just claiming their own benefit and being done. So obviously, a distinction here between the two questions, but I think it's loosely connected enough that you can run with both of them. Yeah. So firstly, I apologize to Jill, but I'm going to be a stickler on terminology here because this is one that can come up and I've seen it come up with SSA. Right. She used SSI benefit. That's a totally different type of benefit.

50:42That's what we call welfare benefits, basically. And I apologize. I know it sounds like I'm being a total pain in the neck here. But sometimes if you ask about SSI to a social security representative, they're going to answer that question and they're not going to give you the information that you actually wanted. So that's just an important distinction here. But to really get to her question, she's saying she's a surviving spouse. So she's currently planning to wait for her own retirement benefit until age 70. So when should she file for a survivor benefit? Well, there is a strategy that's available to surviving spouses that is not available to couples where both people are still alive.

51:19The strategy is called a restricted application. And this is the terminology for exactly what Nick was talking about in his question. A restricted application, it's when you're eligible for two different types of benefits. So in this case, a person is eligible for a survivor benefit and a retirement benefit, but you choose to only file for one of them. So the idea is that you are restricting your application to only one type of benefit. So in this example, Jill could file as early as age 60 because that's the earliest you can file for survivor benefits. So she could file at age 60 for her benefit as a survivor on her deceased spouse's work record.

51:54And she can collect that for 10 years and then turn on her own retirement benefit at age 70 once it has maxed out. The alternative strategy that somebody can do is file for their own retirement benefit as early as possible, so that's 62, and let their survivor benefit keep growing until it maxes out. And survivor benefits max out at full retirement age as opposed to age 70. So you'd be collecting your own retirement benefit starting at 62, and then letting your survivor benefit grow until full retirement age and then filing for it then. And the way you choose between these two strategies, which one to file for first and which one to wait, is whichever benefit could grow to be a larger amount.

52:33So your retirement benefit at age 70 or your survivor benefit at full retirement age, let that one grow to be its maximum amount and file for the other one, the smaller one, as early as you can. That's basically the rule. Wonderful. I love that. I absolutely love when you really just dial into the essence of it. So that's great, Mike. Keep rock and roll. There's one exception, which is if Jill is still working and she's younger than her full retirement age, then we have to get into the earnings test, which I know we're going to talk about in just a little bit. But most of the time, the idea here is file for the smaller benefit as early as you can, let the other one max out, and then file for it at that point.

53:10And restricted application, that's the terminology you want to use with the Social Security Administration. I'm filing a restricted application for just my survivor benefit or just my retirement benefit. Great. And again, the terminology is very important. So Mike's being a little bit of a stickler, but very importantly, very, very, very importantly. So it's not SSI benefit in this case. So yeah, Mike, you alluded to us, we were going to talk about the earnings test a little bit from now, but I think now that it just came up here, why don't we dive into it now? Sure. So there's a rule, the earnings test, which says that if you're younger than full retirement age and you have filed for a benefit, whether that is a retirement, spousal, or survivor benefit, then if your current earnings or your earnings for this year exceed a certain threshold, then social security is going to withhold a portion or even all of your benefits for this year, depending on how much you earn.

54:01So the threshold for this year, for 2024, for somebody who is not going to reach full retirement age this year, so let's say somebody who's 62, 63, 64, the threshold is$22 ,320. And for every$2 above that, your earnings for the year are, Social Security is going to withhold$1 of your benefit for the year. In the year that you reach full retirement age, the threshold is higher. So for somebody reaching full retirement age this year, the threshold is$59 ,520, so considerably higher. And they withhold$1 of benefits for every$3 by which your earnings exceed the threshold. So it's not quite as bad.

54:39Plus, in the year you reach full retirement age, they only count your earnings up to the month of your birthday. So if you reach full retirement age in April, for instance, it's only your January, February, and March earnings that get counted. So it's a lot easier to stay under the threshold. Oh, that's interesting. So regardless of whether you're working the entire year or not, it's only until that birthday. And then in subsequent years, so let's say full retirement age is 67 now, but let's say when you're 68, is it irrelevant whether you're making$400 ,000? Exactly. The earn excess simply does not apply after full retirement age.

55:11Okay. Wonderful. That is perfect, perfect for us to know. So right. This is only until full retirement age. So does the penalty, using that term very loosely penalty, but so there's this 22 ,000 and change you said was the earlier threshold. And then right. It's$1 for every two that you earn. So$1 less in benefits, but then you said the 55 ,000 or 50, 59 ,520, 59 ,000. Okay. So right. That is significantly higher, obviously. And then it's$3 of extra income for every$1 reduction. But are those the only two or is it like a sliding scale to get you there? It's not a sliding scale. It's just this lower threshold for every year before the year that you reach full retirement age.

55:54And then this higher threshold for the year that you reach full retirement age. And then after that, it doesn't matter. Okay. So this is a calendar year thing. So not that this is going to really matter all that much, but it's just satisfying my own curiosity. So, okay. What else do we need to know about earnings? Yeah. The other thing about the earnings test that's super critical is that this is not just a complete penalty and those benefits disappear. It's not that bad. So what actually happens is that when you reach your full retirement age, they make an adjustment to your benefit to account for however many months your benefit was either fully or partially withheld.

56:26So for example, let's say you filed for your retirement benefit 48 months early. And then during those 48 months, so 48 months prior to your full retirement age, that is. And let's say that during those 48 months, you were working, you had earnings over the threshold and on and on. And so your benefit was withheld either partially or fully for 18 months. Then when you reach your full retirement age, they do a calculation and your benefit gets adjusted to what it would be if you had only filed 30 months early because they say, okay, you filed 48 months early, but we withheld benefits for 18 of those months.

56:59So we're going to say it was as if you only filed 30 months early. So it's not as if this withholding is just like poof and that money is completely gone. You get an adjustment to account for it later. Okay. That's nice and charitable. I like that. Another important thing to know about the earnings test, and I saw some questions came in about this is what counts as earnings. And broadly, this is mostly the same as the question of what counts as earnings for your earnings record. So wages count, self-employment income counts, but then interest income does not count. Dividend income does not count.

57:35Capital gains do not count. Distributions from an IRA or a 401k, they do not count. So for the most part, it's wages do count, self-employment income does count, and most of the other stuff does not count. Cool. Again, nice, easy back of the envelope thing to think about. So right, we said before schedule C and W-2, that's kind of the broad strokes for this. Yeah, exactly. Nice. All right, Mike. So I think we've covered that unless you have any additional flavor. And then there was one last thing we wanted to cover today. And like we said, there's almost certainly going to be around three on this, but windfall elimination provision.

58:13This is something we had a shocking number of questions about actually. So yeah, instead of summarizing all the questions, I'll let you just run with that. Sure. So the windfall elimination provision, the WEP, which people often just pronounce as the WEP, is a rule that comes into play when somebody has a pension from work that they did that was not subject to social security tax. So generally, what that means is somebody who's working for a state or local government entity. And so they're not paying social security tax at that job, but they are going to get a pension from that job. So if you have a pension like that, then the windfall elimination provision applies.

58:50And what the windfall elimination provision does is if you think back all the way to the beginning of the episode, when we were talking about how your primary insurance amount is calculated. So step one is they calculate your average indexed monthly earnings, which is the wage inflation, adjust all of your years of earnings, pick the 35 highest, add them up, divide by 420. And that's that monthly amount. And then we take that monthly amount and we multiply it by various figures because there's a 90 % replacement rate for the first little piece of earnings, then 32%, and then 15%. Somebody who's subject to the windfall elimination provision when they do this last step of the math, instead of using 90%, they use 40%.

59:28So it's basically for somebody who had turned 62 this year, the first$1 ,174 of average index monthly earnings, instead of a 90 % replacement rate, it's a 40 % replacement rate. And so the maximum penalty, if you want to call it that, from the windfall elimination provision is the difference between 90 % and 40%, so 50%. So 50 % of 1174. So that's the biggest penalty that you can have from the windfall elimination provision. But it can be less. So there's two ways that it could be less. Number one is that there's a rule that says that the maximum reduction from the windfall elimination provision is half of your monthly government pension.

1:00:12So let's say your monthly government pension was 400 bucks. The maximum reduction from web would be 200 instead of that other amount. The other thing here is that they look at how many years you have, quote, substantial earnings covered by social security tax. And if you have more than 20 years of substantial earnings in the threshold, by the way, for 2024, the threshold is 31 ,275. So if you have more than 20 years of substantial earnings for every additional year that you have, the reduction or the replacement rate figure, instead of 40%, we start to bump it up. It goes 45, 50, 55, et cetera.

1:00:52Until eventually, once you have 30 years of substantial earnings, it's back up to 90%, which is what it would be anyway. So the maximum reduction from web is 50 % of that first bend point in the PIA calculation. But there's two ways that you can have a smaller reduction. Gotcha. Okay, right. And critically, it's just for that first bend point. Like you said, it's just that first amount of the average index monthly earnings that are applied against the 90%. Bingo. Yep. Got it. Okay. So that's very, very, very important. And there's some more to talk about here. Point number one is because it's reducing your PIA, that means it also reduces anybody else's benefit on your work record because all of those things are pegged as a percentage of your primary insurance amount.

1:01:39So that's just an effect of the windfall elimination provision. And then there's a totally separate rule called the government pension offset, which also applies when somebody has a government pension. But it's a separate set of rules, so we can get into that if you want to. Yeah, let's do that. I think that sounds like the perfect place to land the plane here. Okay. So the GPO, government pension offset, this is a rule that kicks in. Again, if you have a pension from government work that was not covered by social security tax. And the way this rule works is it says that any social security benefit that you would get on somebody else's work record, so a benefit that you would receive as a spouse or that you would receive as a surviving spouse, it's going to be reduced by two thirds of your monthly pension amount.

1:02:24And depending upon the size of your pension, that could mean it reduces it all the way to zero. Okay. Well, that makes sense. And yeah, very clear, but important nevertheless. So, okay, Mike, I think that is a perfect stopping point. We got through a whole lot here today. And I think this is going to be really, really helpful. Of course, there's still more to come. And just like always to all of you listening to our community, if you have additional questions, please continue to send them in. The easiest way is just to hit reply to my five weekly newsletter. So if you're not subscribed already, please subscribe.

1:02:56It's really quite a good newsletter. I put a lot of time and effort into it. It's kind of the companion piece to this podcast. So you can find that at chooseavite.com slash subscribe, or really any page on our website, just in the top right corner, we'll take you there. And then just literally hit reply to any of the emails. They come to me and I will catalog them for parts three and beyond here. But Mike, we talked about, obviously, opensocialsecurity.com. We talked about your book, Social Security Made Simple. Is there anywhere else that you'd want to send people or have people reach out to you?

1:03:28As far as reaching out to me, you can just reach me by email, mike at obliviousinvestor.com. As far as other places send people, the tool I mentioned earlier, ssa.tools, is just fantastic. It's free, it's quick, it's easy to use, and it's the best benefit calculator that I'm aware of. Wonderful. I love someone who is really so honed in on getting people the right information that when they're asked, where can they send people? It's to someone else's site, because that is the best piece of information. Mike, I love that. I mean, that says so much about you as a person. So I know it's a little thing, but the little things are the big things in life.

1:04:00So I love that. And we very clearly will have that ssa.tools in the show notes, along with all the other links. You did mention, sorry, it's mike at obliviousinvestor.com. Yes, that's correct. Another website that you have, which is great. So we'll throw that in the show notes as well. And I really appreciate you being here and for all the help and the expertise. Thank you for the invitation. You bet, my friend. Thank you. Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first subscribe to the podcast.

1:04:32So you're listening to this on a podcast player and just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choosefi.com slash subscribe. And it's really, really easy to get on the newsletter list right there. And I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox. So that's the way that I keep a pulse of the community and how we keep this the ultimate crowdsource personal finance show.

1:05:07And finally, if you're looking to join an in real life community, we have choosefi local groups in 300 plus cities all around the world. So head to chooseify.com slash local, and you'll find a list of all of those cities in 20 plus countries all across the world. And if you're just getting started with FI, or you have a family member or a friend who you think would be interested, two easy ways. Chooseify episode 100 is kind of our welcome to the FI community. And even though it's a couple of years old at this point, it still stands up. And it's a really great just starting point to get an understanding of what is financial independence what are we doing here why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life and then choose if i created a financial independence 101 course that's entirely free just head to choose if i.com slash fi 101 and again thanks for listening

1:06:08Thank you.