A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
Hello there. David McKnight. Welcome to The Power of Zero show. Grateful you could join us. I’m the author of the best-selling book The Power of Zero, as well as Look Before You LIRP, and The Volatility Shield, all of which can be found at davidmcknight.com. I’ve got some good news on that front, the Audible of The Volatility Shield is now available, of course, The Power of Zero and Look Before You LIRP are also available on Audible. Those can be bought only on Amazon.
Today, we're going to talk about the oft-posed query, “When should I take my Social Security?” Now this answer can change dramatically if looked through and considered through the lens of The Power of Zero worldview. First of all, when should you take Social Security? I'm going to tell you that it all really comes down to this: how long are you going to live? If you can predict how long you're going to live, then you can accurately predict at what age you should draw Social Security. How often do people say, “Hey, I'm going to retire at 70, draw Social Security at 70,” and then die at 71? Obviously, that mathematically didn't work out for him. I've got a friend whose dad died at 63, had he known he was going to die at 63, he would have taken Social Security at 62. The bottom line is it really depends on how long you're going to live. The question becomes: How do you figure out how long you're going to live? My experience shows that one of the surefire ways to figure out how long you're going to live is to simply go through the underwriting process for the LIRP. Remember these underwriters who are evaluating your health situation are like oddsmakers in Vegas, they're in the business of predicting how long you're going to live and they're pretty darn good at it. They're basically betting money, i.e. your death benefit, that you are not going to die anytime soon, they need you to live long enough so that they can have it be a worthwhile investment for them and ultimately provide you with the protection that you need in the event that you die or should end up needing long-term care.
What we found is that if you can go through the underwriting process—and remember, when you go through the underwriting process, you can get 1 of 30 different ratings; 1 means you walk on water, you're going to live forever, 30 means they gotta kind of hold out the mirror and see if you fog it, and then you can get everywhere in between. The closer you get to a one the longer you're going to live, and the longer you should put off taking Social Security.
Now what I'm going to discuss next presupposes that you are going to live a nice long life. I'm going to tell you that you should put off Social Security if you're going to live a nice long life and if in that underwriting process, you get a one, two, or three, you should really put off Social Security as long as you can. Remember that each year after your full retirement age that you put off Social Security, your monthly benefit increases by 8% per year. A lot of people who are undertaking The Power of Zero worldview, or they're shifting assets from taxable, tax-deferred to tax-free, are doing—particularly with tax-deferred to tax-free—they're doing so by way of a Roth conversion. When you do a Roth conversion, that is provisional income. If you take Social Security during the years where you are doing a Roth conversion, then that will cause up to 85% of your Social Security to become taxable. That's the first reason why I'm not a big fan of taking Social Security at an early age, because if you're taking Social Security while you're doing that Roth conversion, you sort of lock into a taxable portion of Social Security. Not only that but if you take it at 62, you are locking into the lowest possible amount that you could receive for Social Security.
If you were to take Social Security at 62 while you're also doing Roth conversions—you're taking advantage of this 7-year sale that we have, while taxes are on sale, we know that they expire January 1, 2026, so you want to spread the tax liability out over 7 years—if you're doing Roth conversions during those 7 years and you're also taking Social Security, what have you done? You've locked yourself into the lower amount—we've already discussed that—and you've also locked yourself into a taxable amount. While you're doing those Roth conversions, your Social Security will be taxed. There's an opportunity cost on that. Whatever money you give up by way of tax is money that you could have saved and invested and had that interest accrued to your benefit over the balance of the rest of your life.
Two points I really want to drive home here, number one, if you take Social Security early, you lock into a lower amount. If you do it while you’re taking Roth conversions, you lock into a lower amount that's also taxable. That's why if you're going to live a long life, I'm a big fan of pushing off Social Security as long as you can. Take it at age 70, you're locking into a much higher amount, mathematically speaking, you'll be able to take more money out because the longer you live, the better off mathematically speaking you are to take the Social Security later on in life. But also, if you get all of the Roth converting done by the time you take Social Security, you can get yourself to a 0% tax bracket, get your provisional income, if you're a married couple, get your provisional income below that $32,000. Now, all of a sudden, what have you done? You've locked yourself into a higher amount that's also tax-free. You never give up any tax for your Social Security. There's a lot of benefits of pushing Social Security off especially if you're going to live a long life, especially if you're planning on doing Roth conversions. It doesn't make a lot of mathematical sense to take Social Security early if you plan on doing a lot of assets shifting, and especially if you plan on living a long life.
It really comes down to this: how long do you think you're going to live? Figure out how long you're going to live by going through the underwriting process, see if you can qualify for an LIRP, if you’re going to get a one, two, or three, it makes sense to push Social Security off as much as possible. If you go through the underwriting process and you find out you're going to die at age 70, forget everything I've talked about so far, don't worry about pushing Social Security off, take Social Security immediately, that's going to work out ultimately in your best favor.
In summary, if you're not going to live very long, take Social Security as soon as you possibly can, if you're going to live a very long time, push Social Security off as long as you can, get your Roth converting done. In the meantime, fund your LIRP, if you're doing it out of your tax-deferred bucket, do that in the meantime, and take Social Security at age 70 where you can lock into a much higher amount that's also tax-free.
Again, folks, opportunity cost, there's a huge opportunity cost when you pay a tax that you didn't otherwise have to pay, not only do you lose that tax, you lose what that tax could have earned for you had you been able to keep it and invest it for the rest of your life. I didn't want to spend a lot of time on today's podcast other than to tell you that if you are adopting The Power of Zero worldview, if you are implementing The Power of Zero strategy, it's my strong recommendation that you push Social Security off as long as you can, so long as you plan on living a nice long fruitful life.
Again, if you want any of our books, The Power of Zero, Look Before You LIRP, or The Volatility Shield, you can get them in hardback or paperback, for those last two, you can get them on Kindle, and now you can get all three in Audible. I’m very, very happy with how The Volatility Shield Audible turned out. If you would like to buy any of those books with bulk discount, you can go to thepowerofzerobook.com, you can go to lookbeforeyoulirp.com, or you can go to thevolatilityshield.com, and you can get all those with bulk discounts.
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Thanks for being on the show. Again, if you need to get a hold of me or have any questions, you can email me directly at davidmcknight.com. Thanks for being on the show today and we will look forward to talking to you next week.