Today, Paul and Evan talk about the Federal Reserve remaining neutral amidst Trump’s rhetoric around trying to influence the bank and interest rates. The two advisors talk about why they aren’t confident that Trump will follow through on the pressure and dive into some of the history of this independent bank, as well as which countries have not kept their nation’s banks independent and which countries don’t have nationalized banks at all. Then, they switch topics to address a listener’s question about how social security benefits are penalized if you retire early and how to calculate if you’re hurting or helping your benefit if you continue to work past your retirement age.
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Paul Winkler: Welcome. This is “The Investor Coaching Show.” I’m Paul Winkler, along with Evan Barnard hanging out with me today in the studio.
Evan Barnard: Howdy.
PW: Man, good to have you here. I always say, “It’s good to be had.” No, no, no. That’s not right.
EB: I sure can’t work on the property or the garden or anything.
PW: No.
EB: Glad I’ve got something to do.
PW: Thankfully. How long did we go without rain? Good grief.
EB: It’s welcome. It’s welcome.
PW: That was a long, long time.
PW: So I had a blast yesterday with Matt Murphy going on before the debate, just talking about … Why does he always have to give me hard questions? Because I just knew …
EB: He knows you can answer.
PW: Well, I just knew it’d be one of those things that would be so controversial. It’s the whole idea, “We’ve got to shut the Fed down. We need to tear that non-constitutional institution out and throw it in the garbage.”
You hear that kind of debate all the time regarding the Federal Reserve. And, “It was set up in the middle of the night and it’s not constitutional and it’s problematic. They make all kinds of mistakes.” And all of these things.
And people, a lot of times, they don’t know much about the history back in the 1800s where you had these bank runs going on all the time, and I talked about JP Morgan, who called to bail out the banks all the time. It was a financial crisis where just absolutely every few years we would have these runs and you go, “Well, what does a Fed do?” And I said, “It’s a Wonderful Life was a really good illustration of what happens when you have people that panic about the banking system and velocity of money.”
Money has a turn of eight to 10 times, so your money’s not there. It’s in Joe’s house, as Matt and I were talking about.
It’s not where it is. It’s not sitting in the vault someplace.
EB: At this point it’s in the car going down the road and the education expense that was from three years ago.
PW: That’s exactly true. It’s exactly true.
And the idea of auditing the Fed, I said, “Well, there’s an independent auditor.” You don’t hear that in the debate, that there are independent audits of the Fed already and they have their own little arm as well inside, and that’s another layer.
PW: But the thing that always makes me nervous is, anytime that you have Congress, you have the president, you have anybody — and Matt and I talked about that off-air afterward, he says, “I don’t think Trump is going to do anything.” And I go, “I agree. I don’t think that he’s going to do anything either, that he’s going to try to take over the Fed or anything like that.”
There was an article from Brett Arends from Wall Street Journal that was actually talking about, “Watch Out, Retirees: President Trump Doesn’t Understand Interest Rates.”
EB: He probably does.
PW: Really?
EB: Most real estate people have a pretty good handle on interest rates.
PW: And he is making the point that the Fed doesn’t control long-term interest rates. And it’s interesting, there isn’t a direct. That’s true.
There is all this talk about the federal government. And there is reason to be nervous about anybody in Congress, anybody in the government in general, getting control over the Federal Reserve, just simply because they’ll use it for their own political purposes. If there’s anything that I was a student of when I was in college in economics and back in high school, what always intrigued me is how could you get a country to go down a path like Germany went down?
Or how do you get a country to go down the path that Russia went down? How do you get a country to go down the path that China, of course, has gone down? And, of course, I brought up Venezuela, Argentina.
It was funny. I didn’t have to bring it up, but I actually had done a little bit of research just before the show and I wanted to just look. Because I don’t like to ask questions that I don’t know the answers to.
EB: Just like any good attorney.
PW: Pretty much. But what I did was I said to Matt, “Well, can you name me a country that doesn’t have a central bank?” And he’s like, “No.” And I’m like, “Right.”
Because it’s like Andorra and Kiribati. I don’t even know how to pronounce the name of half these countries. Marshall Islands, of course, I can do that. Micronesia, Monaco, Nauru, Palau, Tuvalu.
It’s funny. Who are they? Who are these countries that don’t have central banks?
EB: They’re not even in the emerging market fund.
PW: No, no, exactly.
PW: Then the other thing that I did is, I wanted to look up countries that actually had central banks where there was a lot of government influence, and, of course, the ones that come up are Argentina, and Russia, I think, was one of them. China was another one that I brought up in the interview.
EB: China, yeah.
PW: I couldn’t think of the Panic of 1907 is what it was. It came to me afterward.
But it was the Panic of 1907 that led to the Federal Reserve being something because they would turn to J.P. Morgan. He would go, “Hey, I’m not coming to Washington to talk to you fellas. You’re going to come talk to me in New York and I’ll talk to you about bailing the banks out.”
And you go and say, “Well, what did they have to do?” Well, of course, the Federal Reserve controls … you have the reserve requirements and those types of things.
That is who you actually turn to in order to make sure that you have your reserves that they’re showing there. Because you don’t want to have a situation where you have panics where people pull their money out of the bank and, of course, the money isn’t in the bank, as we established.
So it was a lot of fun just getting into that. It was a little bit of nerd territory, which always makes me a little bit nervous because Matt asks really good questions. And I’m like, “Am I going to know the answer to these things?”
Thankfully, yeah. Thankfully, it hasn’t turned out where I didn’t know the area, because it’s something I study a lot.
PW: But anyway, there was something that we heard. We were listening in on a question that was asked regarding Social Security, and I thought I would just address it really quickly at the beginning of the show here.
Social Security, people often retire early, and they wonder what the penalties are. You’ve got, of course, the penalties if you retire, or you don’t retire, technically you continue to work, 62 to full retirement age for Social Security for a lot of people out there, post-1960, people that are born 1960 and after is age 67.
EB: Woo-hoo.
PW: And before that, you have the gradual move from 66 to 67, two-month increments for when you were born in 1959 or 1958, and you go back to ’59, you got 68 and 10 months, and if it’s ’58, it’s 68 and eight months.
EB: Sixty-six.
PW: Then you go back to 1957, it’s going to be six months. Exactly. You go back two-month increments going backwards.
And the thing is that if you retire before that, you have that penalty of a dollar for every $2 you earn over the threshold, which is close to $22,000 right now. Now, what happens is that they will recalculate your Social Security. If you actually do have that penalty, they’ll recalculate it as if you’re older.
So if you actually paid two years of income or Social Security benefits back, let’s say, because of the penalty, they will act like you’re two years older than you are when you actually get your Social Security back when you hit your full retirement age. Let’s say that you end up with a penalty and you don’t get your Social Security benefit in the last couple of years, just to keep it really simple, and they’ve taken all of your Social Security benefit back, they will actually increase your age, which increases your benefit amount.
It’s not the end of the world.
PW: Now, what can be a problem, and this is the financial planning perspective, the thing that you have to be really, really conscious about is, you can look at it and say, “Do I take it early? Do I take it later?” And I am not a hard and fast rule person.
But that is something, when you’re in the planning process, you’re going, “Okay, how much of my benefit am I going to be dependent upon? Am I more security-related? Do I want to make sure that I have a benefit that is cost-of-living protected?”
Some people try to take their Social Security benefit early because they say, “Hey, the benefits are going to go away because of the trust fund.” And I say, “Well, what happens is, if you take it early or if you take it later, the likelihood is …” And this hasn’t been actually spoken about other than informally; I’ve heard it talked about a lot in political circles that they would just do a pro rata increase.
If you took it early, your benefit is going to go down. If you took it later, your benefit is going to go down. So you’re not beating the system by taking it early.
You’re not going to get out of where the reduction of 20% could happen with your Social Security benefits. Because that’s what happens if the trust fund goes dry, you could actually have about a 20% decrease in the benefits.
Now, the situation is this. Let’s say that I am looking at this and going, “I’m continuing to work.” This guy was asking a question: “If I continue to work, am I going to get more benefits as a result of that?” Maybe.
The whole idea is that they look at 35 years of income and they bring it up to today’s dollars. So the cost of living increases. So whatever your income was 35 years ago, let’s say it’s $10,000, and let’s say that in today’s dollars, that’s like $40,000 is today.
I’m just throwing out a number. It’s not going to be exactly that, but it’s like that. If you look at the purchasing power of $10,000 40 years ago, well, it takes a lot more money to live right now. It might take 40 to live right now.
So they’ll take it up to today’s dollars. If you’re earning income that isn’t any higher than any year in your previous 35 years of data that was looked at, it’s not going to increase your benefit at all. So that doesn’t really help you at all as far as your future benefits.
But I actually had a person recently and they were continuing to work and they were receiving Social Security, as a matter of fact, and this person I recall was … Evan, I think she was 67 or something like that, 68 years old, and she knew it. She was well aware that her benefit was going up as a result of her continued work because she was replacing lower-income years.
So that can happen. That absolutely can happen, that it helps.
PW: The way to figure out whether that will help or not, there is a neat little calculator on ssa.gov and you can actually plug in income in future years to determine whether continuing to work will actually increase your benefits. So that’s out there.
It’s a little bit hard to understand how to work with it, and it may be one of those things you go, “Evan, Paul, you guys do it. Help me out here. This is not my thing. It’s not my wheelhouse.”
And that’s okay, but I just want you to be aware that it’s out there.
I know it stinks that you still have to pay Social Security taxes on income even after you’re receiving your benefits. I know that’s terrible. Right, Evan?
EB: It’s like the tax-free tips. You’re still paying Social Security on all that stuff.
PW: Yeah. And so, it’s one of those things to just be aware that there are tools out there, and it’s cool because sometimes what happens when people project their Social Security, Social Security is going to assume that, for example, your current income is going to be what it is going forward.
And you may be sitting there going, “Hey, well, if I retire right now, here’s what my benefit will be at age 67.” Maybe, maybe not.
Because they’re assuming that your income right now … let’s say you’re working right now and you’re age 61 and you’re working right now and you’re earning a decent income and you’re looking at your Social Security benefit statement, and it says, “At 67 your benefit is going to be $2,700.” Whatever. Well, what’ll happen is, if you do stop working and the system is actually assuming that you’re going to continue to work, that’s when they’re doing their estimates.
It’s assuming that you’re going to continue to work. Your benefit could go down because maybe your benefits going forward, from age 61 to age 67, would be such that it would have increased your benefits in the future at 67.
So you’ve got to recognize what the assumptions are in the Social Security calculators that are online. And if you don’t know what they are, it can throw you for a loop because you go, “Oh, wait a minute, I went and retired and then my benefit went down. Why?”
Because, well, they were thinking when they gave you your estimate that your benefit was going to be a lot higher because of continued work. So just recognize, it’s not that cut-and-dried. You really have to understand the system. Evan, I think probably one of the most complicated, convoluted courses I have ever taken in financial planning was understanding Social Security.
EB: I’ve even taken courses on being whatever, a registered Social Security advisor or something or other.
PW: Oh, did you? Did you do that one too?
EB: Just some stuff.
EB: It’s interesting, you mentioned earlier, not just the math of, “Did I replace a year in the 35 that was below average?” And so forth. But you did mention the factors, and so we have that conversation with clients all the time.
PW: The break points you’re talking about?
EB: No, just the fact of, “Should I take it early? Should I take it later.”
PW: I gotcha. Gotcha.
EB: “Well, no one in my family has made it past 74.” Well, that’s a factor. “Everybody lives to 100.” That’s a different factor too.
So, you look at a lot of things. And sometimes, there really isn’t a choice to be made. “Hey, my lights are going to go off if I don’t take Social Security.”
PW: Exactly.
EB: The decision is made for you, then you’re fine.
PW: Or, “My back is in such bad shape, I’ve got to retire, and I don’t have enough in savings.”
EB: But there are a lot more factors than just, “Oh, there’s 2,400 ways to take your Social Security.”
Do I have children or not? So I’m not worried about leaving assets to the next generation.
PW: What’s your benefit versus the spouse’s? A higher-income-earning spouse, the survivor is going to get that benefit. That’s another thing to think about.
EB: And if any of us were God, Social Security planning would certainly be much easier, but unfortunately, none of us are. And so, you go with the odds.
PW: We live in an imperfect world. Then the other thing that people get confused about is the break-even point, because they misdo the math and the math can be really, really hard to do because of actuarial tables, because of interest rate assumptions and those types of things.
PW: But a lot of times the break-even point, because let’s say you take your benefit early, well, you’re taking a lower benefit for life. You don’t get a do-over. You get a one-year do-over regarding that. If you took your benefit and all of a sudden you recognize, “Huh, maybe it was a mistake,” you can actually go and repay those benefits and redo it as long as it’s within one year.
It used to be you could do that up to age 70, and that was abused. It was really funny when people did it. They’d take their benefit at 62 and age 70 and they go, “Oh, you know what? I think it would really be better to have a high benefit level that I should have had had I waited to age 70.”
And they’d pay all their benefits back from 62 to 70. Used to be able to do that. Isn’t that crazy?
EB: That’s a big chunk.
PW: That was a big chunk. But there were people that did it because they had the savings. I’d seen people do it, but what happens is that you don’t have that do-over again.
And then you’re calculating, “I’m taking a lower benefit for life versus what if I actually wait to age 70 and I get a much, much higher benefit?” Because your benefit increases by about 7%, I’m just going to do rounding. It’s 5%, then it’s about 7%, then it goes to about 8% in the last three years.
So what happens is, your benefit ends up being much higher at age 70 than it is if you take it at age 62. Now, the question is: How many years do I have to receive a benefit, the higher benefit at age 70, and that higher amount that I’m getting to make up for the fact that I didn’t receive benefits between 62 and 70? And that’s when people are doing the calculation on break-even. And typically, that number is in the neighborhood of 8, 9, 10 years, somewhere in that neighborhood.
EB: It just really depends.
PW: It really depends on the person. But yeah, usually around that neighborhood.
So you look at it and go, “Hey, what’s life expectancy?” And those types of things, and all of the other mitigating factors that Evan and I were just talking about.
So it’s not that easy, but there are a lot of the more sophisticated financial planning, not some of these more simplistic Social Security calculators, but there are a lot of ones that integrate with the other finances in your plan. You can make those decisions a lot better if you know that type of information.
PW: So we have … Let’s see. Let’s see. Oh, you know what might be fun, Evan?
EB: Yeah.
PW: “Trump Promised ‘No Tax on Social Security’ in His One Big Beautiful Bill Act. This Democratic Bill Could Actually Do It.”
EB: Oh, there we go.
PW: What do you think about that? So what we have here is, so in the Big Beautiful Bill, we had that $6,000 a piece, the increase in the standard deduction. So you basically have the standard deduction went up to $31,000 and some change, and you also had another $6,000 a piece over 65, Evan? It went for over 65 to $6,000 extra?
EB: Six thousand and 12,000, yeah.
PW: That’s what I was thinking. But it was 65, right?
EB: Yes.
PW: It’s so many different numbers in my head. Sometimes I just go, “Ah, Calgon, take me away.”
So you had that extra $6,000, and the idea being that we couldn’t quite get Social Security. And the reason I proposed that we couldn’t get the Social Security taxation taken away was because the system is in trouble already, the trust fund.
So the idea being that you have payroll taxes that come out, 6.2% on the employer side and on the employee side, and that is how we fund Social Security. If the trust fund runs out — in other words, the extra money that was taken in by the Social Security Administration, the trust fund that wasn’t needed right away because you didn’t have enough people that were actually on Social Security, because of that, because there was all that extra money — you had a surplus fund. Now they’re spending that down and literally at the point where just not enough money is coming in.
Now, the situation is that you could increase the payroll taxes as one of the ideas to do something like that. You could actually decrease the COLA, which is based on labor inflation rates versus the regular CPI, and there are a lot of things that you could do to actually fix that particular situation.
PW: Now, what Trump was doing was he was saying, “Hey, let’s do this. Let’s take taxation off of Social Security.” Because for forever, we had these thresholds of $25,000, $34,000, $32,000, $44,000, and the idea being that, if your income has exceeded those numbers, anywhere from 50 to 85% of your Social Security becomes taxable.
It’s not taken away. It just becomes taxable.
Now, the Big Beautiful Bill, the idea was going to be to have some kind of a reduction in taxes or get rid of the taxes on Social Security, but that got torn up. Because if you take away the taxes on Social Security, you take away one of the things that was helping make sure that we had funding for Social Security.
Now, the system went under one year or two years earlier if you went and took away the taxes. It wasn’t the end of the world, but it got demagogued pretty well in the media, and that ended up going by the wayside.
So what happens is, you have Democrats come up with this new act that they’re talking about, a new proposal from an Arizona Democrat. I love the name of it. This is marketing.
EB: I can’t wait to hear the acronym. This is news to me.
PW: Oh, it’s not an acronym. It’s just: You Earned It, You Keep It Act.
EB: Oh, there you go.
PW: You earned it, you keep it, Social Security. And who wouldn’t like that? The idea that “You’ve already taken this, this is tax money. You have this money.”
But it’s basically billed as an investment fund, that money is being put aside for your future. That’s the way it’s been sold forever, even though that wasn’t necessarily what was going on.
So anyway, they said this “would eliminate taxes on Social Security benefits entirely. The bill, introduced in the Senate on Thursday, follows a House of Representatives version” from another Minnesota Democrat and a New Jersey Republican. The bill would eliminate taxes on Social Security, called the “No Taxes on Social Security Act.”
“‘Like a lot of Americans, I’ve been paying into Social Security since my first job at 14. But despite decades of paying into the system, seniors are still forced to pay taxes on their hard-earned benefits.’” And a lot of people, they do, they bristle at that whole idea.
Now, how are they going to do it? That’s my question. Well, it says the bill “expands the Social Security payroll tax to cover earnings above $250,000 a year.”
EB: Geez.
PW: Yeah.
EB: So are they going to leave a gap between whatever the current is, 156 and 250?
PW: Yeah, the donut hole thing, I think that that’s what they’re saying. Yeah.
EB: Or they’re going to restart it above 250?
PW: Yeah, Evan, I think that’s exactly what it is, that donut hole idea that they talked about, is to do it that way. That’s as best I can gather. The article wasn’t really totally clear about that, but that’s probably what they’re looking at doing right there. Something like that.
PW: Because the idea being that people that have higher incomes, they don’t vote, or they don’t have the voting power that lower-income people do. Now, the problem that you run into is, you take these payroll taxes, you look at another 6.2% on both sides for a lot of self-employed people, you throw another 12% tax on top of income taxes that are 40%, at what point do you go, “That’s probably enough”? And I don’t know about you, man, but I have clients that are going, “I’m taking my toys and I’m headed over to another country when I retire.”
EB: We have that conversation more frequently than in the last 10 years.
PW: Do you?
EB: Yeah.
PW: I think it’s interesting. And I’ve had some head down south, not to Mexico.
EB: Well, we’ve got clients in Panama now.
PW: I was just thinking of Panama, that area. I’ve had some people talk about that.
EB: It’s beautiful.
PW: Yeah. Well.
EB: The dollar goes a long way.
PW: I had one, his wife, I forgot what country she was from. She was from the Far East, and she grew up in a country that he was like, “I’m fine if we go there. I’m okay going there.”
And you have some people that just say, “Hey, this is how much further my money can go if I go to …” The big thing that has been talked about a lot in the media recently is the level of healthcare in other countries, people getting dental work down in Mexico, and it’s hit and miss, but some of it is really, really high quality. You have some people that have been doing that, getting different types of operations.
EB: Medical tourism.
PW: It is a big thing. Hair transplants over in, where is it? I should be able to remember this.
EB: Hair transplants, wow.
PW: Not because I’ve been personally thinking about it, but I’ve had people that have actually asked me about it.
EB: I do wear hats now when I mow the grass.
PW: There you go.
EB: But when you were doing the tagline of the bill, the “You Earned It, You Keep It,” it’s interesting that the Democrats view Social Security that way, and yet if you’re making over $250,000, “You Earn It, You Keep It” just kind of flies out the window.
PW: Oh, Evan, that’s exactly what went through my mind.
EB: Wait a minute.
PW: We think way too much alike.
EB: This isn’t working.
PW: That is exactly what went through my mind.
EB: It’s like Dr. Phil. “How’s that working for you?”
PW: Yeah, exactly. It’s the same exact thing.
EB: Apparently not.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
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