Social Security - Make Your Decision Easier With 9 Questions

Social Security may be one of the largest “assets” you have available to you in retirement. You may not think of it as an asset like a house or a 401(k), but since it could potentially provide monthly income to you for 30 year or more (and adjusts for inflation), it may be “worth” more than anything else you own. Technically, Americans don’t “own” anything in the Social Security system. Instead, it’s a promise made by the government through Federal laws and funded by tax revenue. However, as long as the system doesn’t change dramatically in the years ahead, that promise may be worth a large sum if you live to life expectancy or beyond.

Educated guessing may work in a fantasy football league or a game of blackjack, but not Social Security income.

So when should you begin drawing your Social Security benefit in retirement? If you’ve read articles that tell everyone to claim their benefit at age 62 because the system may change one day, that’s a general rule of thumb. If you’ve read articles that tell everyone to claim their benefit at age 70 because it maximizes their monthly benefit, that’s also a general rule of thumb. You know what I think of general rules of thumb? Thumb your nose at them! When to begin drawing your Social Security benefit is an extremely important decision that could greatly impact your retirement, as well as a spouse’s retirement. Educated guessing may work in a fantasy football league or a game of blackjack, but not Social Security income. Why? You’re making a decision today that has long-term implications. I understand it can be very difficult for us to think 10, 20 or even 30 years into the future because we normally don’t plan our lives out that far. I'm guessing you plan your vacations a few months to a year in advance. Do you plan anything else out beyond a year? Well hopefully you’ll think about your Social Security decision this way. It takes long-term thinking.

Over the years, I've seen complex articles on the topic of when to take Social Security benefits. Instead of throwing formulas and statistics at you, let’s make this simpler. I've compiled what I feel are some of the most important factors to consider when deciding on when to take your Social Security benefits. Although I do believe precise calculations are the ideal way to make this decision, these concepts do hold weight in making a professional recommendation on when someone should begin taking their benefits. Before we start on those concepts, it’s worth mentioning the importance of having a formal plan for your overall retirement goals. When I mention having a “plan,” I'm talking about using software to help estimate what your retirement future may look like based on how much you’re saving each year for your retirement goals, how much you’ve saved up for retirement already, the tax implications of making withdrawals from your savings, the implications of buying or selling a house in retirement, estimating inflation in retirement and more. Even as a group of independent financial planners, we don’t rely on spreadsheets or pen and paper to make these projections. Take advantage of today’s technology to make this easier for you (and probably more accurate). To create a financial plan, you can speak with a CERTIFIED FINANCIAL PLANNER professional or you can purchase software on your own, such as ESPlanner.com. Either way, this will help you better understand your probability of success for your overall retirement goals, plus you can run different scenarios for when to take your Social Security benefit (more on that below).

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Before we get into the factors below, let’s make sure you know some quick basics about Social Security income. Social Security has calculated your “full retirement age” based on when you were born. This age will be between 65 and 67. For example, if you were born between 1943-1954, your full retirement age is 66. You can begin claiming your benefit as early as age 62 (regardless of when you were born), but you will receive a smaller monthly benefit. For example, if your full retirement age is 66 and you begin drawing at 62, your benefit will be reduced by 25%. If you delay taking benefits beyond your full retirement age, you will be rewarded with “delayed retirement credits.” Keeping with our example of age 66 being the full retirement age (and born in 1943 or later), your delayed retirement credits amount to 8% per year until age 70. In this example, waiting from age 66 to 70 could give you a 32% increase in your full retirement age Social Security benefit (plus, adjusted for inflation, plus a spouse may be able to receive this benefit after your death). See why this could be such a big decision? Below are other factors to help you:

Are you married?

• Yes – This can favor delaying. If you’re married and one spouse’s benefit is larger than the other (one spouse earned more than the other while paying into Social Security), you may want to maximize the larger spouse’s benefit by delaying. Why? Because if the spouse with the larger benefit passes away, the surviving spouse may be able to “take over” that benefit. In essence, instead of continuing to claim their own smaller benefit, they begin taking over monthly income from the larger spouse’s benefit instead of their own. Plus, it’s adjusted for inflation for as long as that surviving spouse lives. This can potentially amount to a large amount for both spouses if one survives the other.
• No – Neutral factor. Arguments could be made for taking your Social Security benefit early, at full retirement age or delayed.

Are you conservative with your investments?

• Yes – This can favor delaying. If you’re relatively conservative with your investments and don’t have much of an opportunity for long-term growth, delaying your Social Security benefit may be a great way to “grow” your income. In the example above, delaying past a full retirement age of 66 offers you an 8% annual delayed retirement credit. If your investments are expected to earn less than that, it may be a great way to boost your income.
• No – This can favor drawing early. If you’re relatively aggressive with your investments, you may be more interested in the growth potential of your portfolio than waiting until your full retirement age or later to draw Social Security benefits. Also, if your portfolio were to drop in value during a recession, it may help to have your Social Security income to help pay for your needs instead of selling your investments while they’re down.

Have you saved much for retirement?

• Yes – Neutral factor. If you have $5MM saved up for retirement and you need $100,000 per year to live, your retirement probably looks good. The decision on when to draw your Social Security benefit matter less and less with more and more wealth. In other words, do you think Bill Gates cares much about his Social Security benefit?
• No – This can favor delaying. If you haven’t save much to a 401(k) plan or investment account and you’re close to your retirement goal, Social Security may be your primary source of income. If so, treat it as if it’s your primary source of income. If possible, consider delaying this benefit by working longer or living on ramen noodles so you can delaying taking this benefit. Okay, I'm kidding about the ramen noodles, but you get the idea.

Do your family members have longevity?

Yes – This can favor delaying. The longer you expect to live in retirement the more expensive your retirement may become. Delaying your benefit in exchange for a larger monthly amount may be a great way to help cover your healthcare expenses in retirement and take pressure off of depending on your investments.

No – This can favor drawing early. If you want to retire at 62 and your parents and grandparents didn’t live past 75, it may make sense to draw your benefit early and enjoy it. It’s hard to tell how long we will all live, but if your family history repeats itself, you may be glad you took retired and started enjoying the fruits of your labor.

Do you have good health?

Yes – This can favor delaying. This is similar to the family longevity topic above. If you’re in good health and don’t foresee that changing any time soon, you may be looking at a longer (and more expensive) retirement. Having a larger Social Security benefit can help with longer and more expensive retirements.

No – This can favor drawing early. If you have cancer or other health issues that make it hard to predict your life expectancy, it may make sense to draw your retire, draw your benefit early and enjoy it.

Can you earn part-time or consulting income after you retire?

Yes – This can favor delaying. One of the greatest challenges with delaying Social Security benefits is retiring and finding income from other sources. You may be able to do that with a pension or investments, but it may not be enough to meet your needs. Plus, the more you draw from your portfolio early in retirement, the more pressure you put on those investments to last all the way through your life expectancy. This is especially true during market downturns. If you have the ability to retire at 62, but keep earning income part-time or through consulting work, you may be able to meet your income needs until full retirement age or even age 70 (the maximum age to claim a maximum benefit). If you don’t really need the income when you retire, consider delaying.

No – This can favor drawing early (or right when you retire). You may have saved a decent sum to your 401(k) or other investment accounts over time. Hypothetically, you could draw from your investments right when you retire and delay taking your Social Security benefit until a later date. However, drawing too much from your investments can have an exponential impact on your retirement future in your late 70s, 80s or 90s. Drawing too much (and too soon) means that principal you may have spent won’t have the chance to grow ever again. You spent it. Spending down your assets in retirement is normal, but it requires strategic planning to try and make it last long-term. We’ve prepared many different calculations for people that want to know when to draw their Social Security benefits. If they don’t have a pension or part-time income available in retirement (only investments), the math usually favors drawing your benefit as soon as you retire. Please note, that’s not always the case, so having a financial plan is important.

Are you considering working full-time while you draw your Social Security benefit?

Yes – This can favor delaying. First, keep in mind that the Social Security Administration may force you to give up some of your benefit if you draw before your full retirement age and your earned income is over a limit they set annually. If you’re in the "middle class" or higher, you probably make more than this limit. They do eventually recalculate your Social Security benefit when you reach your full retirement age for any amounts they forced you to give up, but drawing your benefit while you’re working full-time may not make much sense if you don’t really need it. Plus, working full-time and drawing your benefit before full retirement age can have a negative tax impact for your Social Security benefit too. Once you’ve reached your full retirement age, the Social Security Administration doesn’t force you to give up any of your benefit any longer if you still work and earn more than their limit, but the tax issue can still exist. Just remember, if you don’t really need your benefit, consider delaying.

No – Neutral factor. If you plan on fully retiring before claiming your benefit, your decision on when to actually claim is weighted more to other factors mentioned in this article.

Do you think the Social Security Administration has made empty promises they can’t or won’t keep to Americans?

Yes – This can favor drawing early. If you seriously fear your Social Security benefit may not last very long after you retire due to legislative changes or an economic issue in the US, consider drawing your benefit early. Once you’ve collected your money from Social Security, it’s yours. Although there are solvency issues with Social Security expected in the years ahead due to the Baby Boomer population and American longevity, don’t let this fear weigh heavily on your Social Security decision. I feel the system will change in the future, but it’s unlikely it will completely go away.

No – Neutral factor. As mentioned above, I expect the Social Security system will be here for the Baby Boomers and future generations, but it will likely look different. Congress may decision to tax workers more to help pay out benefits, they could delay the full retirement age or penalize early retirement more, or they could even remove the inflation adjustment on future benefits. If you think Social Security will be around long-term, use other factors to help make your decision.

Are you eligible for benefits on someone else’s record? (such as a widow, widower or surviving divorced spouse)

Yes – This can favor delaying. If you’re able to draw benefits on someone else’s Social Security record, you may be able to use some unique strategies to maximize either your own benefit or this benefit from another record. For example, if you qualify for benefits from an ex-spouse that has since passed away, you may be able to begin drawing that benefit at age 60 (that’s not a typo) and allow your own benefit to delay and grow until you age 70. Speak with the Social Security Administration or an independent financial planner about your eligibility and the complex rules surrounding these types of strategies.

No – Neutral factor. Don’t worry about not having this as an option. Dad things like death or divorce (or both) may need to occur for you to qualify for someone else’s record.

Aside from the factors above, please also remember that, under current law, Medicare eligibility begins at age 65. If you plan on delaying your Social Security benefit beyond age 65, remember to file for Medicare. If you’re not covered under another health plan, such as one from full-time work or a retiree health plan, and you want to enroll in Medicare, be sure to contact the Social Security Administration about three months before you turn age 65. Even if you are covered under another health plan, some of these plans change once you reach age 65, so check to see if you need to file for Medicare.

As you can see, when to take your Social Security benefit involves so many factors. I didn’t list all of them here, but I did list some of my favorites. Whether it’s you that’s coming up on Social Security or someone you care about, make sure these factors are considered before you make the “big decision.”

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Source: www.ssa.gov/planners/retire (data not dated)

Content in this material is for general information only and not intended to provide specific tax, legal or investment advice or recommendations for any individual. Laws are subject to change and you should consult with your attorney or tax advisor for guidance on your specific situation.

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