The following is adapted from Income for Life.
Social security will represent several hundred thousand dollars of income (or more!) over the course of one’s retirement. Moreover, it has the benefit of being inflation-adjusted, which is of enormous value in planning income that will need to last for, potentially, decades. As such, one of the most critical decisions in any retirement income plan is determining the point at which Social Security benefits should be claimed.
Many people tend to underestimate the impact of Social Security on their retirement, and as a result, may make poorly informed decisions about when to claim their benefits. They may make hasty decisions based on the media’s cry of Social Security going bankrupt. It is true that both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. However, according to the 2019 OASDI Trustees Report, Social Security will be 100% funded through 2035, and after that 75% of scheduled benefits are projected to be funded through the end of 2093. (How the recent and ongoing medical and financial crisis will impact these numbers is presently unknown.) However, between now and 2035, lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall. So what that means is that for anyone reading this article, you are assured to receive, at the very least, the majority of your social security benefits.
Source: The 2019 OASDI Trustees Report
Fortunately, with some basic education as to how Social Security will affect your income throughout retirement, it’s a decision that can be made with confidence. Here’s what you need to know.
Determine Your Lifetime Earnings
The total amount of a retiree’s Social Security benefit is dependent upon two primary factors: lifetime earnings, and the age at which an applicant chooses to begin receiving their benefit.
Determining your Social Security benefit amount is as simple as logging onto the Social Security Administration website at www.ssa.gov and establishing online access.
The total amount of Social Security benefit to be received is calculated based on the average of the highest thirty-five years’ worth of workforce earnings. Any years during which no income was earned for any reason will be listed as a zero, and when included in an average, these zero sums can significantly and negatively impact your Social Security benefit amount.
Understand Your Timeframes
Social Security benefits can be accessed as early as age 62. However, it’s important to note that a significant and irrevocable financial penalty is assessed to those who apply before full retirement age. This penalty can represent a reduction of anywhere from 25 to 30 percent of your Social Security benefit, and will remain in effect for the remainder of your lifetime.
If you turn 62 in the year 2020, your full retirement age is 66 years and eight months; it will gradually rise to age 67 for those born in 1960 or later. Every extra year that a person waits to claim Social Security benefits between the ages of sixty-two and full retirement age increases their Social Security benefit by an average of 5 percent. This represents a 5 percent growth on guaranteed, inflation-adjusted income.
Those who apply for benefits between full retirement age up to the age of 70 will increase their benefit by an average of 8 percent per year (in other words, they will maximize their potential benefits). After the age of 70, there is no further benefit to waiting to claim.
This means that the difference between claiming Social Security at 66 and at 70 represents an approximate 32 percent increase of the total monthly benefit.
As a result, waiting to claim your Social Security benefit until the age of 70 pays off significantly. For example, a retiree who will earn $1,950 per month by claiming his retirement benefit at age sixty-two will increase his benefit amount to $2,600 by claiming at age 66. This amount balloons to $4,212 per month by waiting until age seventy. This final amount is more than double what the retiree would receive were he to claim his benefits eight years earlier at age 62.
Consider Your Family and Health
There are a few legitimate reasons for opting to claim Social Security benefits at an earlier age. Factors that may impact this decision include personal health, family history, and marital status.
Those who are single and in poor health, or who have a family history of early death may be wise to claim their benefits closer to age 62. Determining factors in this scenario include a lower life expectancy and the fact that spousal longevity is not a consideration.
However, a person who is healthy, has a family history of long life expectancy, and/or has a spouse’s lifetime to consider should generally opt to delay for as long as possible, even though it may mean deciding to work a little longer or temporarily over-withdrawing from an IRA or investment account to bridge the income gap.
Spousal retirement planning is slightly more complex for the simple reason that two lifetimes, not one, must be considered. With two lifetimes to consider, the likelihood of at least one spouse reaching the age of 90 or beyond increases significantly. In the event of a death, the surviving spouse will continue to receive only the higher benefit amount for the duration of their lifetime. Therefore, generally speaking, the higher-earning spouse should delay claiming Social Security benefits for as long as possible in order to maximize income during their lifetime as well as for their spouse’s lifetime.
Here’s a real-world example: A client of ours was determined to claim his social security benefits at age 66. When we asked him why, he said, “Well, in order to break even on what I contributed, I’d need to live to my mid-seventies. What if I don’t live that long? I want to claim as soon as I can, so I can be sure to at least break even.”
“Mark,” we said, “Have you thought about how long Mary is going to live?”
He, as the higher wage earner, hadn’t thought about his wife’s life expectancy in the context of Social Security claiming. We laid out the numbers for Mark, showing his benefit at age 66 and at age 70. It turned out that the difference between claiming his Social Security benefits at 66 versus 70 would cost them a total of $350,000 over the combined estimated lifetimes of him and his wife. In other words, if his wife outlived him, he’d be costing her over a quarter of a million dollars.
Social Security is Part of an Overall Retirement Plan
Don’t make your Social Security decision in a vacuum. Consider it as part of a coordinated retirement income, investment and tax plan. Research all of your options so that you can understand how Social Security will affect your retirement income plan long-term.
Social Security is complex. There are many claiming strategies out there that you may run across in your research, and it can be confusing to figure out which strategy to take. We ourselves—experts in our industry—routinely seek outside advice from dedicated Social Security experts, because the subject is so complex. We recommend that you do the same before any decision is set in stone. As well, one should understand the unique tax implications Social Security brings to the table and plan accordingly.
Whatever you do, take Social Security seriously. Include it in your retirement planning considerations with the same weight you give to planning the rest of your income streams. Once you’ve made a good decision, you can relax; it’s behind you, and you can simply enjoy the benefit.
For more advice on social security, you can find Income for Life on Amazon.
Joseph DiSalvo, ChFC, AIF and Marie L. Madarasz, AIF of Quest Capital & Risk Management, Inc. are committed to bringing their clients the clarity that will promote and enhance confidence in the future. For more than two decades they have used a proven process that helps clients think through how best to structure and manage their resources in order to produce a growing stream of retirement income for life. As experts specializing in all aspects of Retirement Income Planning, they are passionate about the coordination and integration of their clients’ income, investment, and tax planning strategies in order to help clients live the life they’ve worked hard for. Joseph and Marie are strong advocates of financial education, seeking to teach others how to achieve sustained success and lifelong prosperity.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.