Written by: Michael B. McKay & Sarah Clayton
Deciding when to start taking Social Security can be an emotional decision for clients. After spending decades paying into the program, many people feel they need to see their money as soon as possible; yet, prevailing attitudes have little confidence in the durability of the Social Security system. Despite this lack of faith, “for most middle-income retirees, Social Security is the foundation of retirement income, providing anywhere from half to more than three-fourths of total retirement income.”1 The choice of when to take their benefits can have a huge impact on how much of an advantage clients receive.
Most couples use a break-even analysis (determining the age when total lifetime benefits received would be equal to those received at a different claiming age2) to decide when they should draw their benefits, but the downside of this method is that break-even analyses can push clients towards claiming their benefits earlier than they should for fear of losing benefits.2 Clients should be aware of the longevity risk (the risk that you will outlive your resources in retirement) they undertake if they withdraw benefits before age 70. Many people are living to be older and staying healthier longer, thus putting themselves in danger of outliving their income. “A maximized Social Security benefit with inflation protection is highly valuable” for those who may live long enough to exhaust their savings.2
There are plenty of reasons for deferring to age 70, but the largest is the guaranteed return that can be made by waiting. If your Full Retirement Age (FRA) is 67 and you defer to 70, you will receive 124% of your primary insurance amount, which is a 65% increase compared to taking benefits early at age 62. This percentage increase is even larger in those whose FRA is less than 67 – it can be up to 76% which equates to 132% of your primary insurance amount. (Check what your FRA is here: https://www.ssa.gov/planners/retire/agereduction.html). “Every year you hold off claiming benefits from age 62 to 70 effectively guarantees you an annual return of 6.5% to 8.3% on the amount you could generate.”1 This income is guaranteed to be cost-of-living-adjusted for the rest of an individual’s life.3 This adjustment is significant because older investors tend to be more conservative and may have a lower percentage of equities, resulting in a lower rate of return. To be able to meet the rate of return possible by deferring to age 70, investments would have to retain a larger amount of risk, which could result in losses instead of the needed gains.
In addition, if you take Social Security prior to your Full Retirement Age and are still working, you lose $1 for every $2 of benefit paid when earning more than $17,640 per year (2019), but this earnings limit disappears once you reach FRA. Up to 85% of your Social Security benefit is taxable, so by continuing to work while receiving benefits, you are increasing your amount of taxable income which could result in a higher tax bracket. Remember: this is a lifetime increase or decrease, whether you choose to take your benefits at age 62 or 70. Despite these advantages, the Social Security Administration released a statistic that only 4% of people wait until age 70 to take their benefits.
Some advisors recommend a timing strategy to married couples, in order to take advantage of survivor benefits. If the higher wage earner delays filing as long as possible, a surviving spouse can receive a survivor benefit equal to 100% of the deceased spouse’s benefit. Widows/widowers are entitled to receive either their or their spouse’s benefit (whichever is higher), but they can also make the choice to take the lower amount and let the higher amount continue growing. Individuals who are reaching Full Retirement Age or older in 2019 can defer their own benefit in favor of receiving half of their spouse’s if their spouse has already filed. Meanwhile, they can allow their own benefit to continue to grow by 8% a year up to age 70.3 Unfortunately, this strategy is only valid for 2019 and will no longer be available in 2020. If you were born in 1954 or later, you are entitled to whichever benefit is higher at the age you claim.
Another benefit is for divorced clients – they can take spousal and survivor benefits from their former spouses. “If you are married at least 10 years, divorced, and currently single, and you turn [your FRA] this year, you too can say, ‘Don’t pay me my Social Security retirement benefit… Pay me only as a spouse on my ex’s earning record.’”3 This arrangement can be handled without your having to discuss it with your former spouse. (The SSA offers a longevity calculator at: https://www.ssa.gov/oact/population/longevity.html).
There are some conditions which could make withdrawing benefits early a sensible decision – if you are in poor or declining health, if you need supplementary income to meet monthly living expenses, or if you have exhausted all other means for retirement. If none of the above applies to your situation, it is worth considering deferring to a later date to avoid the lower benefits for life, including lower survivor benefits for a spouse.
Delaying might seem difficult for middle-income Americans, but there are strategies that can be implemented to bridge the gap. For one, continue working if possible, especially if under FRA, to avoid benefit deductions. Also, cut down discretionary expenses in the first years of retirement to give yourself a cushion against the previously mentioned longevity risk. As you age and your retirement accounts are subject to Required Minimum Distributions (RMDs), it is helpful to consider your Social Security income as a “retirement paycheck” to help cover monthly expenses, and your RMDs as a “retirement bonus.”1 Placing these bonuses into stocks allows you some wiggle room for greater returns. Just because you are required to take the money out of your retirement account does not mean you are required to spend it.
Since no one can predict their or a loved one’s life span, when to take Social Security is not a clear-cut choice. Your individual situation should be discussed with your LongView Advisor; however, we hope that the above information helps you to make a more informed decision.
1 O’Brien, Elizabeth. “The Best Way to Guarantee More Money in Retirement.” Money May 2018: 35. Print.
2 Miller, Mark. “Show Me the Social Security Money.” Wealth Management July/August 2018: 36. Print.
3 Benz, Christine. “Why This Is a Pivotal Year for Claiming Social Security.” Morningstar, 08 July 2019, https://www.morningstar.com/videos/934599/why-this-is-a-pivotal-year-for-claiming-social-sec.html.