7 Steps For When to Take Social SecuritySubmitted by Moneywatch Advisors on September 14th, 2018
Financial planning would be much simpler if our clients would tell us exactly how long they plan to live. Is that really too much to ask?
When to take Social Security is one of the key retirement planning decisions one must make and can be complicated, stressful and confusing. While each person’s decision will depend on their own, specific circumstances, here are 6 steps to consider when crunching those numbers.
Social Security isn’t intended to be your sole source of income
Social Security should not be viewed as your primary source of income during retirement. In fact, we often plan that SS essentially be viewed as supplemental payments to your income from investment assets or pension income.
So, your first step in determining when to take Social Security is to estimate your living expenses in retirement and how much of that will be covered by your investment assets such as your 401(k), 403(b) or IRA. More on this later but subtract 4% of your total investment assets from your estimated living expenses – is there a gap? If so, how large is the gap?
Determine your Full Retirement Age
You can lose a lot of money betting on what Congress will do next but it wouldn’t be too much of a surprise if they continue to raise the age of full eligibility. Here is the current chart for determining the age at which you become eligible for a full, unreduced benefit.
- If you were born from 1943 -1954 your full retirement age is 66
- If you were born in 1955 your FRA is 66 and two months
- If you were born in 1956 your FRA is 66 and four months
- If you were born in 1957 your FRA is 66 and six months
- If you were born in 1958 your FRA is 66 and eight months
- If you were born in 1959 your FRA is 66 and ten months
- If you were born in 1960 or later your FRA is 67.
Estimate your monthly benefit at difference ages
While you can receive Social Security as young as age 62, you will only receive 75% of your monthly benefit at that age. On the other end, you can also benefit by delaying taking Social Security past your Full Retirement Age.
Starting at Full Retirement Age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age – 8% times 4 years. I’ll take an 8% return guaranteed by the U.S. Government all day and twice on Sundays.
To determine your individual benefit based on your work history, I highly recommend establishing an account at https://www.ssa.gov/. This will show your monthly benefit at three points: Age 62, Your Full Retirement Age and Age 70.
Will you work?
If you’re a, say, faculty member and you still love to teach or research but don’t work full time, that income can reduce your monthly Social Security benefit in the years prior to your Full Retirement Age. There are too many scenarios to describe here but this is a key factor to consider. When you reach Full Retirement Age, you can earn all you want and your benefit won’t be reduced.
Factor in taxes
Regardless of your age or where your income comes from – wages or investment income – your social security benefits can be taxed based on your income level. Here are the details:
Tax filing status Combined income % of your benefit that will be taxed
Single $25,000 – $34,000 Up to 50%
Single Over $34,000 Up to 85%
Married filing jointly $32,000-$44,000 Up to 50%
Married filing jointly Over $44,000 Up to 85%
The threat of taxation shouldn’t be the sole reason to delay taking benefit payments, but it should absolutely be factored in.
Estimate expense and income sources
To truly determine the best outcome for you, and only you, it’s best to run several scenarios through your financial plan. Let’s look at just one over-simplified example:
- Chandler and Monica are both 64. While their Full Retirement Age is age 66, they just couldn’t stand the grind any longer and decided to retire.
- Their investment assets from their 403(b)s and IRAs total $1.5 Million.
- Their annual living expenses total approximately $125,000.
- A safe withdrawal rate from their retirement account is 4% per year – that totals $60,000 in income they can safely take from their $1.5 Million without taking too much, too soon.
- So, $125,000 in living expenses minus $60,000 in safe retirement income leaves a gap of $65,000.
The question, then, for Monica and Chandler is whether it makes better long-term sense to start taking Social Security payments now, at age 64, or wait until later.
Calculate the time value of your money
Life is full of trade-offs, right? Since there is a gap between Monica and Chandler’s income and their expenses, the money has to come from somewhere:
On the one hand, if Monica and Chandler begin taking social security payments earlier than their Full Retirement Age, their benefits will be reduced and the total amount from Social Security over their lifetimes might be lower.
On the other hand, if they don’t take those benefits but, instead, dip further into their retirement accounts for income, those assets won’t have the opportunity to grow for later in life when they might be needed.
Only by running the various scenarios through their specific financial plan can they make an informed decision of what is right for them. And, if they can tell us how long they intend to live, the calculation would really be much easier.