When should I take Social Security?

If we knew the numbers after the birth and “-" on our tombstone, it would be easy to calculate the break-even age where we would receive the most benefit from Social Security because we’d know how many checks you get.  The earlier you take social security, the smaller your checks will be, and the longer you wait, the bigger the checks will be.        

It’s not surprising that the majority of people take Social Security as early as they can at age 62 -  over 34% in 2018 - although from a financial standpoint almost no one should.   Perhaps the early-takers thought “it might not be there later”.  However, we are dealing with the federal government who has the inherent power to tax persons and properties to raise revenue (or add to the mountain of debt), so of course something should always be in that pot.  (You know, they can print it too!)  The ssa.gov website says full benefits are solvent until 2037.   What will happen when the “trust fund” is exhausted AND benefits exceed collections?  One proposal is to reduce the benefit; another idea is to increase the payroll tax rate, or perhaps a combination of these two changes.  This would allow the program to be solvent for another 75 years. If you aren’t planning on living past 2095, you should be covered.    

Without going into too much history, suffice it to say that Social Security has changed over the years.   Prior to 1982, it was not taxed; but now 50% or even 85% of benefits are taxed for most households.  If you are the unfortunate victim of lack of planning and your only source of income is Social Security, you likely will avoid income tax on your small benefit.  

Calculating Benefits:   Everyone has a full retirement age (FRA) through Social Security which is the point they receive 100% of their benefits (currently 65-67 years).  The age is based purely on the calendar year you were born and is irrelevant from your actual retirement from work.  This inflation-adjusted benefit amount is calculated using the 35 highest earning years of your career.  For those born in 1955, their FRA is 66 years and 2 months.  You receive a calculated reduced benefit (5/9 of 1% per month) clear down to the month before your FRA.  If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month.  If a person born in 1955 took benefits at the earliest age of 62, the ongoing benefits would be permanently reduced by a full 25%.  If your FRA is age 67, you would have 30% reduction in your benefit amount if you start taking it at 62.  On the other hand, benefits increase by 8% a year every year beyond your FRA.  As Adam Sommers, owner and founder at Sommers Financial, claims, “Social Security is the best annuity you can buy!” Financial advisors cannot guarantee that amount of annual return on your invested assets, but we know you are going to get a guaranteed 8% return a year for waiting to claim Social Security – up to age 70.  Therefore, as fiduciaries we often say, “if you need the money to live on, let’s pull from the investment accounts we manage and let your Social Security continue to grow”.  But there are a few other key factors to consider before making that decision.  

Health & Life Expectancy:  Americans can expect to live longer lives than ever before.  When Social Security was designed in 1935, the average life expectancy at birth was less than 65.  Now we are comfortably living beyond the average age of 78.  The longer we live, the more advances in healthcare and technology to keep us “staying alive”.  Consider what your health is like, your spouse’s health and that of your parents or other relatives.  If they died early of illness, genetics could indicate your expected longevity will be shorter than others.  Typically, we like to plan for our clients to live far into their 90s.  

Still Working:   It rarely makes sense to take Social Security while you continue to work before your FRA unless you need it to support yourself, since benefits are reduced in those months in which you exceed set income thresholds.  Taking Social Security before your FRA in 2020, means your payments will be reduced by $1 for every $2 you make over $18,240 in wages or net profit from being self-employed (a 50% tax rate!).  It gets more complicated in the calendar year of your FRA, where benefits are reduced every month before the FRA by $1 for every $3 you make over a different benefit amount of $48,600 in 2020.  Since this could be 1-12 months, those with birthdays early in the calendar year see a slight benefit.  Every month beyond your FRA, you can make as much as you want with no reduction in benefit, although you will still be subject to income tax.

Spousal Benefits:   If there is a spouse who hasn’t worked or has worked very little, it is likely that he/she will be claiming half of the higher wage earner's benefit rather than taking their own benefit.  This also applies to divorced spouses married at least 10 years.  However, the spousal benefit cannot be unlocked until the first spouse files for Social Security so there must be some coordination between these benefits.   Up until several years ago, you could file on a spousal benefit and allow yours to grow.  This was commonly referred to as the “File-And-Suspend” strategy.   Delaying your benefit and filing at a higher age was like having your cake and eating it too; but in April 2016 this great benefit claiming strategy for married couples born before 1953 was eliminated (#thanksobama).

Cash Needs/Wants: Sometimes you need cash to supplement your income from investments or pensions. You might have had to leave a job involuntarily earlier than expected due to a job loss or health reason. Sometimes you just want extra cash to spend early on in your retirement while you are young and can enjoy it more. Understandably, there is a reason why people don’t wait until their 80s to buy a Harley and start a new hobby of motorcycling.  

Keep in mind that the timing you choose to start claiming your hard-earned benefit is a permanent decision, and you only get one chance at it. At the point when you file, this amount is irreversible unless you want to pay all your benefits back to the Social Security Administration with interest and start over.  

All these things have a determining factor in when you file. Social security should be seen as an asset that needs to be evaluated along with your other financial assets, goals and expenses in a comprehensive financial plan. We sometimes see that you'd receive more from Social Security in your lifetime by waiting to claim, but also notice that the likelihood of success of your financial plan is better off if you claim benefits earlier. Instead of standing around the water cooler at work to see when your co-workers are taking Social Security, we suggest seeking the advice of a fiduciary and completing a comprehensive financial plan to determine what is best for YOU!