“Coordinating Social Security with other retirement benefits is a moving target that requires careful, deliberate strategizing,” said William Meyer of Social Security Solutions recently, as we discussed this blog post, “Utilizing proper coordination, with the help of an advisor like Roger, may result in extending the longevity of your retirement portfolio.”
It is common for clients and potential clients to have this whole Social Security thing worked out in their minds when we begin the process of piecing together the elements of retirement planning. The problem is that many are simply wrong. Even high net worth individuals could benefit from a Social Security analysis. Social Security Planning is quite complex. As you read on, you may find yourself questioning your assumptions.
For our purposes, let’s assume you are retiring at or before the age of 62 and that you will not be working between age 62 and your full retirement age. Your situation may be different and can be analyzed to provide you with meaningful data and recommendations, but unless we narrow this down some, we will be here all day.
Social Security rules are complicated. The first misconception is the notion that one has only three options to begin receiving their benefits: age 62, full retirement age, and age 70. Consider the eight years between your age 62 and age 70. If you are single, you have 97 dates on which you could begin receiving Social Security benefits. (Eight years times twelve months plus the month of your seventieth birthday.) But, if you are married, the strategic combination of months for you and your spouse to begin benefits could be as many as 9,409 possibilities (97 X 97 if you are the same age.) So, instead of deciding from three dates, you may have thousands of possible combinations. How do you even begin to decide?
When the benefit is absent:
Married couples are faced with more variables when making Social Security benefit decisions, and we will touch on that later. However, if you are single and healthy, you might think the choice of when to begin benefits comes down to your estimated mortality and a quick calculation of how much more you might receive by waiting for the maximum benefit at age 70 to begin receiving your benefit. The often-missed variable is the opportunity cost. There are two ways to look at opportunity cost, and each arrives at the same conclusion. Remember that we are assuming you are not working in retirement, so you will need to income. If you are not receiving Social Security benefits, you will be required to make withdrawals from other funds to replace your absent Social Security income. Every dollar that you withdraw from other funds will eliminate any potential growth that each dollar would otherwise generate until it is eventually spent or left at your death. That could add up! But what if you don’t need the money for income? In that case, you could be taking the Social Security benefits and investing and growing the money. Not having those dollars beginning at age 62 will change the growth dynamics and future income that could be generated from your nest egg. This is not an argument for taking benefits early. I simply want to point out the fact that, when income is factored in, there is a cost of not receiving Social Security income during the years that you elect to delay your benefits. This cost should be factored into your analysis.
What does risk tolerance have to do with it?
This concept of opportunity cost introduces another element. Who would ever think that one’s risk tolerance would impact their decisions regarding their Social Security start date? It does. To calculate the opportunity cost, an assumed rate of return is required. This is the expected rate that your assets might earn if you invest your Social Security benefits or the rate of return you will not receive if you take income from your assets to replace delayed Social Security benefits. If a retiree is more conservative in their approach to investing, the opportunity cost will be lower. A more aggressive investor will have a higher opportunity cost. So, one’s attitudes toward risk will impact the overall calculations.
Let’s look at the other extreme.
I am not an advocate of any particular strategy. The one that is best for you (and your spouse if married) can only be determined by running an analysis based on your unique information. It is common for high net worth clients to seek the higher, delayed benefit as they do not need the income. One’s benefit does increase by 8% for every year that you delay beginning your benefits beyond full retirement age, and that can be a great incentive for waiting. The percentage of increase looks like a rate of return, but it is not. Be sure not to confuse the two. There is still the matter of opportunity cost that should be factored in. If you delay benefits to receive the annual increases, you will still need to do the math to see if it makes sense, considering the period during which you are not receiving any benefit. Mortality and opportunity costs should be factored into your analysis, even if you don’t need the money.
When will I die?
Mortality is certainly an issue here, but whose mortality are we talking about? It may make sense for an unhealthy person (with a short life expectancy) to delay benefits! Allow me to explain. It is less complicated to determine the best start date for a single person than for a married person. For a single person, one can consider their health, family history, and mortality tables to come up with an assumed mortality age. Then, by considering other assets, tolerance for risk, expected rate of earnings on investments, expenses, and tax consequences, one could calculate the best month to begin taking benefits. Everything changes when a spouse is involved. It is possible to have a scenario where an unhealthy primary earner may delay benefits for the sole purpose of increasing the spousal or survivor benefit for a healthy spouse who anticipates longevity. This concept throws rules of thumb thinking out the window.
Spousal and Survivor Benefits:
I feel a migraine coming on, so I will not complicate things further by attempting to articulate Spousal and Survivor benefits. Let’s just agree that spouses’ age difference, the differences in earned Social Security benefits, and their life expectancies are all elements to be considered. Spousal benefits have an entirely separate set of rules compared to benefits derived from one’s own Social Security earnings.
I wish I could tell you that I am smart enough to figure all of this out with my financial calculator or a super-duper Excel
Mr. Meyer concluded by saying, “Claiming Social Security can be the biggest cumulative financial decision many people will make in their retirement, and for some, their lifetime.” Do not take Social Security planning lightly. The objective of this writing is to heighten your awareness of how easy it is to make a costly decision. With the right analysis tools and assumptions, your advisor should be able to demonstrate to you the best month and year for you (and your spouse if married) to begin taking your Social Security benefits. If your advisor does not have the tools needed to run an analysis, reach out to me, and we will put our heads together and get you the information you need to be confident with your decision.
Roger Walker is a financial advisor with Walker Wealth Management, LLC, Centaurus Financial, Inc. He conducts seminars, workshops, and webinars for employees of Fortune 100 companies, providing insight into pensions and retirement planning strategies.
Office: (731) 434-4139
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