Help Me Retire Podcast - Episode 34

Deciding when to take Social Security

Show notes:

It’s the question every retiree faces... when’s the best time to claim Social Security benefits? I’ve got five questions for you today... that could help you make a smarter decision... on this episode of... The Help Me Retire Podcast...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

For a lot of people... deciding when to file for Social Security benefits comes down to an old rule of thumb... take it early if you need it... wait if you don’t...

But there’s more to it than that... and today I’m going to try to give you a practical framework for making that big, big decision...

Social Security is a big deal... because it’s one of the only inflation-adjusted... government-guaranteed income sources we have... and it’s a major source of retirement income for most Americans today...

So, let’s start with the basics... three ages you should be aware of...

You can claim Social Security benefits as early as age 62... or as late as age 70... or anytime in between...

Depending on the year you were born... there’s also something called your Full Retirement Age... or F-R-A... the age at which you qualify for the full benefit you’ve earned...

If you were born in 1960 or later... your full retirement age is 67... and if you were born between 1954 and 1959... your FRA is somewhere between 66 and 67...

Now... if you claim Social Security early... before FRA... your benefits will be reduced... permanently... by up to 30-percent...

And if your full retirement age is 67... and you wait until you’re 70 to file... your benefit will be up to 24-percent higher than the FRA amount... and again, that’s a permanent increase...

Before you ask what’s the best age for you to claim Social Security... understand that it depends on a lot of other factors...

So, instead of asking... “When should I take Social Security?”... ask yourself... “What job do I need Social Security to do for me?”

Is it to give you income to live on right now?

Is it to protect yourself financially if you live a long time?

Or is it to protect your spouse if you die first?

Finding the answer to that question right there is going to make deciding when to file... a lot simpler and easier...

And I’ve got five more questions for you to consider... in just a moment...

Okay... let’s say you and I were sitting down together... trying to figure out the best time for you to claim your Social Security benefits... here’s what I’m going to ask you...

First question: Are you still working... and if so, how much?

If you claim benefits before your full retirement age... and earn more than the annual income limit... Social Security will hold back some of your benefits...

You’ll eventually get that money back... but it’s confusing and frustrating...

So if you’re still working and haven’t reached full retirement age... think twice about filing for Social Security...

Second question: Do you need the income... or do you just want it?

If you need Social Security at 62 just to pay the rent and keep the lights on... then your decision is easy...

But if you don’t need it... if you can live off your savings and investments for the time being... then delaying Social Security might be worth considering...

Every month you delay... you’ll be permanently increasing that lifetime... inflation-adjusted stream of income...

Question three: Tell me about your health... your family longevity...

Do you have any major health issues? Do you take care of yourself?

How long do people in your family typically live?

If you’ve got good health and good genes on your side... the odds say to postpone Social Security...

But if there’s a good reason to believe your life expectancy is shorter than average for some reason... think about claiming Social Security early...

And if you’re just not sure either way... just realizing that postponing benefits is going to reduce the risk of outliving your money... especially later in life when the stakes get a lot higher...

Fourth question: Are you married? And if so... whose Social Security benefit is larger?

This is a big one... a lot of couples I talk to... one spouse has a much larger earnings record... and therefore a much larger Social Security benefit...

So if you’re the higher earner... delaying your benefit can do more than increase your check... it’s also going to increase the benefit your spouse will receive if you die first...

Think of it this way... for married couples... the higher earner delaying Social Security is a one of the least expensive forms of “widow insurance” you’ll ever find...

Last question: What do your taxes look like... between the time you retire... and age 73... which is when required minimum distributions begin?

In the last episode of the Help Me Retire Podcast... Episode 33... I talk about what I call the “golden window”...

It’s the years between when you retire... and age 73... when required minimum distributions... or RMDs... kick in...

If you claim Social Security during that golden window... it’s probably going to drive up your taxable income... and possibly reduce your ability to do things like Roth IRA conversions... manage your tax brackets... plan for capital gains... or other strategies for smoothing out your income over those important years... and beyond...

So sometimes the best reason to delay Social Security isn’t just to get a bigger benefit later on... it might just give you more control over your taxes while you wait...

Now I’m going to give you three different scenarios for claiming Social Security...

Maybe one of these applies to you... and might help you make your decision...

Number one... you file for benefits at age 62... simply because you need the money...

You’re retired... you’ve got a lot of expenses... and Social Security income is going to stabilize your household...

There’s nothing wrong with that approach... and it sure beats exhausting your retirement savings just to get a bigger Social Security check...

Just understand that you’re getting a lower benefit... and it will never increase beyond the annual cost-of-living adjustment...

Second scenario... you claim Social Security at your full retirement age... the middle-of-the-road approach...

This makes sense if you’re retired... but you don’t need the income urgently... and you’re not strongly motivated to delay your benefits...

And Scenario number-three... you do decide to wait until age 70 to file for Social Security...

This is the optimal strategy if you’re healthy and expecting a long retirement...

You like the idea of getting a substantial raise for every year you wait...

You can afford to live off your savings and investments in the meantime...

And/or... you’re the higher-earning spouse... and you want to maximize the spousal benefit if your spouse outlives you...

Now... let’s wrap up this episode with three mistakes we see people make when it comes to deciding when to file for Social Security...

Mistake One... focusing too much on the “breakeven age” you read about... the age at which... if you live beyond it... justifies postponing your benefit...

Knowing your breakeven age is important... but it’s no substitute for retirement planning...

There are too many other things worth considering...

Mistake Two... claiming as soon as you can... because you think Social Security is going broke...

Sure... the system needs fixing... and if it doesn’t get fixed... your benefits could be reduced... regardless of whether you’re already receiving them...

And understand that whatever reforms get implemented... are likely to have a much greater impact on younger people... than on those already receiving benefits or close to it...

So slow down... deciding when to claim Social Security is too important a decision... to be based on fear and emotion...

And Mistake Three... is making that big decision without looking at all the other things it’s going to impact...

Your taxes, for example... the spousal benefit that’s tied to yours... your portfolio withdrawals... and when you file for Medicare...

So, it’s not just about... “When should I file for Social Security?”...

It’s... “How does Social Security fit into my overall retirement income plan?”

One last thing...

You know you don’t have to guess about any of this, right?

We use some very sophisticated software to help clients make a smart decision about Social Security... we can look at all the possible scenarios...

It’s part of Step 3 of the seven-step retirement planning process that we use with our clients...

If you’re not a client... see if your advisor can run some numbers for you...

And if not... well... you know where to find us...

Thanks for your time today... we’ll talk again soon...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.