When Should You Take Social Security?

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Social Security CardSocial Security maximization is a hot topic among retirement planners and the financial press these days. Maximization strategies focus on the age to draw benefits and the sequence of who draws first when dealing with married couples. The objective is to get the most dollars from Social Security during your retirement.

The age of death is probably the most important variable. No one knows of course when they will die. From a Social Security perspective, the magic age is 82. This is the age you must live past in order to benefit by delaying the start of your Social Security benefits. A single person who anticipates not living to age 82 due to identified illness or family history would be a good candidate for earlier filing.

Consider a worker earning the maximum-taxable earnings ($113,700 in 2013) who would be eligible to collect $1,992 per month in SS benefits at age 62 if they started drawing in 2014. Waiting another 8 years to draw at age 70 would increase the monthly benefit to $3,425 – an increase of 72%. This doesn’t take into consideration the automatic cost-of-living adjustments (COLA) that will be applied to SS benefits. COLAs have averaged 2.47% annually since 2000. Including COLAs into the calculation raises the benefit to $4,160 per month at age 70!

The higher benefit at age 70 means nothing if the worker dies before age 82. However, SS actuarial tables show the average life expectancy for a male age 70 is 14 years and for a female is 16.3 years. A healthy 70 year-old has a good chance of benefiting by delaying the start of their SS benefits.

Life expectancy is not the only criteria to consider when making this decision. You’ll need income from somewhere if you’re retired at age 62. Drawing SS early allows you to preserve you own savings longer. You can keep your own savings invested and growing longer by using your SS benefits to meet your living expenses.

The other more important consideration for the more affluent retiree is the financial challenges facing the future of SS. While it’s unlikely changes to benefits would be made to those who are already retired, it could happen—especially to those who have done a good job of preparing for retirement and have adequate retirement income from other sources. A retiree may delay drawing benefits only to find out the amount they were expecting to receive has been changed. In the meantime, the retiree had been using their personal savings to live on.

Legislation in 1983 was designed to shore up the SS system by raising taxes, boosting inflows and setting the stage to dramatically grow the trust fund. Today that trust fund has over $2.5 trillion in assets. In fiscal year 2012, SS benefit payments exceeded tax payments by over $130 million. However, interest on the trust fund balance offset the payments and still grew by $94 million. To be sure, the SS system does have a problem going forward. The trust fund is projected to be depleted by the mid-2030s. At that time future tax receipts are expected to pay out about 72% of promised benefits.

There have been numerous SS fixes proposed including raising the benefit eligibility age, changing the benefit formula and raising the cap on income subject to SS tax. These “fixes” could be minor if enacted quickly. The longer action is delayed the more draconian the changes will need to be. Unfortunately our politicians seem unwilling to make changes of any kind. President Obama’s 2014 budget proposal calls for a reduction in future SS outlays by changing the annual cost-of-living increase to a method called chained CPI. The proposal went nowhere.

Anyone who has done a good job saving for their retirement on their own should consider the chance that SS benefits will be means tested in the future. This is an important factor to consider when planning the start of SS benefits. Means testing of SS benefits already takes place in the form of taxation. It would not be a big stretch to propose only providing monthly benefits to retirees who have less than a certain amount of non-Social Security annual income.

One proposal suggested would reduce SS benefits for individual retirees with more than $55,000 of non-Social Security income. Their SS benefits would be reduced by about 1.8% for every $1,000 of income they have over the threshold. The threshold would be doubled for couples drawing SS. This proposal would affect 9% of current SS recipients.

Means testing could also come in the form of an asset based cap instead of income based. President Obama proposed capping tax-advantaged savings across all accounts at $3 million last year. An excise tax could be levied against those with more than $3 million in retirement accounts. There was a 15% excise tax imposed on excess distributions from qualified retirement plans, tax-sheltered annuities, and IRAs back in the mid-1990s. A similar tax could be reinstated with the proceeds dedicated to the SS trust fund.

The decision to draw SS benefits is an important one to all retirees. Make sure you consider all the important issues before making this decision. A qualified retirement planner can help you evaluate all your options.

Rick’s Tips:

  • Life expectancy is one of the most important variables to consider when deciding when to start Social Security benefits.
  • Social Security benefits can be subject to income taxes based on your other sources of income.
  • Vulnerability to means testing should be part of decision process when deciding when to start drawing SS benefits.

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