When To Take Social Security

Updated: Mar 31

Four considerations, including one no one talks about.


KEY TAKEAWAYS

  • Understand and calculate your breakeven.

  • Larger benefit could mean more taxes and higher Medicare premiums.

  • If something happens to me, what happens to my benefit?

  • Delaying can put too much stress on your personal portfolio.

 

Social security can be a stressful topic for those entering retirement. You have one shot at getting it right, but there are very polarizing stances on the “best” strategy.


Some “experts” will pound the table saying, “Don’t take it a day before 70.” After all, where can you get an 8% guaranteed return on your money, right?


Then there are some who say to collect benefits at Full Retirement Age (FRA), and others who think it’s best to claim when you’re eligible at age 62.


The truth?


Social security is a different type of asset that requires a different way of thinking. Looking at your strategy through a practical lens instead of just the difference in monthly benefits is crucial.


There are MANY factors that go into a social security strategy, but here are the four big ones – the last one, almost no one talks about.


Your Breakeven


If you forgo a current benefit in exchange for a greater future benefit, then you should know how long it will take for you to recoup the lost benefits and come out ahead.


This number is known as your breakeven.


Let’s use this benefit table as an example and assume that your FRA is age 67.


If you wait to collect your benefits until age 70, then you forgo $3,129 per month for 36 months or $112,644.



In exchange for forgoing your benefits until age 70, your monthly benefit will grow to be $3,961 per month. It would take you 28.4 months or about 2 years and 5 months to recoup the $112,644 that you had forgone, meaning that you would come out ahead at age 72 years and 5 months.


Taxes & Medicare


A larger monthly benefit sounds great, but what does that do to your taxes? Greater social security benefits lead to more income, and more income can lead to:

  • More of your social security benefits being subject to taxes

  • Being pushed into a higher tax bracket

  • Potentially paying higher Medicare Part B premiums

A single dollar of additional income can increase your Medicare Part B premiums by 40%.


Before deferring benefits, project how much of that benefit increase is really a benefit. After all, it’s not what you make, it’s what you keep.


Health & Longevity


You’ve paid into the system for decades, and you want to get as much out of it as possible.


But the reality is that anything can happen to anyone, regardless of health and age. That’s a particular problem with social security because it doesn’t get “passed down” the same way as your other assets.


If your benefit is greater than your spouse’s benefit when you pass away, then they will inherit your benefit but lose their own – still a very meaningful change to their income. If your spouse has an equal or greater benefit and you have no minor children, then your benefit just goes away.


If you have a personal or family history of health issues, then there isn’t a right answer either. On the one hand, you might think that it’s not worth delaying your benefits and to collect right away. On the other hand, you may consider delaying your benefit, so that your surviving spouse or minor children have a greater benefit if something happened to you.


Stress on your nest egg


If you are retired and choose to delay social security benefits, then that income has to come from somewhere to support your lifestyle, and that “somewhere” is your personal nest egg.


Relying on your nest egg too much too soon can put a lot of pressure on your portfolio and jeopardize how long your personal savings will last you. Here’s an example.


As a rule of thumb, you don’t want to withdraw more than 4% of your retirement savings any given year. If you have $1 million portfolio and decide to delay a $3,000 per month ($36,000 a year) social security benefit, then you’ll be taking 3.6% out of your portfolio just to replace what you’re not getting from social security, on top of the rest of your annual spending needs.


Couple higher withdrawals with negative markets in a given year, and that could spell disaster on your retirement outlook.


If that’s not enough, then think about it from a legacy planning perspective. Your social security benefit may not get passed down to anyone, so why deplete more of your personal savings – of which every penny will be passed down – for the sake of a larger monthly benefit?


Conclusion


Social security is just like any other aspect of financial planning – it’s personal.


There’s no one-size-fits-all strategy that makes sense for everyone, and there are pros and cons to every option. All you can do is identify your options, assess the pros and cons of each option, and make an informed decision that’s best for your personal circumstances.


If you do that, then you’ll be confident in your strategy regardless of what you hear or read in the headlines.


Frank Iozzo, CPWA®

President, Private Wealth Advisor


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