Based on my financial planning experience, I’ve outlined key factors to consider along with a few guidelines to help readers who think they might be ready to collect Social Security.
Where Should You Begin?
Start by obtaining a current recap of your projected Social Security benefit. You can establish an account with the Social Security Administration at www.socialsecurity.gov. This will allow you to see your projected monthly benefit depending on your election. With those figures in hand, an analysis can begin. At SilverStone Group, we use a dynamic software program that identifies the optimal election depending on a number of factors. For purposes of this writing we will focus on couples, but the same factors affect individuals.
There are three primary factors that should influence your Social Security election decision: 1 – health / life expectancy; 2 – assumed rate of return on money received; and 3 – inflation.”
- Health / Life Expectancy
If both spouses are in reasonably good health, taking reduced benefits early (i.e., age 62) typically makes little sense. Moreover, so long as one spouse is healthy, it usually still makes more sense to wait until Full Retirement Age (FRA) or even later to collect Social Security. People often forget that unlike spousal income benefits, survivor benefits reflect the actual benefit being received by the deceased spouse at the time of death.For example, if benefits are deferred to age 70, the higher benefit (along with any upward inflation adjustments) would be paid to the survivor. For each year one defers after reaching FRA, the benefit increases by 8%. So, if FRA is age 66, waiting an additional four years will increase the benefit by 32% (four years x 8%). It may give the healthier spouse comfort knowing that after the death of their spouse, he or she will receive a much higher income in retirement.
- Assumed Rate of Return on Money Received
We’ve studied a variety of data reflecting breakeven points to help us determine how long someone must live in order to make it more beneficial to defer their Social Security election. Many couples have other sources of income between the ages of 66 and 70 and can afford to wait until age 70 to take the benefit. While enviable to be in such a position, waiting may not be the right decision based purely on total income received and reinvested. Simply stated, if you collect Social Security at FRA, you’re able to invest the money because you have other sources of income. The higher the assumed investment return, the more advisable it is to collect Social Security at FRA.To illustrate, assume a 66-year-old is entitled to receive a benefit of $1,000 per month and decides to defer the benefit just one year in order to get the 8% delayed retirement credit. By waiting one year, that individual foregoes $12,000, but at age 67, the benefit increases to $1,080 per month. How long would it take that person to break even? Approximately 13 years. If we assume, however, that the individual receives the $1,000 per month at FRA, invests it and earns 4%, the breakeven is 18 years. If they can earn 6%, the breakeven is 25 years and so on.
Generally, the higher the assumed inflation rate, the shorter the breakeven on deferring your Social Security benefit. In the previous example, the 6% assumed return breakeven is reduced from 25 years to 17 years assuming a 3% inflation rate is applied to the Social Security benefit. At that point, the extra $80 / month has risen to an extra $128 / month thanks to the cost-of-living adjustments. In addition, once the breakeven is reached, any extra growth rate will compound in favor of having delayed. Typically, men reach their breakeven at life expectancy while women are ahead of the breakeven at life expectancy.
- Social Security as a Hedge
Interestingly, these key factors represent a perfect hedge against qualities we want in portfolio-based retirement funds. Scenarios that warrant a delay in collecting Social Security are also some of the worst for portfolios. That is, we suggest deferring when inflation is high, assumed returns are low and life expectancies are long. Conversely, when we save and invest money for retirement, we generally want low inflation, high returns and shorter life expectancies (i.e., not outliving retirement funds).
- Spousal Income Benefits
Spouses are entitled to 50% of the other spouse’s Primary Insurance Amount (PIA), but they must be eligible. That is, they must have been married for at least one year, still be married and the spouse must have filed for his or her own benefit. It’s important to note that there are no delayed credits for electing the spousal benefit after reaching FRA. Moreover, the spousal benefit is limited to 50% of the other spouse’s PIA regardless of whether the other spouse delayed taking higher benefits. Finally, if a spouse is eligible for both spousal and retirement benefits at the same time and files a claim, the spouse will receive the higher of the two (not both). Keep in mind there are special rules for anyone born in 1953 or earlier that permit a “restricted application for spousal benefits.” This allows one spouse to file, suspend and continue to earn delayed credits while the other spouse immediately claims a spousal income benefit.
- Spousal Survivor Benefits
This differs significantly from spousal income benefits in that it is 100% of the other spouse’s PIA (not 50%), but reduced if the other spouse claimed early or increased if the other spouse delayed. Therefore, if spouse “A” has a normal life expectancy but spouse “B” has a family history of living to age 100, having spouse “A” wait to collect Social Security until age 70 will have as much as a 32% higher income paid for their life and the life of spouse “B.” Again, the longer the assumed life expectancy of a spouse, the more advisable it is to delay taking the Social Security income benefit.
→Note: To be entitled to a survivor benefit, the couple must have been married for at least nine months prior to the death and must be unmarried or only remarried after age 60. If the survivor remarries prior to age 60, he / she will get the spousal and survivor benefits based on the new spouse, not the deceased spouse. Also, if a couple was divorced at the time of death, the survivor is entitled to a benefit as long as they were married for at least 10 years and the survivor remains unmarried or remarries after age 60.
- The Conundrum
It’s important to weigh the relative importance of lifetime income versus survivor benefits. If the higher-earning spouse delays taking Social Security, it effectively holds the other spouse hostage from claiming a spousal benefit. On the other hand, the delayed benefit will result in a materially higher survivor benefit for that same spouse. Generally, having the higher income earner delay will provide them with a higher retirement income benefit and a higher survivor benefit for their spouse.
Weighing Your Options
Deciding when to collect Social Security can be difficult. Using analytical software can be beneficial because it provides a present value computation of all projected benefits related to all potential scenarios. This information can help you thoroughly evaluate your options and arrive at a confident decision. Once the scenarios are analyzed, it’s important to discuss family cash flow needs that may impact your decision. If there aren’t enough survivor assets (investment accounts, life insurance, etc.), it may be wise to maximize survivor benefits by delaying the benefit election. Our wealth management experts are ready to work with you and address these important financial matters. If you think you are ready to collect Social Security, we encourage you to speak with one of our financial planners today.
This article originally appeared in the 2018 | ISSUE TWO of the SilverLink magazine, under the title “Ready to Collect Social Security? Consider This.” To receive a complimentary subscription to the SilverLink magazine, sign up here.