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When Should I Take My Social Security? A Question Far More Complex Than Many Realize...

When Should I Take My Social Security? A Question Far More Complex Than Many Realize...

May 13, 2024

The decision on when to begin receiving Social Security benefits may appear to be a straightforward concept, however it is often far more complex than meets the eye.  As financial planners, we understand the significance of this decision in shaping our clients' financial futures.  In this article, we delve into the intricacies of Social Security benefit optimization and offer insights into crafting a strategic approach that aligns with individual financial goals.

It is of the upmost importance for a client to understand the rules relating to Social Security and different payment options at different ages in order to make the most educated decision possible.  A person qualifies to receive Social Security as long as they have worked 10 quarters (2.5 years) throughout the course of their lives during which Social Security deductions were made from their paycheck.  The amount of Social Security a person will receive is ultimately determined by the value of their Primary Insurance Account (PIA) which is comprised of the average of their 35 highest earning years (capped at the Social Security limit for each year).  

If qualified, a person has the option to begin receiving payments as early as age 62.  However, for each year before normal retirement age that a person begins receiving their payments there is a reduction of approximately 6.25% compared to their full retirement payment with a total reduction of 30% if taken at age 62.  Further, if a person is still working and begins receiving their Social Security before their normal retirement age there is a reduction in payment of $1 for every $2 of earnings greater than $22,340 (2024 limit). 

Once a person reaches their normal retirement age they have the option to work with no reduction in Social Security.  However, it is important to note that to the extent a person earns beyond $34,000 in income, 85% of their Social Security benefit will become taxable income which will be taxed at their marginal tax bracket. 

A person also has the option to delay receiving their Social Security payments until age 70 and will receive an increased payment of 8% per year for each year they delay payment beyond their normal retirement age.  This is important to consider because all future cost of limit increases will be based on this higher amount. 

Finally, a worker is entitled to receive the higher of either their own Social Security or an amount equal to half of their spouse’s Social Security.  When one spouse dies, the living spouse will maintain the higher of their own Social Security or the deceased spouse’s Social Security.

We address this complex landscape in the following ways:

Comprehensive Analysis:  At the heart of determining the optimal Social Security claiming strategy lies a comprehensive analysis of each client's unique financial situation. This entails projecting retirement assets, estimating expenses, evaluating income streams, and considering factors such as health and longevity for both partners.  Armed with this information, we can provide tailored recommendations that maximize the financial impact of Social Security within the broader context of our clients' financial plans.

Beyond Gross Dollars:  True Social Security maximization extends beyond simply identifying the age that yields the highest gross benefits. It requires an understanding of the tax implications and their impact on overall cash flow.  By considering factors such as investment asset allocation and drawdown strategies, we aim to optimize clients' overall financial well-being.

For instance, if a client and/or their spouse is still working at their full retirement age they will most likely be in a significantly higher marginal tax bracket than when they both end their employment.  As such, were they to begin receiving their Social Security at this point we must factor in the after-tax net payment they will receive during these last few working years to analyze the true “break-even” point were they to wait and receive a higher payment for life in the future which also factors in potential cost-of-living adjustments on a higher payment.

Comparative Analysis:  A critical aspect of our approach involves conducting a side-by-side comparison of claiming benefits at different ages.  This analysis allows us to assess the income gap, potential asset drawdowns, tax liabilities, and estate considerations associated with each scenario. By weighing these factors, we empower our clients to make informed decisions that best suit their individual needs and circumstances.

Understanding the impact differing Social Security payments have on a client’s need to draw down assets we can make assumptions relating to the risk a client can absorb with their investments which ultimately impacts their long-term estate projections.  I.e., if a client has a greater percentage of their income need covered through Social Security, we need to rely less on asset withdrawals which allows for more equity exposure which may generate a greater long-term rate of return.

Protecting Spousal Benefits:  Delaying benefits until 70 can provide valuable protection for surviving spouses, ensuring they receive a higher benefit in the event of the primary earner’s death.  This aspect of Social Security planning can be viewed as a form of insurance, safeguarding the financial security of loved ones. 

In addition, there are options for widowed spouses to maximize the Social Security benefits they will receive by either receiving their own Social Security and delaying their spouses to age 70 or vice-versa.  We must analyze the benefit payments and the client’s current tax situation and income need to determine the optimal strategy. 

In conclusion, deciding when to claim Social Security benefits is a multifaceted decision that requires careful consideration of various factors.  By taking a strategic approach to Social Security planning, we can help our clients optimize their benefits and achieve their long-term financial goals.  As trusted financial advisors, our mission is to provide guidance and support every step of the way, empowering our clients to make confident, informed decisions about their financial future.