I hear it all the time:
- “Social Security is going broke, I won’t get any benefit”
- “I might as well claim at 62, since I won’t break even until I am 77”
- “It’s not enough money to worry about”
- “Take it as soon as your full benefit is available, waiting to 70 isn’t worth it
- “I want to get something back, what if I die?”
There are many variations of these rationalizations about taking social security benefits early. I believe this is mainly due to folks not understanding what Social Security is, the role it plays in your retirement income plan, and how to maximize your benefits under the rules.
Why Should Anyone Care About Social Security?
In retirement, the focus is not on wealth, but on income. After all, during your working years you bring home a paycheck and use that money to pay for your lifestyle. Once you retire, that paycheck goes away, and you will need to replace it. It is either 1) you at work or 2) your money at work, there is no other way to provide for your lifestyle. Because of this fact, the number one risk in retirement is called “Longevity Risk”. This is because if you live so long that you run out of money, your end of life years will be miserable. If you start to worry about running out of money, then those years will be miserable as well.
Clients have taught me that to be truly happy in retirement, there is no room for worrying about running out of money. If they are worried about markets, interest rates, political risks to the economy, etc., they won’t be able to relax and enjoy their retirement years.
It Really is that Simple
All risks for retirement flow from the longevity risk. After all, if you die shortly after retiring, it doesn’t matter if we have inflation, or what interest rates are doing, or whether you need long term care, or whether the stock market dropped by 50%, because you will be dead.
However, if you live, those and other risks can come into play and threaten your security and by extension, your happiness.
At one time, several decades ago, most folks in the country were covered by pensions and we would talk about the “3-legged stool” of retirement. Your income came from your Pension, Social Security and your savings – two of the three are guaranteed income for your lifetime!
Today, few are covered by pensions and many pension plans are at risk of insolvency, making the availability of Social Security much more important than in the past.
When to Claim Social Security
Let’s take a look at 4 things you need to know before you make a decision as to when to claim your benefit:
- “Social Security is going broke”. Under the current rules and rates, the Social Security Trust fund has enough money, along with tax receipts, to pay full benefits until 2034. At that time, they would be forced to reduce your benefit to an estimated 77% of the previous benefit. If that happens I would rather have 77% of 3,000 ($2310) than 77% of $2,000 ($1,540), wouldn’t you? The good news is there is new legislation, with bi partisan support, called the “Social Security 2100 Act” that would make Social Security solvent into the next century. It would also provide a 2% increase in benefits across the board for all recipients.
- “I might as well claim at 62, since I won’t break even until 77”. This statement is mathematically true, if you don’t use the right math to reflect the role your benefit plays in your retirement. This statement comes from the simple math of adding up the checks you would receive from 62 until you die vs. the benefit you collect at your “Full Retirement Age” (FRA) which is between 66 and 67 for most folks. Then you add up the checks you get at FRA and the total will not exceed the amount you collect until about the time you turn 77. Since most people don’t save this money, but spend it, we can’t really add an interest rate into our comparison, because the money is gone.
- “Take it as soon as I am eligible for my full benefit, after all, if I die, I won’t get anything” See what I said above, if you are going to die, or are in ill health, of course you should claim sooner. If you don’t live to a ripe old age, it won’t matter if you took a benefit. You won’t be on your death bed lamenting that you aren’t going to get much total benefit. As I tell my clients, I like you to bet on yourself and not against yourself. Let’s be optimistic and look to a long and happy retirement.
- “I should claim at my FRA and not wait until I turn 70”. How much would you like to invest in an investment that guaranteed you a minimum 8% annual rate of return? These days most people would gladly take all they could of something like that. Say you are eligible for your full benefit (FRA) at 66. If you wait until 70 your benefit will be at least 32% larger (more if there is inflation)! Let me share some real numbers from a client. They are eligible for $3030 per month at their FRA of 66 and 4 months. If they wait until 70, they would get $3943 per month, or $913 more per month or $10,956 per year!! If the client lives to 90 (which statistically is likely for him or his spouse) that is nearly $225,000!!
So the way I look at it, how much would I need to save from 66 and 4 months until 70 in order to provide that much income per year. If I wanted to save the principal, it would be nearly $250,000 given today’s interest rates! If I were to buy a lifetime income annuity, which is more like the Social Security benefit, I would need around $160,000 in savings to provide that benefit for both spouses. How likely are you to save that much in less than 4 years? If the client took the money he would get at his FRA from his IRA’s or other retirement savings, he would only have to withdraw $133,000 from those accounts. This can help preserve the longevity of his other assets and savings as well.
How Do You Decide What is Right For You?
You now have gained some perspective on how beneficial social security can be to retirement happiness. Happiness in retirement is based on reliable, guaranteed, lifetime income and Social Security is one way to provide that income.
I urge you not to leave money on the table and integrate your Social Security strategy into your overall retirement planning. I know that it can make a huge difference in your future security and peace of mind.
Have You Done Your Social Security Claiming Strategy Report Yet?
To help you along that path toward deciding what your optimal claiming strategy is, contact our office and ask us to run a Social Security claiming strategy report. It will show you your options and what different strategies will provide you. It is a fantastic tool that just became available to us to offer our clients. I look forward to helping you “Retire Happy”!
Roger holds the coveted and well-earned designations of Chartered Financial Consultant (ChFC®) and Retirement Income Certified Professional (RIPC®) from the American College. He is also a licensed insurance agent for life and health insurance and a Certified Paralegal for Estate Planning.