How Do You Determine When to Start Taking Social Security Benefits?
Deciding when to start taking Social Security benefits is a critical financial decision, and to offer you the most informed perspectives, we've gathered insights from seven financial professionals. From integrating all retirement factors to approaching the decision as a comprehensive investment choice, CEOs and financial planners weigh in on tailoring advice to individual client needs.
- Integrate All Retirement Factors
- Utilize Retirement Income Planning Tools
- Analyze Based on Individual Circumstances
- Conduct a Holistic Retirement Analysis
- Discuss Personal and Health History
- Consider Health and Tax Implications
- Approach as a Comprehensive Investment Choice
Integrate All Retirement Factors
Our team uses several factors to determine when is the right time to start Social Security. We consider factors including health, whether you have a pension, how much you have saved in assets for retirement, what you will need for income to maintain your lifestyle, and also the big-picture tax implications that electing Social Security could have on your retirement. Another factor is if you're married and what your spouse's benefit is compared to yours; sometimes, through different strategies, it may make sense to wait to get your spouse a higher benefit based on yours, and sometimes it makes more sense to take your benefit early because of taxes and the pressure it could put on the rest of your plan. The most important thing is having a team of professionals that integrate all areas for your benefit.
Utilize Retirement Income Planning Tools
Social Security is a much more powerful retirement tool than most give it credit for. We start by having the client create their Social Security account at SSA.gov—it's a little difficult to set up; they definitely want to verify it is you.
Once that is set up, we make sure to include the estimated amounts for each year from age 62 to age 70, including an estimated Cost of Living Adjustment, to give us a more realistic estimate of their monthly Social Security income.
Next, we use our Retirement Income Planning software to model retirement incomes at different levels of Social Security to see which age and income serves them best.
Social Security income grows by about 8% per year from age 62 to 70, and if you add on the COLA, it is typically north of 10% income growth per year—nothing on the market can deliver that much increase in guaranteed income for life, which makes Social Security a vital part of your retirement income plan.
If we determine that delaying Social Security income is best, we'll use current retirement assets to build an income bridge to get them from their retirement age to the target Social Security claiming date.
Analyze Based on Individual Circumstances
That's a loaded question because it all really depends on the client's situation. We can run an analysis on their Social Security amount if they're an individual or if they're married, based on how to get the most money out of Social Security throughout their lifetime, based on average life expectancy, but that really doesn't tell the whole story. Everyone is in their own situation; do they have health issues, do they need the money now to survive, are they planning on doing Roth conversions with their IRAs and retirement plans? If they are, they might not want to create more income from triggering Social Security while they're doing that. Do they have longevity in their family? If they're married, the one who has the most Social Security will continue when the other spouse passes, which makes planning theirs even more important. There are a lot of factors to consider when to trigger your Social Security.
Conduct a Holistic Retirement Analysis
When advising clients on the optimal time to start taking Social Security benefits, focus on a holistic analysis that includes their Full Retirement Age (FRA), longevity expectations, and overall financial picture. Begin by discussing how taking benefits before or after FRA impacts their monthly payments, and perform a break-even analysis to show the long-term effects.
Consider their current and future income needs, factoring in their retirement income sources like pensions or IRAs. Additionally, account for their healthcare costs, especially if they retire before Medicare eligibility. By integrating these considerations, you can provide tailored advice that aligns with their retirement goals, ensuring they make a well-informed decision.
Discuss Personal and Health History
Everything starts with a conversation to seek understanding of the client's overall financial picture. Aspects of the client's personal and family health history, which could impact longevity, as well as the need for maximizing spousal survivor benefits, are important considerations. We should be mindful that by delaying Social Security benefits, a client's cash-flow needs could draw down their personal savings assets considerably, having an impact upon future liquidity or wealth transfer options. Academia has highlighted that the number one misstep with Social Security is claiming too soon. This is, therefore, typically a personal decision to be determined case by case.
Consider Health and Tax Implications
Like all financial questions, this comes down to an individual's unique situation. For healthy clients with other resources, delaying retirement benefits to age 70 allows those benefits to grow more quickly and provide more security for a potentially long life. For those who expect to have a shorter life expectancy, claiming benefits early may provide more opportunities for them to enjoy their lives and retire sooner. There are also tax consequences that come with claiming prior to your Normal Retirement Age that should be confirmed.
Approach as a Comprehensive Investment Choice
When to claim Social Security benefits is a critical decision that can affect a person for many years to come, especially considering the extended life expectancies today. The claiming-age decision is in many ways an investment choice as well as a mitigation against many retirement risks, and it should be approached with care as part of a comprehensive retirement plan with an understanding of the client’s objectives and their timing of retirement.
First, we estimate retirement income needs based on the client’s objectives. Then we identify the client’s sources of income, including Social Security, and all assets available to generate retirement income. After collecting all of this information, we make a preliminary calculation—considering all of the risks inherent with retirement such as longevity risk, inflation risk, increased taxation risks, medical expenses risk, etc.—to establish the client’s financial preparedness for retirement. Hopefully, the client has started this process years before the timing decision has to be activated with Social Security.
This gives the client options and comparable possible choice outcomes to identify the right time to take Social Security that is in their best interest as part of a whole, well-thought-out process.