One of the most frequent questions we get from clients is “when should we claim Social Security?”
The answer as it so often is, “it depends.” How is that for help?
We have done an immense amount of research on this topic, and think we can shed some light. At a minimum, our goal for this blog is to help you at least ask your advisor the right questions regarding this decision.
Most of our clients come to us wanting to know what their lifestyle in retirement (how much can we spend?) would look like if they retired today, or at some future date. I focus on income net of taxes (and inflation…but this is for another blog) because this is the money we truly get to “spend.”
For most folks, this spending money comes from an income stream from Social Security along with a financial portfolio. I think it is best to contemplate retirement income as consisting of both sources.
After creating thousands of plans over the past 32 years, we have come to a few conclusions about the first source of retirement income we mentioned, Social Security, and particularly when to start receiving benefits. For the most part, this “it depends” issue is a function of several variables…which are simply numbers we don’t know yet.
For example, it depends on how long you think you will live (longevity issues). It depends on your Primary Insurance Amount (PIA) which is simply the benefit a person would receive if he/she elects to begin receiving retirement benefits at his/her normal retirement age. It depends on the size of your investment portfolio. It depends on what type of accounts you have (tax-privileged vs. taxable accounts). Finally, it depends on the returns you might earn. These are all numbers we don’t know ahead of time.
This is why it is necessary to have someone simulate a wide range of outcomes with each variable. While it is tempting to shrug your shoulders and just default to claiming early, you might be decreasing your lifetime retirement lifestyle if you do so.
Fortunately, even without knowing all the variables of your personal financial situation, we can still provide you with some of the lessons we have learned after running a large number of simulations and real financial plans.
- It is possible to extend the life of your financial portfolio—how long it lasts, by delaying Social Security benefits.
- If you think you might live into your 90’s, delaying benefits might add 10 years to your portfolio’s life expectancy.
- If you think you will live beyond normal life expectancy but not by an extraordinary amount, the impact this decision has on how long your financial portfolio lasts is less than the impact on those that think they will live well beyond their life expectancy.
- For those of you that insist that you “won’t live that long,” when you claim your benefits will have little impact on how long your financial portfolio will last.
- It is possible to increase spending in retirement by 10% by delaying benefits – for some folks.
- Delaying benefits will be much more meaningful to people with lower levels of financial wealth because Social Security tends to be a larger share of retirement income.
- The benefits of delaying decrease as the amount of wealth people have increased, and you guessed it, because of taxes.
- Social Security income subject to taxes goes from essentially tax-free to nearly completely taxable (85%). This “Tax Torpedo” in effect significantly increases marginal tax rates on wealthier households in retirement. We find that folks with roughly $250,000 to $600,000 in financial assets are the most sensitive to this issue and benefit the most from careful planning.
Now that you are aware that when and how you claim Social Security can have a significant impact on your retirement lifestyle, you might want to ask your advisor the following questions:
- Can you show us the claiming strategy that will maximize my lifetime Social Security benefits if we live to normal life expectancies?
- Can you test the various claiming strategies in my overall financial plan which considers a wide variety of longevity scenarios and return scenarios?
- What claiming approach would minimize the risk of my portfolio running down to zero?
- Are you aware of the “Tax Torpedo” and how do you minimize the taxation of my income while maximizing my after-tax income?
- Can you provide me with estimates of the increased lifestyle by following the optimal strategy vs. other options?