The Social Security Dilemma

 

With the largest portion of our population reaching retirement age – PEW Research states approximately 10,000 people will turn age 65 each day until 2030 – this age group is starting to really pay attention to Social Security.  

Baby boomers’ ages now range from 51 to 69.  And research also suggests that they don’t “feel “old.  So what does Social Security mean to them?  What do they really know about it?  And really, what does Retirement mean to you?  I define retirement as having choices: working if you want, but not necessarily depending on that income.  Rather, working for the fun of it, making a difference.  

There have been strategies suggested over the years for married couples who can take advantage of spousal benefits, filing and suspending, etc., however these don’t work for everyone. In fact, the best use of these strategies was for spouses that were only a few years apart in age. The government has recently closed these “unintended loopholes” effective 2016 for anyone who is age 62 or younger.

 

RETIREMENT INCOME DECISIONS

There are some very important pieces of information that will help you understand what it means and how, even in the wake of closing loopholes, retirees can maximize their benefits.  A little knowledge can go a long way.

  1. First, the decision on when to take Social Security is not all about numbers.  Although claiming your benefit before Full Retirement Age will permanently reduce the benefit, there are reasons to do this. 
     
    • First and foremost is your health and expected longevity.  Nobody knows exactly how long they will live, but given certain risk factors, or diagnoses, it may be prudent to take the benefit prior to Full Retirement Age.  But be aware of the reduced monthly amount you will be eligible for, up to 25% less at age 62, for the rest of your life.
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  3. Second, total retirement savings will have an impact on how long you can wait.  Many people are choosing to work longer because they are in good health and want to delay retirement.  But if retirement from the workforce is the desired choice, where does the money come from?
       
    • Pensions – which are annuities provided by companies for employees under defined benefit plans.  These are fast becoming endangered and are almost extinct!
    • 401/Thrift plans with companies, education systems, government and such – these are the defined contribution plans that may have grown nicely with regular additions from you and your employer during your employment;
    • Individual Retirement Accounts, Traditional and Roth IRAs that contain tax-deferred or now tax-free (Roth) investments and savings;o Deferred Annuities;
    • Taxable savings and brokerage accounts;
    • There may be others, but these are the most likely candidates.

BENEFITS OF WAITING

There are good reasons to delay claiming your Social Security benefits:

  1. Increasing your income.  For each month you wait between your full retirement age (which for people retiring in 2015 is age 66), your benefit will increase .667%, or 8% per year.  For someone who could retire at age 66, waiting to age 70 will increase their monthly income by 132%.  This is a significant increase, and certainly one that the equity markets could not guarantee!
  2. Planning for a surviving spouse, minor children or dependent parent. The spousal benefit is 100% of the deceased spouse’s benefit (if higher than their own), so if you are able to get the maximum benefit at age 70, your spouse will receive that benefit upon your death.  For children and surviving parents, the factors are slightly less, but would be calculated on a larger benefit amount.
  3. Taxes.  Planning on income outside of Social Security benefits could result in lower overall taxes.  Currently, long term gains and dividends are taxed at between 0% and 20%.  Income from various retirement savings vehicles can be scheduled to keep taxes low.

Bottom line – Social Security is everyone’s pension plan.  There is a way to evaluate the timing so that it makes the most sense to you, to improve your overall retirement income.

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