Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at firstname.lastname@example.org . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!
One of the questions that I get the most as a financial advisor, especially from people who are planning for retirement is: “When is the right age to collect my Social Security benefits?”
And my favorite answer to give when I get a question like that is: “Well, it depends.”
It comes down to a few things we’re going to cover, three different areas today that might color your decision as far as when you decide to collect your benefits.
This is a very personal decision. Financial advisors of course like to run numbers and spreadsheets and things like that. And it’s a good idea to do that. It’s important to understand the math so we understand the logic side of things. But I can tell you from doing this for 22 years that people have lots of different reasons for choosing when they collect their benefits.
First of all, if you have never been married before and you’re not married right now, the decision of when to collect is relatively simple, because it really does just come down to life expectancy. Normally the way benefits work is that you could take benefits as early as age 62, and you would definitely want to elect benefits by age 70.
So, 62 is the earliest age that you could collect, and every year you wait, you get about a 7% increase. However, once you hit full retirement age, which is 66 to 67 for most people, at that point you start getting about 8% per year for waiting. So you do get paid quite a bit to wait for benefits. But if for example you’re thinking about life expectancy and everybody in your family has died by the age of 70, that certainly would weigh on your decision and then you may want to start collecting your benefits early.
One area to think about is life expectancy and another is marital status, because that makes a big difference too. Today we’re not going to cover survivor benefits, and we’re not going to cover divorced spouse benefits. Those topics are kind of in the weeds. Here at Keystone Financial, we can explain those situations if you qualify for that, or if you have a family member who qualifies for that. But I think those areas qualify for their own episode of the Wiser Financial Advisor because they’re so nuanced.
So if you are married or you’ve been married before, there’s a lot more complexity as far as when you should be drawing your benefits because you could have somebody else’s benefits to collect. That’s where it’s important to understand the rules of the game and understand how those benefits might affect you.
Going back to life expectancy, that is one big factor that will weigh on people who ask themselves “When do I start collecting a Social Security benefit?”
If you’re married and neither one of you have long life expectancy, then you may want to start collecting those benefits early. If you have a long life expectancy—or if both of you have a lot of longevity in your families and you take care of yourselves, you might want to think about taking it later.
As financial advisors, we do tend to recommend that people wait until at least full retirement age. I think the math will probably work in your favor. I say that based on running thousands of calculations and seeing a lot of situations with clients. Waiting to take Social Security until full retirement will usually work out in your favor. But that brings us to the next point, which is your personal view.
As far as the outlook towards Social Security, you might have heard that Social Security could hit a point of insolvency when they will not be able to pay out all the benefits that have been promised to you and to me. There will need to be some changes to the program going forward, and those changes may affect your benefits.
There was a point in time when there was a piece of bipartisan legislation that called for phasing Social Security out once people reached a household income of $200,000 or more. That legislation was out there within the last 15 years or so, and it didn’t pass although it had both Republicans and Democrats supporting it. Keep this in mind: it’s pretty likely that there will be some cuts to benefits based off of income or wealth in the future. In other words, if you have a high income and a high amount of wealth, that could weigh on your decision because you might say, “I think they’re going to take this away from me,” or “I’m not going to get the full benefit that I’ve been promised because I’ve got too much financial means.” Certainly, high financial means is a great problem to have. But I encourage you to really think about things, because this is probably the most common area where I see people collect benefits earlier, even though on paper it looks like they would get more by waiting.
Another thing that could happen would not be necessarily taking your benefits away but they could just raise taxes quite a bit on your Social Security once you reach a certain income level—which would basically accomplish the same thing, in that you would have your benefits cut back. If that happens, Social Security would turn more into an entitlement program to be there for folks who don’t have much financial means, or maybe just people in poverty. That’s what Social Security could turn into in the future.
Back in the 1930s when they started Social Security income, it was a safety net for old people when they couldn’t work anymore but were still alive. Back then, people were not living that long, and so benefits would be collected at age 65 but people didn’t live much longer than that. So really, as a financial obligation for the country, Social Security wasn’t that big of a deal. We were just handling a small subset of people. Now, it’s turned into something that people rely on for their entire retirement income. Social Security wasn’t put into place for that, though. And not to get political at all, it’s just a policy thing that they are likely to change in the future because the math just doesn’t work out. There are too many people collecting benefits and not enough people paying in through their payroll taxes. The scales tip and there isn’t enough money to cover benefits.
Is it possible there could be some kind of a bailout or something like that? Yes, but how will that be paid for? Ultimately, when we borrow money, either as individuals or as the government or companies, we’re borrowing money from the future to be able to spend that money today.
Ultimately, there is going to have to be some balancing effect where there will be either a reduction in benefits or an increase in taxes, or some combination of both.
Here’s a big one that I hear from people, and they are absolutely spot on: Let’s say that you’re retired and thinking about drawing benefits from Social Security at say age 62. If you don’t start drawing your benefit, where will you get the money to live on between now and the time you do start collecting Social Security? That’s actually a good point because it makes a big difference depending on the individual. If you have all your money sitting in the bank for example, and presumably with zero risk in CD and savings accounts or someplace super conservative like US Treasuries, if you’re getting a 7% increase per year to wait on your benefits, but your savings account or CD’s are paying maybe 1% maybe right now, (which would be pretty generous because rates are so low), you have something to think about. You’re drawing from a place that’s not earning a whole lot, and maybe it would make more financial sense to let your Social Security benefit keep going up.
Another way to approach this would be that if you have an investment portfolio that’s more growth-oriented—and of course, there are no guarantees because we can’t guarantee any rates of return—but let’s say somebody was assuming a rate of return on their portfolio would be a lot higher, perhaps 6,7, 8 or 9 percent . If that’s in a person’s mind thinking, “Well, I can do better with my portfolio so I really don’t want to draw down on that; therefore, I’m going to collect my Social Security benefits now.”
Whenever you are faced with that decision, that’s a big factor to think about: “When am I going to take benefits and where will I get money to live on in between now and then?” If you’re still working, let’s say you’re 62 and still working, it’s a lot easier decision, isn’t it? Because Social Security will penalize you if you have earned income and you haven’t yet reached full retirement age. You can only make something small like 17, 18 thousand dollars per year before they start dinging you on your Social Security benefit. So that decision is relatively easy if you’ve hit full retirement age. At that point, you can work as much as you want to and you won’t get dinged on your benefits. That situation comes down to the same thing—“If I don’t start drawing Social Security benefits right now, then I’m using my money from work,” which also could mean, “If I draw my benefits, my portfolio could be fed by some of these dollars. I might be able to contribute more to my 401K and build up my wealth more.”
So, there are different factors at play here for sure, but you should be taking into account where you’ll get money to live on if you’re retired and you haven’t started drawing benefits.
Another thing to look at is that the back end of Social Security is age 70. That’s the age when you definitely would want to start collecting benefits if you haven’t already, because after that point you just start losing money if you don’t collect. There are no more increases at that point, so you definitely don’t want to wait beyond age 70.
Most of the people I talk to end up collecting earlier than 70. It’s the exception to wait until that age. But again, it does largely depend on those three factors: life expectancy, your personal views on Social Security, and timing of benefits versus potential rate of return on your wealth.
What about somebody who doesn’t have any wealth? Let’s say you have no balances anyplace, no cash, no investments, nothing like that. Again, it gets to be a relatively easy decision at that point because you would just take it when you needed the money. When you retired, you would have to take it because that would be your only source of income.
Before I go, I’ll just plant the seed for a future episode. Are those survivor benefits a big deal? Remember that all the stuff we’ve just talked about will affect your spouse as well. You may not believe Social Security is going to be around, or you may not believe that you’re going to live a long time, but you also have to think about your spouse. They may be collecting off your benefits someday. They could have a long life expectancy and maybe their views are a little bit different than yours, so you might have another factor at play there. We’ll talk about that in the future. It’s a big big deal thinking about not only yourself but also survivor benefits for a spouse.
I hope this was helpful today.
I encourage you to contact us to go through these factors in more detail, because it does come down to a personal decision in the end, no matter what the math says. Ultimately, it comes down to your personal opinions, your personal views, your personal values and how you’re going to sleep at night. These are your decisions, and we can guide you and give you the best information possible, but it all comes down to what makes you feel good, both logically and emotionally.
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I hope you have a wonderful week, and God bless.
The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.