Posted:
11/1/2017
By William G. Lako, CFP® and Shawna L. Theriault, CFP®, C.P.A.
Regardless of how much investors save for retirement, nearly every couple has the same basic question when it comes to Social Security: When should we begin taking benefits? Many different factors play into when the best time to take benefits might be, but generally, it comes back to what your financial plan looks like and when you need your money.
Social Security benefits were designed to provide workers a continuing income after retirement. Generally, the earliest a worker can receive benefits is age 62, but this comes with a 25 percent reduction in benefits. Full benefits are available at full retirement age, which is 66 for people born between 1943 and 1954, and gradually rises to 67 for those born in 1960 or later. If you delay claiming benefits until after full retirement age, you can earn up to 8% a year until age 70.
Because of the way benefits are calculated, many investors look at the breakeven point of how long one would have to live past full retirement age, or a delayed retirement age, to receive the same amount in benefits if the investor had taken them at age 62. The breakeven point is an average of 8 to 10 years, meaning an investor would have to live until at least age 74 to break even to what he would have received if he had started taking benefits at 62. However, if you delay benefits from full retirement age until age 70, the breakeven point is closer to 12½ years, meaning you would have to live through age 82½ to recoup the money you could have had from full retirement age through age 70.
While this calculation can help, it is only one of many factors that should be considered when deciding when to take Social Security benefits, which is why we like to ask the question, “When do you need the money?” If you are still working at age 62, you generally do not want to take early benefits because you can only earn up to $16,920 in 2017 without a reduction in benefits. If your income exceeds that amount, $1 of benefits is withheld for every $2 you earn above the threshold amount. If you have reached full retirement age and you are still working, it may be OK to delay receiving benefits because you have a stream of income coming in. Furthermore, workers who reach full retirement age in2017 can only earn up to $44,880 before their benefit is reduced by $1 for every $3 earned above this higher limit.
If you are retired and you still have not applied for Social Security benefits, this may affect how your investments are allocated—especially if you need the money. You may need more of your wealth in fixed-income investments to cover your spending needs for 10 years. With more money allocated to fixed-income, your overall long-term return on your portfolio may be lower because of the low interest rate environment. You will likely owe income tax on withdrawals from tax-deferred accounts, such as an IRA or 401(k), which could defeat the purpose of delaying Social Security to boost your benefit amount.
In addition, Social Security allows for a spousal benefit to provide for a spouse who does not work outside the home or who has earned significantly less during his or her career. When a worker files for retirement benefits, the worker’s spouse may be eligible to receive up to 50% of the worker’s benefit.
Your benefit is not affected if your spouse, a former spouse, or dependent children receive Social Security benefits based on your earnings record.
Overall, there is no single rule for taking Social Security benefits—it all depends on your financial plan. Most investors could benefit from discussing their retirement income with a financial adviser and have Social Security projections run based on their lifestyle and retirement income sources.
William G. Lako, Jr., CFP®, serves as a principal at Henssler Financial. Shawna L. Theriault, CFP®, C.P.A. is a Managing Associate at Henssler Financial, specializing in assisting high net worth individuals, families and businesses in tax, financial and estate planning. Both Lako and Theriault are Certified Financial Planner™ professionals.
Founded in 1987 by Gene W. Henssler, Ph.D., Henssler Financial provides solutions for individual, corporate and institutional clients that incorporate a range of services, including wealth management, financial planning, tax preparation and consulting, small-business retirement planning and estate planning. www.henssler.com
