When it comes to Social Security, the most common question Americans ask as they approach retirement is:
When should I start taking my Social Security?
And yet, the “right” answer to this common query remains as elusive as ever. It depends on a wide array of personal variables. It depends on how Congress acts. It depends on how the unknowable future plays out.
No wonder many families find themselves in a quandary when it comes to taking their Social Security benefits. Let’s take a closer look at how to find the right balance for you.
Social Security Planning: A Balancing Act
For Social Security planning purposes, you reach full retirement age (FRA) between ages 66-67, depending on the year you were born that is the age at which you are entitled to your full benefit (unreduced/unincreased). However, you can generally begin drawing Social Security retirement benefits as early as age 62 (with the lowest available monthly starting payments) or as late as age 70 (with the highest available monthly starting payments).
Retirees are often advised to wait until age 70 to begin taking Social Security. However, the most popular filing age (approximately 1/3 of Americans) file as early as possible at age 62. In cumulative lifetime dollars, waiting to take your Social Security to at least FRA often works out to be the best deal for many families. Plus, these days, many of us choose to work well into our 70s and beyond. Some analyses have even factored in the cost of spending down other assets while you wait, rather than using them for continued investment growth. The conclusion is the same.
However, you’re not “many families.” you’re your family. Your personal and practical circumstances may mean this general rule of thumb won’t point to your best choice. Following are some of the most common factors that may influence whether to start taking Social Security sooner or later.
- Alternate Income Sources: First, and perhaps most obviously, if you have few or no alternate income sources once your paychecks stop, you may not have the luxury of waiting until you’re 70. You may need to start taking Social Security as soon as possible. Social Security is the major source of income for most seniors in America, and nearly nine out of ten people age 65 and older were receiving a Social Security benefit as of December 31, 2022 Among Social Security beneficiaries, 37% of men and 42% of women receive 50% or more of their income from Social Security.
- Life Expectancy: To at least break even and benefit from waiting past age 62 to file, if not come out ahead by waiting until age 70, there is an important assumption at play, that you’ll meet or exceed the age the Social Security Administration estimates someone your age and gender is likely to reach, based on the averages. Even if you can afford to wait, you’ll want to factor in whether your health, lifestyle, and family history justify doing so.
- Estate Planning: Have you placed a high or low priority on leaving as much as possible to your heirs and/or favorite charities after you pass? Your preferences here may influence how, and from where you’ll spend down your inheritable estate, which in turn may influence the timing of your Social Security enrollment.
- Employment: How likely is it that you’ll keep working until your FRA? Once you reach it, you can collect full Social Security benefits, even if you’re still working. But until then, your earnings may reduce your Social Security benefits prior to FRA.
- Marital Status: If you’re married (or have been married in the past), one of you has probably paid in more, one is likely to live longer, you may retire at different times, and your ages probably differ. All these factors will complicate the equation. You’ll want to consider the timing, rules, and outcomes under various scenarios, such as when and whether to take Social Security as an earner, the spouse of an earner, the widow or widower of an earner, or an ex-spouse of an earner, while also factoring in whether you and/or your spouse are still working prior to your FRAs, as described above. Ideal start dates for one scenario may not be ideal for another.
- Other Circumstances: Beyond your marital status, there are other factors that may influence your timing decisions if they apply to you, such as if you’re a business owner, you live abroad, you qualify for Social Security Disability, or your children qualify for Social Security benefits under your account.
- Income Taxes: We find many pre-retirees don’t realize that up to 85% of their Social Security income may be taxable. Your annual Social Security income also figures into your modified adjusted gross income (MAGI), which can push you past thresholds for incurring Medicare surcharges (beginning at age 65, based on your MAGI from two years prior). The bottom line, broad tax planning may influence your timing as well.
Degrees of Control
Clearly, there’s a lot to think about when deciding when to start taking Social Security. Whether you’re going it alone or with a financial planner, here’s one piece of advice that should help: Control what you can. Let go of what you can’t.
What do we mean by that? There are many known factors you can include in your Social Security planning. You know your marital status. You can access your Social Security account and/or use a calculator to estimate your benefits. You can make educated guesses about your life expectancy, how long you’ll work, and so on. Also, if you’ve delayed taking Social Security past your FRA, you may be able to change your mind to a point. You can file to collect up to six months of retroactive benefits if you end up needing the income sooner than planned.
You can use all of this planning information and more to make reasonable assumptions and timely decisions about when to take your Social Security.
After that, we recommend going easy on yourself if (or more realistically, when) some of your plans don’t go as planned. Come what may, you’ve done your best. Instead of channeling energy into regretting good decisions made, use it to make judicious adjustments whenever new assumptions arise. By consistently focusing on what we know rather than what we hope or fear, we remain best positioned to shift course as warranted in the face of adversity.
The second most common question Americans ask as they approach retirement is:
Is Social Security Going Bust?
Most Americans have been paying into the program our entire working life. We’re counting on receiving some of that money back in retirement. But then there are those headlines, warning us that the Social Security trust fund is set to run dry around 2034.
Does this mean you should grab what you can, as soon as you’re able? let’s explain why we agree with Social Security specialist Mary Beth Franklin, who suggests the following:
“While there may be good reasons to file for reduced Social Security benefits early, claiming Social Security prematurely out of fear is a bit like selling stocks in a down market: All you’ve guaranteed is that you’ve locked in a loss. And if future benefit cuts did materialize, the benefits of those who claimed as soon as possible would be reduced even further.”
—Mary Beth Franklin, InvestmentNews
The Evidence Suggests That Social Security Will Endure
While we don’t expect Social Security to go bust, we do expect it will need to change in the years ahead. As its trustees have reported:
“Social Security is not sustainable over the long term at current benefit and tax rates….and trust fund reserves will be depleted by 2034.”
But let’s unpack this statement. First, “depleted” does not mean the Social Security Administration is going to turn out the lights and go home. It means it could run out of trust fund reserves by then, which are used to top off the total amount spent on Social Security benefits. There are still payroll taxes and other sources to cover more than 77% of the program’s payouts. So, worst case, if we did nothing but wait for the reserves to run out, we’d be forced to make hard choices about an approximate 23% shortfall starting around 2034.
The Evidence Suggests Social Security Will Change
Admittedly, Social Security is between a rock and a hard spot, but Security has been here before and has gone through major reforms a number of times since its inception in 1935. Nobody wants to lose benefits they’ve been counting on or spend significantly more to maintain the status quo. But if we don’t do something to shore up the program’s reserves, our options will likely only worsen.
As members of Congress wrangle over the “best” (or least abhorrent) solutions for their constituents, they have been submitting proposals behind the scenes, and the Social Security Administration has been weighing in on the estimated effect for each.
Time will tell which proposals become legislated action, but the range of possibilities essentially falls into two broad categories: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both.
Paying More In
To name a few ways to replenish Social Security’s reserves, Congress could:
Raise the cap on wages subject to Social Security tax: As of 2023, earnings beyond $160,200 per year are not subject to Social Security tax. There’s been talk of increasing this cap, eliminating it entirely, or reinstating it for income beyond certain high-water marks.
Increase the Social Security tax rate for some or all workers: Currently, employers and employees each pay in 6.2% of their wages, for a total 12.4% up to the aforementioned wage cap. (This does not include an additional Medicare tax, which is not subject to the wage cap.) As cited in a September 2022 University of Maryland School of Public Policy report, “73% (Republicans 70%, Democrats 78%) favored increasing the payroll tax from 6.2 to 6.5%.”
Increase the tax on Social Security payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a joint return ($34,000 on an individual return), up to 85% of your Social Security benefit is taxable, as described here. Anything is possible, but taxing retirees more heavily seems less politically palatable than some of the other options.
Taking Less Out
We could also cut back on Social Security spending. Some of the possibilities here include:
Reducing benefits: Payouts could be cut across the board, or current bipartisan conversations seem focused on curtailing wealthier retirees’ benefits.
Extending the full retirement age: There are proposals to extend the full retirement age for everyone, or at least for younger workers. This would effectively reduce lifetime payouts received, no matter when you start drawing benefits.
Tinkering with COLAs: There are also bipartisan conversations about replacing the benchmark used to calculate the Cost-of-Living Adjustment (COLA), which might lower these annual adjustments in some years.
These are just a few of the possibilities. Some would impact everyone. Others are aimed at higher earners and/or more affluent Americans. it’s anybody’s guess which proposals make it through the political gamut, or what form they will take if they do.
Should You Take Your Social Security Early?
So, given the uncertainties of the day, should you start drawing benefits sooner than you otherwise would? An objective risk/reward analysis helps guide the way.
Many investors feel “safer” taking their Social Security as soon as possible, to avoid losing what seems like a bird in the hand. However, the appeal of this approach is often fueled by deep-seated loss aversion. Academic insights suggest we dislike the thought of losing money about twice as much as we enjoy the prospect of receiving more of it. Thus, we tend to cringe more over a potential loss of promised benefits than we factor in the substantial rewards we stand to gain by waiting. Put another way:
If this still seems like a fair trade-off, consider that Social Security is one of the few sources of retirement income ideally structured to offset three of retirement’s greatest risks:
- Life expectancy risk: In an annuity-like fashion, Social Security is structured to continue paying out, no matter how long you and your spouse live.
- Inflation risk: The payouts are adjusted annually to keep pace with inflation.
- Market risk: Even in bear markets, Social Security keeps paying, with no drop in benefits.
This is not to say everyone should wait until their Full Retirement Age or longer to start taking Social Security. When is the best time for you and your spouse to start drawing benefits? Rather than hinging the decision on uncontrollable unknowns, we recommend using your personal circumstances as your greatest guide. Consider the retirement risks that most directly apply to you and yours, and chart your course accordingly. Also, stress test your plan to model your income with a reduced cost of living adjustment, a permanent reduction in benefits, or an increase in taxes.
Need help navigating Social Security planning?
You don’t have to go it alone, the team at Curio Wealth can help you. Schedule a call with us today if we can assist you with your Social Security planning, or with any other questions you may have as you prepare for your ideal retirement.
