Whether or not you have ever spent time at a concert hall or not, chances are relatively high that you’ve heard the harmonious melodies an orchestra can produce. If you’ve watched any movies over the last decade, you most certainly were exposed. In today’s modern symphony orchestra, there can be upwards of 120 players following the conductor’s hand movements and baton. Each musician and their respective instrument play a key role in the outcome and success of the symphony. With all of the players and their instruments working in unison to play a beautiful piece, it’s easy to see how this process compares to helping clients implement their financial plans and value-based goals. I often draw that comparison myself. Rather than build out our financial composition with the totality of all the instruments necessary, I want to give one particular overlooked “instrument” — like perhaps the contrabassoon or viola in a real-world piece — a chance to shine. Enter Social Security.
Why understanding Social Security is so important to a financial plan
Currently, about one-third of a retirees’ income comes from Social Security benefits. Perhaps even more surprising is the fact that roughly 25% of married couples and 43% of unmarried retirees rely on Social Security for 90% of their income; let that sink in. It’s no wonder, then, why we should spend more time understanding how to best utilize income from Social Security.
How Social Security works from a high level
For starters, one must contribute into the system — or at least have been married to someone who was contributing — to receive Social Security benefits. You’ll need 40 credits (10 years) of earned and reported income at a minimum. You can begin filing as early as the age of 62 and defer benefits up until age 70. The Social Security Administration (SSA) will look at your highest 35 years of earnings.
As an example, if you have reportable earnings in which you paid Social Security taxes for only 25 years, the SSA will add in 10 years of zero earnings before running the numbers. Conversely, if you have 45 years of earnings, the SSA would take the highest 35 years. So, when is the right time for you? Before we review those considerations, here is a helpful link to explore all sorts of useful calculators for Social Security.
When you are entitled to Social Security benefits
The year you were born will help you determine the year you will be entitled to the full retirement benefit. In general, your full retirement age will be between 65-67. Don’t let the term “full retirement age” (FRA) fool you, though. To max out your benefit potential, you may want to prolong filing until the age 70. The rule of thumb is: if you file immediately at age 62, you may reduce your benefit by approximately 25-30%, depending on your FRA. That’s for your entire life! If you can afford to wait, however, your benefit may increase roughly 8% for every year you wait beyond your FRA. After some simple math, we find that waiting until 70 could allow for a 32% increased benefit over filing at the full retirement age.
Should I wait to file for Social Security?
Here are some reasons why you may want to consider waiting to file Social Security — or why it may be more beneficial to do it sooner. (These are general guidelines; make sure to meet with your financial advisor for advice specific to your situation.)
Reasons why you may consider waiting to file Social Security:
- You expect to have a long life
- You need to maximize your benefit to help with living expenses
- You or your spouse plan to continue working
- Survivor benefits and spousal benefits up to Full Retirement Age
- The age discrepancy between spouses
Reasons why you may consider filing for Social Security sooner:
- You have health concerns
- Low earned income expectations
- Spousal benefit is larger than yours
- Out of necessity / no other sources of income
Other Social Security issues to consider
These are just the beginning of considerations you will need to work through when working Social Security benefits into your retirement planning. An additional important talking point is the impact of spousal and survivor benefits and how they can maximize your total benefits as a couple — and for the surviving spouse. Under certain circumstances, divorcees could also look at spousal and survivor benefits as a factor. The taxes you will pay on your benefits is also important to understand when looking at your retirement income. (Hint: it is more than just looking at your adjusted gross income.)
Don’t overlook Social Security as part of your overall financial plan
When you start analyzing all the options, it can feel very complex and difficult to understand. While there certainly is truth to that, it’s very important not to overlook Social Security — it’s one of many financial instruments that you will want to have in sync with your financial plan. Having a conductor (your trusted financial advisor) help you orchestrate that financial plan will give you clarity and confidence, even if it all seems overwhelming at first.
What’s your favorite classical composition?
And — just for fun — I would love to hear from you about your favorite musical compositions! One of my favorites is Concerto Grosso Op.6 No.6 by Handel. Much like life, it takes you on a very rich and emotional journey.
Life is short. Let’s enjoy every moment we can… and learn from those we can’t.
September 2020
Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
