Maximizing Social Security Benefits for Retirement

Kevin Lao 00:12

Hey everybody welcome to the Planning for Retirement Podcast. I’m Kevin Lao, your host. Social Security is a big topic nowadays especially because people are living longer and pensions are pretty much going by the wayside. And I oftentimes get the question from clients you know… Kevin, when should I take Social Security to maximize my benefit? And so I decided to do this podcast today to address that question but also to challenge the traditional method of thinking with regards to claiming Social Security benefits. And so I hope everyone finds this helpful today. If you like what you hear, please subscribe to our podcast. And be sure to tune in for more episodes to come. So let’s dive in.

Is Social Security In Trouble?

So I hear a lot of things about people talking about Social Security being bankrupt by the time 2041 comes around. And you know I definitely understand that concern you know there’s a projection that’s been done, where if there’s no changes that happen, so security is set to run a deficit by that year. But you know obviously what’s going to happen is they’re going to change the way benefits are paid, they may means test it, they might change the ages in which you can start drawing Social Security, they also very likely might raise taxes to pay for the Social Security deficits. So there’s a lot of things that are likely to be done well before 2041. But the reality is social Security represents 40% of all retirement income for individuals aged 65 and older. So it’s naturally a very important part of the plan when I am working with clients to figure out you know what is the proper funding strategy and using social security?

There is no RIGHT or WRONG answer, because we don’t know the exact life expectancy

So what I will first say is there’s no right answer to this. And you know I typically joke with clients and say if you have a crystal ball and tell me exactly when you’re going to pass away I can tell you exactly when to don’t [phonetic 02:08] draw Social Security. And you know if you look at life expectancies, and you know, people living longer and you look at maybe your own genetics, your own health, the natural breakeven point that people think about is… Well Kevin, if I delay Social Security, what is the point in which I will breakeven? Meaning I will be receiving more in cumulative benefits than if I were to draw Social Security at my full retirement age? So I’ll answer that question. But what just for those of you that don’t know social security, your full retirement age will vary between age 65 and 67, it depends on when your year of birth is. And you can look that up by doing a Google search or going on the IRS website or social security.gov, ssa.gov. You can early… you can draw Social Security early at 62. And then you can also delay Social Security until 67. So if you take it at 62, your benefits probably going to be about 35 to 40% lower per month. And if you were to take it at your full retirement age and if you delay it until 70… your benefit increases about 8% per year after you hit full retirement age. So for example, if your full retirement age is 66 and you delay it until 70… you can increase your Social Security benefit by 8% a year for roughly four years, and essentially at 70… You will receive your maximum Social Security benefit possible.

What’s the break even for delaying Social Security?

03:41

So again, the natural inclination is for people to think about taking Social Security at 70 in lieu of full retirement age or of course, early retirement age. And the reason is because many financial professionals are pundits on the media, they talk about delaying until 70 because you’re going to get the most bang for your buck. So the breakeven point that I was referring to earlier usually happens around 82 to 83. So if you retire at 66, and you decide to say… hey you know what, I’m going to delay my Social Security until 70. By the time you hit 82, 83, you would have received more and cumulative benefits by delaying it until 70 than if you were to take it at your full retirement age. So again, I go back to the crystal ball, if you think… hey you know I’m very likely to live longer than 82 or 83. I have longevity in my family. I’m healthy, I keep in shape, you know, by all means. That is one method of thinking is to say… Hey, your maximum benefit lifetime is going to be recognized by deferring Social Security until 70. So that addresses the first. Again, this is the… what I would call the traditional method of thinking when it comes to drawing Social Security. But there are two other things to think about when drawing Social Security at your full retirement age or early or late and I want to address that next…

Consider longevity in your family history

Alright, the second thing I want you to consider outside of longevity when deciding on when to take Social Security is your required withdrawal rate from your investments. So what I mean by that is if you retire at let’s say 65, and you would like to not take Social Security, you’re more than likely going to have to take some sort of withdrawal from your retirement accounts whether that be a 401k or an IRA or an investment portfolio unless you have a really nice pension that’s going to take care of most of your expenses. But if you’re like most people that I talked to, they don’t have a pension or the pensions may be really small. And they’re going to need to take some money out of their investments, whether it’s retirement or non-retirement accounts to meet their living expenses.

How does delaying Social Security impact your safe rate of withdrawal in retirement?

05:51

So what you need to do is figure out how much income you need to maintain a standard of living that you’re comfortable with. And you’re going to need to figure out how much you need to withdraw from your portfolio in order to meet that need. And again, if you’re not taking Social Security, most if not all, of your income is going to be coming from your investment portfolio. And so if you’re required to withdrawal rate by delaying Social Security is let’s say 7% a year or 8% a year or 9% a year, it’s going to be very difficult to maintain that rate of return in your investment portfolio to meet that required withdrawal rate. So in essence, what’s going to happen in those early years in retirement is you’re going to be depleting your principal early on, which I would argue is a big risk for clients that are… are planning to live in long retirement or long life in retirement simply for the fact that you’re going to deplete your liquidity over time. And if you need that liquidity down the road for health care expenses or long term care costs, which are rising at an extremely rapid rate that’s something you really… really want to consider again, the impact of delaying that Social Security.

Let’s say your withdrawal rate is much lower even by delaying your Social Security let’s say it’s only 3% or 4% a year then by all means certainly consider delaying that social security payment because your required withdrawal rate is within what I would call a safe withdrawal rate, anything less than maybe 4.5%, 5% if you’re a little bit more aggressive. But 4, 4.5% is a safe withdrawal rate. So again, think about your required rate of withdrawal. And if it’s unacceptable, meaning it’s outside of that safe withdrawal rate, you might want to consider taking Social Security upon your retirement whether that’s at 62 or 64 or 65 or your full retirement age, take that Social Security because ultimately what that’s going to do, it’s going to reduce your required withdrawal rate from the portfolio to preserve those assets long return.

Especially if you are concerned about your health or longevity, you may not think you’re going to live longer than 82 or 83… you can always pass your portfolio on to your beneficiaries. You can’t pass security on to your beneficiaries. Now I know there’s rules if you’re married you know your spouse can take either their benefit or your benefit but I’m talking about an inheritance can be achieved through your investment portfolio cannot be achieved through passing on a Social Security benefit. So hopefully that is helpful in helping you make that decision of do you take it on time? Do you wait until seven years you take it early? Because many times people think well if I delay it till 70… I’m going to maximize my benefit. And ultimately they don’t realize their burn rate on the portfolio is going to severely deplete their assets over time, which can then impact your legacy goals as well as liquidity on their balance sheet to pay for those unexpected expenses in their old age.

Will you ever rely on Social Security?

08:58

Another thing to consider when making this decision is whether or not you need social security at all for income. So what I mean by that is if you are retired and you do have a pension or investment income or real estate income and it turns out your required withdrawal rate is 0% from Social Security. So, so many people will think that… hey you know what the natural reaction is to delay social security because they don’t need the income. So might as well get the best bang for your buck or the highest bang for your buck by deferring it until 70. Now I do want to challenge that method of thinking because the alternative to delaying it until 70 is actually taking Social Security on time or even early and using that income not for your expenses but to invest in the market long term.

Claim Social Security and invest it!

So by doing so, the benefit there is you actually build up this liquidity on your balance sheet that otherwise wouldn’t be there because you’re not taking social security income… you don’t have that surplus cash flow coming into the picture. So you’re building up this liquidity on your balance sheet to either a, use to pass this on as a legacy to your to the next generation or your beneficiaries or b, use for unexpected expenses you know like medical costs or long term care expenses or c, just use for return you know whether it’s travel or big ticket items that come up like home renovations or maybe it’s a major purchase like a boat or a second home or rental home. So I did a calculation on this one. And I wanted to see… well, if someone took social security let’s say at 65 and they retired at 65 and they took that income and just simply invested it at let’s say 5% a year. And another situation they took it at 70 and invested at 5% a year, what would the difference be in the portfolio? what I found is that the break-even point happens somewhere around 91 or 92 meaning that you would have to live at least until 92 to have a larger investment portfolio by taking such security at 70 and reinvesting that cash flow every single month earning 5% a year versus if you took it at 65. So in other words, for about 25 years, you’re much better off taking it at 65. And investing the difference because you’re going to have more assets on your balance sheet to use for unexpected expenses or pass on a legacy if you don’t make it until 91 or 92 like a lot of people. So again take this into consideration even if you don’t need so security don’t automatically think… hey, I’m going to delay it until 70. Because what you could do is take the Social Security now put it away, get it diversified, invested for the long haul, and use this as an asset and leverage on your balance sheet for the long term.

Summary

I hope you all learned something today and feel better prepared for the social security decision. Remember, there are many tax investment and planning considerations unique to each situation so please consult your own advisors before moving forward. I have a financial planning firm here in Florida and we can help with this. We serve clients here locally and also remotely across the country. So if you’re interested in speaking with me about your situation, you can contact me directly at [email protected] or you can go to our website and book a meeting at www.imaginedfinancialsecurity.com. Thanks everyone for tuning in. Until next time…