“When should I start collecting Social Security?” is a frequent question clients ask me. They are getting close to the age when they are eligible and it seems this is not as simple as one might expect. I’ve previously posted about this which addresses many of these questions but decided to update it.
Most people that have ever worked in the United States or were married to someone who did will likely be eligible for some Social Security benefits. There are different ages when regular benefits can start beginning at age 62. The longer the benefits are delayed, however, the greater they will be until reaching age 70.
There are also many rules. Payments on behalf of minor children are paid if a parent dies or attains age 65. A married person can get benefits based on their spouse’s record if their benefits would be greater than if based on their own account. Benefits are reduced if taken before the full retirement age (age 66 and a few months) and are increased if you wait until your 70thbirthday.
A spouse can take benefits at age 62 (based on their record), jump it up somewhat when their spouse starts collecting or when the spouse attains their full retirement age, but get no jump up beyond that point even though their spouse decides to wait until age 70 to start collecting.
Benefits stop at death, but a surviving spouse can then step in to get their deceased spouse’s regular benefits if the payments would be greater than their own. There are also rules covering divorced spouses getting benefits based on their ex-spouse’s record and benefits paid to a disabled participant.
That being said, I suggest that Social Security be treated as an asset class and benefits be taken as late as possible up until the 70th birthday. The return for waiting is an approximate 30% greater annual payout and this is paid for the rest of your life. That is about a one-third ROI (return on investment) for waiting a little less than four years. This pales any other form of investment. And, the way Social Security is set up now, the payouts increase annually based on an inflation factor; and further, all payments are guaranteed. As an asset class, this should be compared to your other investments. Very few will provide this great of a return.
Most people tell me they want to start as quickly as possible so that they will not leave money behind when they die. Some even have calculations showing a “break-even” point if they die before 9 years and 7½ months or something like that, and the “loss” if they die before then. Let me clue you in on something. When you die, you are dead and do not lose anything – you are gone. However, if you live, this is money that would be paid for the rest of your life. You cannot outlive it. It is guaranteed cash flow. Many of the people I do financial planning with have a fear that they could outlive their money. No one has a fear they will die and lose money because of that. However, running out of money is a real fear. Part of that fear can be alleviated with the guaranteed and higher amount of monthly Social Security payments.
For those that do not need this money, waiting is a no-brainer. For those that do, they should consider withdrawing needed funds from other asset categories they already have, even if they have to take early taxable withdrawals from retirement accounts and annuities or sell stocks. The best would be to spend down cash and some fixed income investments where the tax bite would be minimal, if at all. Work out the numbers and see for yourself.
Instead of looking at Social Security as either getting your money back or as a government entitlement that you want to get your hands on as quickly as you can, consider it an investment that will provide a far greater ROI by waiting than any other investment you have. Social Security is an asset class!
For instance, at an investment return rate of 2%, an extra $6,000 a year in Social Security benefits is like having an additional $300,000 in your account. There is no residual return, but a year by year guaranteed extra $6,000 income. An extra $10,000 a year provides the same cash flow as a $500,000 amount in your portfolio.
There are many other Social Security strategies that should be followed upon. The purpose of this article is to call attention to the potential of treating your benefits as an asset class. Further information can be obtained from www.ssa.gov.
If you have any tax, business, financial, leadership or management issues you want to discuss please do not hesitate to contact me at [email protected].
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