Are You Thinking About the $1 Million Retirement Question?

Most people decide when to claim Social Security in about 15 minutes. For many couples, that decision is worth over a million dollars.

In this episode of The Perfect Retirement Plan?, Phillip Smith breaks down the Social Security claiming decision in plain terms, walking through what you're actually choosing between at 62, 67, and 70, and why getting it wrong is a permanent reduction you'll carry for the rest of your life.

If you're within a few years of retirement and planning to turn on benefits the moment you walk out the door, this episode is built for you. Topics include how your benefit is calculated, spousal benefits, survivor benefits, the break even analysis, the earnings test if you claim while still working, and why the higher earner's decision carries far more long-term weight than most people give it credit for.

#RetirementPlanning #SocialSecurity #RetirementIncome #WhenToClaimSocialSecurity

Chapters:

00:00 The million dollar decision most people make in 15 minutes

02:30 How Social Security benefits are actually calculated

06:45 Spousal benefits: your decision affects more than just you

10:20 Survivor benefits: the part most people skip

14:50 The break even question and why longevity changes everything

19:10 Claiming early while still working: the earnings test trap

23:00 3 things to do before you make this decision

Thanks for tuning in to this episode of The Perfect Retirement Plan, and remember: it's not about having the smartest financial advisor, the most money saved, or the highest probability of retirement success. The perfect retirement plan, for you – is the one you act on.

Phillip Smith, CRPC AIF |  Financial Planner
Tidepool Wealth Strategies
450 Country Club Road, Suite 350 | Eugene, OR | 97401

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Additional Disclosures: 
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. 

Transcript

Phillip Smith: You are 61. You've been thinking about this for a while, and maybe you've even finally got that date in mind. Sometime in the next year or two, you are done, retired, and when you go, you're turning on social security. It makes sense, right? You've been paying into it your whole career. It's your money.

Why wait. There's all this talk of it being gone in less than 10 years anyway. I hear this all the time. You gotta get it while it's still there. I wanna stop you for a second. First, let's clear this up. Social Security is not going to go away. The federal government just isn't going to do it.

They're never gonna stop collecting those taxes from our paychecks to pay to people who are retired, and rightfully so, but the benefit could look different in the future if Congress doesn't take action soon to rectify the deficit that they're going to run into with social security.

I ran the numbers on a couple recently. A husband earning around $85,000 and a wife earning about $65,000 per year. It's pretty typical for the average American. Now, let's just say they turn on social security the day they're eligible at age 62 as a result, they collect about $42,000 per year combined.

Now just imagine that this same couple delays until age 70, now they're looking at over $90,000 per year inflation adjusted for the rest of their life. That is a million dollar decision. And most people make that decision in about 15 minutes.

So take a look at this slide. Both couples turning on their income, one couple at 62 versus the same couple at age 70.

Just consider it when the money hits your bank account from Social Security. It doesn't show you what you gave up. It only shows you what you're receiving. You'll never be reminded of the gap the gap between 62, 67 and 70. Those are not the same thing. They are vastly different income levels.

This episode is for you. If you are in this situation of making that decision, the person who's 61 close to the retirement door and planning to turn on benefits the moment you walk out. Before you do that, I want you to make sure you understand exactly what you are choosing between, because with one small exception, this isn't a button that you get to push twice.

Social Security might be the most talked about topic in retirement planning. It's also one of the most misunderstood. Everyone has an opinion. Most of those opinions are partial or incomplete, and the consequences of getting it wrong, stick around for the rest of your life. This episode isn't going to tell you when to claim.

Every situation is different. It depends on your health, your income needs, your spouse's situation, your tax picture. There's no universal answer. What I am going to do though is make sure you actually understand what you're choosing between. So when you make that decision, it's a real thoughtful decision.

We're going to cover three claiming ages. 62, 67, and 70, and what each one potentially costs you. We'll also talk about spousal benefits and why your decision affects more than just you. And then we'll cover Survivor benefits, which is the part of this conversation most people tend to skip over entirely.

Also wanna make sure that we touch on what happens if you claim while you're still working and how longevity. Should actually be a major factor in the math decision. All right, let's go.

Here we see three claiming ages, 62, 67, and 70.

 the basic idea is the earlier you claim, the less money you're going to get. At 67, that is full retirement age. That is what we call the primary insurance amount, your social security benefit, PIA.

Now at age 67, full retirement age, for most people today, you would get a hundred percent of your benefit. If you take the benefit earlier than 67, you will see a reduction every year early is about a 6% reduction in the benefit.

 If you take it as early as 62, you are giving up 6% per year. So essentially 30% in addition to cost of living adjustments and not accounting for the fact that math is also compounded. Now, when you delay past 67 every year, you delay up until age 70, you can 8% increase.

There's no reason whatsoever to delay past 70. Your benefit does not continue to increase. So if you hit age 70, you should have that thing turned on. Don't give up the money. Here's a huge impactful comparison if two people in the relationship turn on the benefit at 62, and again with this example, I'm talking about a husband making 85,000 a year and a wife making $65,000 a year.

Again, these are just slightly above average for the normal American household. That benefit at age 62 is about $42,000 per year. That's the combined benefit between the two. Now, if you delay that benefit. $90,000 per year. Again, that's accounting for the increase in delaying 6% per year from 62 to 67 and 8% per year from 67 to 70, but also adding in the cost of living adjustment or cola, which basically accounts for inflation.

On average about two and a half percent per year, and again, for social security, they will increase it for every month you delay. So we're just talking about the simple, easy to understand annual delays. But this really, is a benefit that continues to accrue and increase every month.

You delay from 62 on up until 70. So the simple math suggests that you would see a total of about 74% in increase in the benefit delaying from 62 to 70. But that's the simple math. It doesn't account for compounding. Here we can see. What it looks like to delay each year in the actual compounded annual rate, and what you end up with bottom line is if you delay from 62 to 70 on average, you'll see more than a 100% increase in the benefit.

So without getting too boring, but making sure that we cover the details of how does social security work in the first place. Here's what you should know: social Security- the benefit is based on your earnings history. They take your highest 35 years of indexed income.

The Social Security Administration calls this your primary insurance amount, or as I mentioned before, PIA. That's the number that you'd get if you claimed it exactly your full retirement age, which is 67 for anyone born in 1960 or later.

All those years that you paid into Social Security and the Medicare systems, those payments were for the PIA at 67, you claim at 62 the earliest that you can, and that benefit may be cut by simple math, 30%, but in reality more than 30%, and that's a permanent reduction.

So a $2,500 a month benefit at 67 could become $1,750 if you took it at 62. That reduction doesn't go away when you turn 67. It's locked in for the rest of your life. Now, if you wait until 70, instead of a reduction of your full retirement age benefit, you're now receiving an increase in enhancement to the tune of 8% for every year you hold off past full retirement age, and that's only from 67 to 70.

So a $2,500 a month PIA benefit could become $3,100 per month every month for the rest of your life. If you're the high earner and if you pass away first, then this amount is also what your spouse receives for the rest of their life when you're gone. That's up to a $1,350 a month difference in this scenario based entirely on when you push that button to turn on the income.

And so of course this begs the obvious question, Philip, if I'm giving up the income for all those years, how long do I have to live to make up that money? That's what we call looking for the break even point. And for this scenario that we're looking at, as you can see, the break even point is age 79. So of course, longevity is a consideration.

Because if you have a history of your family members passing away in their sixties or early seventies, you have things like cancer or other types of illnesses that are pretty persistent in your family line. 

Then maybe it doesn't make sense for you to delay until age 70. Maybe it makes sense for you to turn it on at 67 or even 65, but rarely does it make sense for somebody to turn on the income at 62.

There are just too few situations where that math really makes the most sense. ​

If you're married, your social security decision isn't just yours. Your spouse may be entitled to a benefit based on your earnings record, up to 50% of your full retirement age benefit, if that's higher than what they'd get on their own. That spousal benefit is capped at 50% of your PIA. It doesn't grow if you delay past 67, the 8% annual credit applies to your benefit only.

So when you claim early and lock in a reduced benefit, you're not just reducing your check, you're also reducing your spouse's check.

And so a benefit reduction like that can ripple through your entire retirement plan. Likewise, if the spouse who had the lower income, and therefore the lower PIA takes their benefit early, takes it at 62, they are locking in a reduction of half of your benefit.

If your benefit's a thousand dollars and your spouse is going to get 500, but they decide to take it early, now they could be reducing themselves to something like $350 per month in lieu of the 500 that they could have been entitled to by delaying longer.

Phillip Smith: Okay, so let's talk about survivor benefits. This is the part that most people skip over. I think it's because it means talking about something nobody wants to talk about: death. When one spouse dies, the survivor doesn't keep both checks. They keep one check: the higher of the two. That's it. One check, not two.

And so when one person passes away, one social security benefit also goes with them. The higher earners benefit isn't just their retirement income, it becomes the surviving spouse's income floor possibly for decades.

If the higher earner claims at 62 locks in that reduced benefit and passes away first, the survivor inherits that reduced number for the rest of their life. In a situation that's already harder financially. One check instead of two same expenses for the most part, probably higher healthcare costs, and now a single tax filer.

If the higher earner waits to 70. The survivor may step up to the maximized benefit. Even if the survivor took their social security benefit at a reduced amount, say age 62, the survivor benefit is not reduced by that decision, and that's an important thing to know for some people that difference is the line between stability, financial stability, and real financial hardship.

I think the best way to bring this to life without it really feeling like a scare tactic is to simply show the numbers and let the numbers speak for themselves. Because ultimately we are all going to make decisions based on what we feel is best for us in that moment.

Here's why I do strongly feel that, typically, the higher earner needs to wait, take everything we just covered and it points to the same place the higher earning spouse should delay. When it's possible and all the other factors to consider point in that direction. That benefit is doing double duty.

It's their retirement income, and it's the surviving spouse's income floor. If the higher earner goes first, that's too much weight, too much money to leave on the table. One approach that may work for some couples, the lower earner claims earlier, which brings income into the household while the higher earner holds off, they delay until 70 if possible.

The higher earner draws from savings a pension. Maybe they keep working a little longer, and then at 70 they turn on the social security benefit. It's maximized for both of them. It's not the right call for everyone. Of course, again, health matters. Cash flow matters. What else is in your retirement plan matters.

But the principle holds true. The higher earner's decision carries more long-term weight than many people even give it credit.

Now let's be sure to hit on longevity and that break even question. A lmost everyone asks at some point. What if I don't live long enough to come out ahead on this? It's a fair question. The honest answer is it depends on how long you live.

The break even point where delaying to 70 produces more cumulative income than claiming it at 62 generally fall somewhere between your late seventies and your early eighties. Short of that. Early claiming may have put more money in your pocket past that age, though, delaying wins by a significant margin.

Most people just stop there. They don't ask the next question, which is, what does your family history have to say about all this? What does your health say? what does your lifestyle say? 

And if you're married, longevity isn't just your number, it's your spouse's number two... not number two, it's your spouse's number "also." if there's a reasonable chance your spouse lives into their eighties or nineties, the survivor benefit changes the break even question considerably. And as this video opened up with considerably meaning it could be a million dollar income decision. 

Waiting from 62 to 70 can more than double the monthly benefit. That's why this is a million dollar decision in many people's financial situations. Now, you may be saying, but Philip, what if I don't want to delay until 70? Is it still a million dollar decision? I mean, no. I've got another slide for you. Delaying from 62 to 67 is still a $600,000 decision. We're talking about hundreds of thousands of dollars of benefit that you could be receiving by delaying just a little bit longer.

Now there is one more thing worth covering because it catches a lot of people off guard: 

Phillip Smith: turning on social security before full retirement age while you are still working. The Social Security Administration has what's called an earnings test. If you're under 67 and collecting benefits for every $2 you earn above roughly $22,000 a year, $1 of your benefit gets withheld.

It's not gone permanently. It just gets recalculated later. The cleaner move for many people is if you're still working and earning meaningful income. Leave the social security benefit alone. If you decide that you're going to claim early, you're already reducing the benefit by claiming early, triggering the earnings test on top of that, pushing more of it into taxable income, that rarely makes sense. Up to 85% of your social security benefit may be taxable depending on your combined income - if you even receive any of that Social security benefit - pre- full retirement age, adding a salary into that picture can push more of your benefit into taxable territory than you even expected.

Alright, I've talked enough - decision time. Three things that you can do before making any decisions on this, but also so that you make an informed decision on this. Pull up your social security statement@ssa.gov. It shows your estimated benefit at age 62 at full retirement age, and even at age 70 and all the years in between.

If you haven't looked at this recently, the numbers. Might surprise you if you're married, run both of your scenarios, yours and your spouse's. Think about the spousal benefit. Think about the survivor benefit. This isn't just a one person decision to make. This affects both of you.

I'd also consider running that break even analysis. You can take the monthly difference between two claiming ages, divide it into what you'd gain by waiting and see how long it takes to come out ahead. If that math makes you feel uncertain, that uncertainty is worth having a conversation about

Social Security is income for life. It is a government annuity, essentially indexed for inflation. That is a truly rare thing as things like pensions become rarer and rarer. The decision about when to turn it on and in what order to turn them on if you're married, is one of the most financially consequential calls you're gonna be making.

Please give it more than 15 minutes thought. Thanks for tuning in to this episode of "The Perfect Retirement Plan?" If this was useful, share it with someone who's within 10 years of retirement and hasn't had this kind of conversation yet. They probably need it. 

and remember, the perfect retirement plan for you is the one you act on.

It's disclosure time! This podcast is intended for educational purposes only and should not be used for any other purpose. The views depicted in this material should not be considered specific advice or recommendations for any individual, are not intended to be financial, tax, or legal advice and are not representative of Tidepool Wealth Strategies or Cetera Wealth Services LLC. The opinions contained in this material are those of Phillip Smith, and not a recommendation or solicitation to buy or sell investment products. All examples are hypothetical in nature, and for illustrative purposes only. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete. For a comprehensive review of your personal situation, always consult with a financial, tax or legal advisor. Neither Cetera nor any of its representatives may give legal or tax advice. Our office address is 450 Country Club Road Suite 350 Eugene Oregon 97401. Securities offered through Cetera Wealth Services, LLC, member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity.