When Should I Take Social Security?
I just finished a meeting with a client who is contemplating when they should start taking Social Security. This question often comes up and is something you should think through before making a decision. Once you decide to take Social Security, it’s hard to go back and change. Here are four things to think about to help you answer the question of when to take social security.
1) What is your financial situation?
Evaluate your financial situation regarding retirement. If you are ready to retire, do you have the resources to provide retirement income? Income in retirement can come from savings, 401k, IRA, mutual funds, stocks, or maybe a pension.
If you do not have the necessary resources to retire now, you will need to determine how much income you will need in retirement. This will help you set a framework for where you are now and where you need to be.
Ask yourself, “Based on my financial situation, do I need the money from Social Security right now or not?”
2) What is your life expectancy?
We often think about retirement as the stopping point of work but forget that it’s the beginning of the next, typically fairly long, phase of life. This phase could go all the way into your 90s or beyond. We are a healthier generation which brings longevity.
If you need your money to last as long as you do, Social Security can be a pivotal part of the equation. People with no real health issues should consider that for their life expectancy. Those with some sort of illness or family history of shorter life spans should make that part of the financial conversation.
The risk that I see most of the time with retirees in retirement planning is not that you pass away early. While unfortunate circumstances like that do happen, the more significant financial impact risk is living too long. You are more likely to outlive your finances, which means running out of money.
How long do you expect to live after you retire? While there is no concrete way of determining the age at which you will pass away, you should estimate it for planning purposes.
3) What is your family situation?
Most people don’t consider their family situation when asking when they should take Social Security benefits. There is a spousal benefit to Social Security that should not be overlooked. If you’re married or divorced and were married for at least ten years, your spouse’s benefit is key to your calculations. Your benefit may be higher or lower depending on what their income was, and you would possibly be able to claim on their benefit as well.
Think through when you’re going to claim it and the impact on not only your benefit but your spouse’s benefit as well. Maybe one spouse was employed, and the other stayed home or worked part-time. The second spouse would not have as much of a Social Security benefit. It becomes key to think about when the primary income earner passes away; that benefit would become the surviving spouse’s benefit. Trying to maximize it is an important strategy.
4) How will Social Security benefits be affected based on when you take them?
Lastly, the timing of when you claim your social security matters because every year that you wait, there’s an increase in benefits. You can claim as early as 62 or 60 in some instances. If you are going to claim Social Security benefits early, you are taking a reduced benefit. Generally, it’s a little bit over 7% per year decrease. Every year you wait is approximately a 7% per year increase.
When we run the numbers, the payoff on waiting is only beneficial if you expect to live past your late 70s. If you want to retire or are forced to, like many were in 2020, and you need to start taking Social Security right away, it’s understandable. You should, however, be informed of the consequences of reduced benefits moving forward.
If you have questions or want to run the numbers for your specific situation, I’m happy to talk with you.
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