By Jim Werner, CFP
If you visit or call the Social Security Administration office, they will remind you that they give information, not advice. And since no one wants to leave money on the table, it is important to create an awareness of traditional and new strategies on how to enhance your benefits. While delayed retirement credits have the potential to offer a greater lifetime benefit, collecting earlier than age 70 may be worth a second look even if you don’t need the money.
Social Security is considered an income, as opposed to an asset. Once you begin, the traditional benefit does not offer you much flexibility or control. You can’t call Social Security and ask for a raise, a pre-payment, or a lump sum.
Collecting earlier than 70 and banking the money creates an asset. Having access to assets offers control, access to lump-sums, and enhanced benefits for survivors and the options to make gifts. An asset will allow you to pay yourself cost-of-living adjustments on your schedule, in addition to what traditional Social Security may offer. Let’s consider this idea to transform your Social Security benefit into an asset.
The Traditional, Individual Social Security Benefit
One way to compare Social Security strategies is to review the total benefits received during your lifetime. For someone who is turning 62 this year the full retirement age (FRA) is 66 years and 10 month. For this example, let’s say the individual benefit is $1,000 per month at FRA. Should they:
· Collect $708 at age 62,
· Collect $1,000 at FRA, or
· Delay collecting until 70 and collect $1,253?
There is no one-size-fits all answer, as it becomes a game of life expectancy. As you can see from the chart below, the cross-over point or break-even age to maximize your lifetime benefit will depend on when you begin to collect.
Be reminded that there are important rules about collecting Social Security if you have earned income. Visit SSA.gov for more info.
(For this example, we will use a person turning 62 this year, which means their full retirement age is 66 years and 10 months. We will also assume a cost of living adjustment (COLA) of 0%. There is no earned income once Social Security benefits are received. All values are after-tax values.)
Helpful resources: Visit https://www.ssa.gov/planners/retire/agereduction.html to see your FRA based on your birth year and benefit reduction if you collect before FRA. Visit https://www.ssa.gov/planners/retire/whileworking.html to see how earned income may affect your Social Security benefit.
Social Security – Creating Income from an Asset
Now, let’s look at the same example with a twist. Let’s say you don’t need the money at age 62, and decide to collect. Since you don’t need the money, you save the money. Between age 62 and FRA (66 years + 10 months), you would have saved $41,064. These savings can provide a few benefits that a traditional Social Security income can’t offer:
· Access to a lump-sum, in the event of unforeseen expenses,
· Access to make gifts, or provide a lump-sum benefit for a loved one to enjoy, and
· The savings can be used to help supplement future income.
At FRA, your benefit is still $708, as you started collecting at age 62. Now, let’s use the savings to help supplement your income at FRA.
The savings can be used to create income of $136 per month, using a 4% withdrawal rate. ($41,064 x 4% = $1,642 per year, or $136 per month).
Combining your Social Security benefit of $708 with your income from savings of $136 provides with a new total benefit of $844 per month, plus you have access to a lump sum in needed.
(This example assumes a COLA of 0%, and there is no earned income once Social Security benefits are received. This also assumes a 0% rate of return on savings, to showcase a conservative example. Any COLAs or investment returns in excess of 0% will provide a more favorable result. All values are after-tax values.)
Let’s expand this example and compare the two options. At full retirement age, would you prefer:
· Option A: $844 per month, with $41,064 of Social Security savings, or
· Option B: $1,000 per month, with $0 of Social Security savings.
The income difference between option A and option B is $154. It would now take 22.2 years (to age 88) for the extra income received in option B to exceed the income and savings created in option A.
Same But Different – Collecting at FRA vs. 70
Let’s review a new example of someone who is 66 this year, and is considering collecting now or delaying their benefit until 70. For this case, the full retirement age is 66, as this holds true for people born between 1943 and 1954. And unlike the first example, the annual earnings limit does not apply once you are full retirement age.
For this example, let’s say the individual’s benefit at FRA is $2,000 per month, after taxes. This person decides to collect and put the money into savings. Is it better to collect a reduced benefit of $2,000 today, or wait until 70 and collect $2,640 per month?
Between 66 and 70, you would have saved $96,000. Using a 4% withdrawal rate, this savings would create an income of $320 per month. When combined with your Social Security benefit of $2,000 per month, the combined income is now $2,320 per month at 70.
Comparing the two options, at age 70, would you prefer:
· Option A: $2,320 per month, with $96,000 in savings, or
· Option B: $2,640 per month, with $0 of Social Security savings?
Option B clearly offers a higher benefit by $320. For a person delaying the benefits to 70, how long would it take for them to make up the difference of $96,000 saved by the person selecting option A? It would now take 25 years (to age 95) for the extra income received in option B to exceed the lifetime benefit earned by option A.
One More Suggestion….
For people that have reached FRA and are still working, consider using your Social Security benefit to fund an employer-sponsored tax-deferred savings plan such as a 401(k), 403(b), 457, or SEP or Simple IRAs.
As an example, you turn on Social Security at FRA and $1,000 is received into your checking account. At the same time, you increase your withholdings into your employer-sponsored, tax-deferred savings account by $1,000. This will reduce your take-home pay from the employer by $1,000, but your Social Security benefit is used to supplement the reduced take-home pay. The result is that the checking account looks the same, but you are now saving $1,000 a month more in the tax-deferred accounts. If you do this using pre-tax dollars, then the taxable portion of Social Security is offset by the pre-tax savings. Actually, you will come out ahead a little, as 85% of the Social Security is taxable while 100% of the tax-deferred savings is pre-tax.
Too many times people intentionally defer Social Security benefits because they are interested in the value of the delayed retirement credit. Collecting earlier than 70 is worth a second look even if you don’t need the money. Collecting early can help create an asset that offers increased income, access to lump-sums, and flexibility and control of the asset. The strategy also allows the saver to extend the break-even or cross-over point a few years, which makes it more favorable to collect earlier than later.
About the author: Jim Werner, CFP®
Jim Werner, CFP® is a Vice President with Halliday Financial. Halliday Financial is full service, comprehensive financial planning and investment advisory firm in Glen Head, NY. Jim and his specializes in helping union members, educators, and administrators make smart decisions with their finances.
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