How Will Social Security Fit Into Your Retirement Plan?

One of the most frequently asked questions during our retirement planning meetings is “when should I take social security?”  I often say that the internet is great for information but terrible for wisdom, and researching social security options is no different.  Some articles will say to wait as long as possible, yet another one says to take it as soon as possible.  The truth is that the best time to take Social Security depends on your unique circumstances.

Here are four things we consider when helping our clients determine which social security strategy will be most effective in helping them live out the vision of their ideal retirement.

1. How long can you afford to wait?

“Wait as long as you can” is probably the most common piece of advice surrounding Social Security benefits. That’s because, while you can start taking Social Security at age 62, the Social Security Administration uses this table to determine the age at which you are eligible for full retirement benefits. And if you delay your Social Security at full retirement, the size of your monthly benefits will continue to increase until you reach age 70.

However, what if you are dealing with a chronic health issue that could impact your longevity? Or, what if taking your benefits early is the difference between making ends meet comfortably and having to downsize into a smaller house?  The longer you wait to take Social Security the bigger your benefit will be, but there could be situations where smaller benefits will be more beneficial earlier in your retirement.

As part of our retirement planning process, we analyze how your cash flow would be affected by different social security claiming strategies.  This analysis will give you confidence that you are choosing the most appropriate claiming strategy for your unique situation.

2. What’s your marital status?

Married couples have several factors they need to consider before either person takes Social Security.

First, compare your individual benefit estimates. If one spouse’s projected benefits are significantly higher, it might be a good idea for only the lower-earning spouse to claim benefits and let the higher benefits continue to grow.

However, if one person earns more than double their spouse’s income, the lower-earning spouse can take a spousal benefit equal to 50% of the high earner’s benefit.

Divorced people over the age of 62 who were married for at least 10 years might also be eligible to receive Social Security benefits based on their ex-spouse’s earnings record.

3. What will be the tax implications?

If you have reached your full retirement age, but wish to continue working, your Social Security benefits could be subject to taxation based on your combined income (if married.)  At a very basic level, this income amount is the sum of your adjusted gross income (AGI,) your non-taxable interest payments, and half of your Social Security benefit. Individuals who earn between $25,000 and $34,000 in combined income in retirement may have to pay tax on up to 50% of their Social Security benefits. Folks who earn more than $34,000 may have to pay taxes on up to 85% of their benefits. The 50% threshold for married couples filing jointly is between $32,000 and $44,000, and the 85% threshold is above $44,000.

One increasingly common situation where these figures come into play is retirees working part-time. Many seniors who want to keep cashing those paychecks are better off delaying their Social Security benefits so that their combined income does not get too high. Once those retirees stop working for good, they can claim higher benefits without an added tax burden.

Another scenario that could lead to unintended tax implications is if you claim social security benefits before your full retirement age but continue working.  In this case, if you earn more than $1,580 per month ($18,960 annually) your social security benefits will be reduced by $1 for every $2 you earn over the limit.  For instance, if you earn $2,400 in part-time income each month, your social security monthly benefit would be reduced by $410 per month.

4. Don’t let fear make your decision

This last point is not so much a “strategy,” but rather a behavior that could lead to poor social security claiming decisions.  Each year social security publishes its annual report and each year there are several articles stoking fear that social security will run out of money in ten to fifteen years, and everyone will lose their benefit.  This has led some people to “grab” their benefit as soon as possible to ensure “they get their money back.”

It is true that if nothing changes between now and 2035, the social security trust fund would be depleted (based on the 2020 report.)  However, projections also show that 76% of expenditures for social security would be covered by payroll taxes, so the worst-case scenario is that benefits could be cut by 24%.

However, I’m a cynic, and whatever political party that would be in “power” at the time the entire countries social security benefits would be cut by 24% would be committing political suicide, so I see no way that happens (obviously, just my opinion.)  There are a lot of “levers” that could be pulled between now and 2035 to keep the social security trust fund from being depleted.  Regardless of how you feel about the current political climate, fear is usually not an ally when making financial decisions.

Making the transition from “earning” an income to the somewhat fixed income of retirement can be a daunting and scary transition to make.  With various options for Social Security, it can be hard to get clarity on the best choice for you.  We have walked with many, many people through this transition and if you have questions about the best time to take Social Security, please schedule a time to discuss your situation.

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