Planning Spotlight: Social Security

What it is. How it works. When to take it.
Planning Spotlight_Social Security

As holistic wealth managers, Comprehensive Wealth Management not only focuses on investing your money but also planning for a successful retirement. For many people in retirement and for those approaching retirement, Social Security benefits will play a substantial role in the success of your financial plan. Most people know that Social Security exists but do not understand the differing options available. This is where a sound financial plan is essential because there is no “one size fits all” answer to when you should start your benefits. It is heavily dependent on your specific goals and situation.

First, let’s discuss what Social Security is. It is a government program that provides a guaranteed monthly income stream to you. This income is also adjusted for inflation each year. The main way to qualify for your benefit is to accumulate 10 years of working history where you paid social security taxes. Your benefit is calculated based on your 35 highest-earning years (indexed for inflation). This is then broken down into monthly payments. There are many calculators online that can estimate your social security benefit. However, creating a log-in directly with the Social Security Administration (www.SSA.gov) will give you the most accurate estimate of your Social Security income. An additional benefit of establishing an online profile with SSA is as a cybercrime deterrent. Cybercriminals will find it more difficult to impersonate you if they cannot create a login in your name.

There are a few other ways to qualify (spousal benefits, widow benefits and ex-spouse benefits) but those are less common. Your CWM advisor can assist you in determining if you qualify for one of these benefits.

How is Social Security funded? Social Security is a combination of employer and employee contributions in the form of a wage tax at a rate of 6.2% each. Next time you receive a paystub, take a look and you’ll see this tax withheld. Another reason to log in to www.SSA.gov is to check your employment income history; since this is how your benefit is calculated you want to ensure the SSA has correct information on your employment record.

Now that we know what Social Security is and how it’s funded, the next major question is when you can claim your Social Security income. If you are eligible for Social Security, you can start taking your benefit as early as 62. However, as the chart below shows, the amount that you receive will be less than if you wait. By starting your Social Security benefits at age 62, you will receive 70% of your full benefit. If you wait until the Full Retirement Age (FRA) of 67, the benefit that you receive will be 100% of your full benefit. If you wait until age 70, the benefit will be 124% of your full benefit.

1. Full Retirement Age Spectrum

One additional thing to consider is do you plan to continue working while claiming your benefit? If you claim your Social Security benefit before your FRA and continue to work, the benefit will be garnished depending on what your earnings were. Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit ($22,320 for 2024)1. In general, we do not recommend starting your benefit before you retire, however individual situations vary, and we recommend connecting with your CWM advisor to discuss your specific needs and financial plan.

Upon seeing that your benefit keeps growing the longer you wait, most people have the same question: “Wouldn’t I want to wait until age 70 to take my Social Security and get the maximum payout?”. That depends on a variety of factors including life expectancy and the break-even age. To help illustrate this let’s look at the chart below which specifically considers these two factors.

In this illustration, if you were to take your benefit at 70, you would need to live to at least 11 more years to make sure that you will receive more in lifetime benefit than you would have if you took your benefit at age 67 (FRA). Currently, the statistical likelihood of a male reaching age 81 is 53% and a female is 66%. Similarly, the illustration shows that if you took the benefit at FRA, you would need to live until at least 77 to reach the break-even point.

2. Cumulative individual maximum benefit claim by age

Over the last decade, life expectancy in the United States plateaued and even witnessed a drop in 2021. According to the CDC, life expectancy at birth in 2022 was 77.5 years2 (up 1.1 years from 20213, but down by 1.3 years from a decade previously4). While there are many factors that comprise the life expectancy equation, this variability highlights the uncertainty when trying to “maximize” your social security benefit.

You must also consider where the funds are coming from to pay for retirement if you choose to wait to claim your social security benefits. The longer you delay taking Social Security benefits the longer you will need to pull funds from your investment and retirement accounts to offset the benefits you are not receiving. We also often see a “Retirement Bump” in spending right after people retire. This usually comes from wanting to, rightfully, enjoy your retirement after you cross the finish line of working. However, now you may be pulling even more funds from your own investment and retirement accounts. The below chart helps illustrate what taking social security early and keeping your own funds invested can do to your break-even age.

3. Comparison of claim age

Determining when you should start taking Social Security will vary based on your specific circumstances. There may be additional factors such as pensions, rental income, or annuities that can influence a recommendation. By working with your CWM advisor to chart your financial course and what is right for you, your goals, and your idea of living richly you can understand the variables and choices available to you in retirement.

If you are interested in a more robust conversation regarding when to take Social Security or other financial topics, please Contact Us or call the office at (425) 778-6160 to schedule an appointment with your CWM advisor.

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1 What happens if I work and get Social Security retirement benefits? (n.d.). https://faq.ssa.gov/en-us/Topic/article/KA-01921
2 Arias, E., Ph. D., Kochanek, K. D., M. A., Xu, J., M. D., & Tejada-Vera, B., M. S. (2023). Provisional life expectancy estimates for 2022 [Report]. https://www.cdc.gov/nchs/data/vsrr/vsrr031.pdf
3 Arias, E., Xu, J., Kochanek, K., U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, Centers for Disease Control and Prevention, National Center for Health Statistics, & National Vital Statistics System. (2023). United States Life Tables, 2021. In National Vital Statistics Reports (Vol. 72, Issue 12). https://www.cdc.gov/nchs/data/nvsr/nvsr72/nvsr72-12.pdf
4 Arias, E., Heron, M., Xu, J., & Division of Vital Statistics. (2017). United States Life Tables, 2014 [Journal-article]. https://www.cdc.gov/nchs/data/nvsr/nvsr66/nvsr66_04.pdf

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