Many Americans depend solely on Social Security for their retirement lifestyle. Unfortunately, too many people are under the false assumption that Social Security will be enough to cover all their expenses. The following statement is taken directly from the front page of the Social Security statements prepared
by the Social Security Administration.
“Social Security is the largest source of income for most elderly Americans today, but Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.”
While one needs to consider all of the other retirement income sources, given the flexibility in the starting date of Social Security benefits, the biggest issue for most individuals and couples as they approach retirement is when to start taking the benefits. This is especially true for married couples. When is the ideal time to begin drawing on your Social Security benefits? The best answer is that it depends. It depends on a lot of factors. You can begin to receive Social Security benefits as early as age 62, which is considered early retirement. In some cases, this might make a lot of sense. In other cases, it may be better to wait until age 70, which is the latest you can begin to take Social Security to maximize your benefits.
Here are two examples from our book, Money Talks: Life Lessons to Help You Plan Now, Save Wisely, and Retire Well of how making the decision as to when to begin drawing Social Security is not always as simple and straight forward as it would seem. Gary and Liz are retired. Gary chose not to retire until age 70 so he could maximize his Social Security benefits. He was healthy, didn’t smoke, and expected to live for a long time. Together, they had done an excellent job of saving for retirement. So, when Gary retired at 70 and started his Social Security payments, Liz was at her full retirement age of 66, so it made sense to start her benefits at the same time.
At age 71, exactly one year after retiring, Gary discovered that he had pancreatic cancer and died a year later. Liz was devastated emotionally after losing Gary, but she was very upset when she thought about how they had planned their retirement, maximizing Gary’s Social Security benefit to support their long-term plan. However, once Liz reviewed her financial situation, she was relieved when she found that they had in fact done the right thing after all. After Gary died, Liz learned that she inherited his Social Security benefit, but lost hers, as Gary’s was the greater of the two. Since Gary had worked until age 70, she was receiving the highest benefit possible.
The same cannot be said for Joseph and Sally. Joe planned to work until age 65, but when an early retirement package was offered; he took it at age 61. Sally was 61 as well, still working and carrying the family health insurance through her employer. Between his pension and her income, they were living a comfortable lifestyle. A year after retirement, Joe picked up some old hobbies, including golf and wood-working and his expenses started to increase. When he turned 62, he started his Social Security benefits to supplement his pension and her income. Sally worked three more years to age 65, and then retired when they both were eligible for Medicare. Sally’s Social Security benefits were significantly lower than Joe’s, even though she had waited until age 65, so she was pleasantly surprised when she qualified for spousal benefits and received more money. Spousal benefits are typically 50% of the other spouse’s income (amount may be reduced, depending on the age of the spouse when the benefit is initiated). Check with the Social Security Administration for specific details regarding the calculation of these benefits.
Joe expected to live a long time. After all, when he retired at age 61, both of his parents were still alive in their 80’s. So, when Joe chose his pension, he picked the highest amount, based on his single life. That meant that he would receive the highest payment amount for as long as he was alive. However, there was no provision for Sally after his death. Since he had taken the highest pension amount and he expected to live a long time, he felt that taking the lower Social Security benefit, starting at age 62, made sense. The extra money allowed Joe and Sally to live very comfortably in retirement.
Unfortunately, Joe was playing golf one day and had a heart attack on the golf course and passed away shortly thereafter. He was only 67 years old. Sally was distraught, but what really shocked her was when she found out that she lost Joe‘s pension and her Social Security benefits immediately upon his death, leaving her with only one income source, Joe’s Social Security benefits. Once a spouse dies, Social Security only continues to pay out one benefit, whichever is the higher of the two payments. And although Joe’s benefit was the larger of the two, since he had started his Social Security benefit early at age 62, his benefit had been reduced about 25% from the amount that he would have received at his full retirement age of 66. That left Sally with about 40% of the income that she and Joe had been living on before his untimely death.
These are just two examples of why knowing when the right time to begin taking Social Security benefits can be a tough decision. The beauty of life is that we never know what lies ahead of us. If we did, it would be all too predictable. However, not knowing what lies ahead makes planning for the future that much more difficult. As a result, the decision when it might be best to start Social Security benefits is not easy.
As financial advisors, we often recommend that you plan for the worst and hope for the best. Good planning anticipates potential catastrophes and develops a strategy that can address them if they actually occur. Retirement can be a long-term proposition, though it can also be cut short. Since no one individual knows which it will be, we have to anticipate both scenarios and balance them in order to help our clients achieve an enjoyable retirement lifestyle.
Don’t hesitate to contact us, if you have questions regarding when to begin taking your Social Security benefits.