The 5 Years Before You Retire: Retirement Planning When You Need It the Most | Chapter 5: What to Expect from Social Security - Part 2

Last week we mentioned the many factors that go into Social Security Retirement Benefits, and how that particular benefit is funded.

To repeat: for most Americans, the main (and often only) decision regarding Social Security is this: When should I start my benefit? That means our job is to give advice to our clients on when they should start this lifetime income stream, all things considered

Here are the principles we use when advising on when our clients should start their Social Security income.

1. Unless there’s a good reason to solve for something else, what we answer first for our clients is, “How much can I spend safely and consistently?”

   • This considers all potential income sources: pensions, investment distributions, and Social Security, and “smoothes” income so that you are spending the same amount regardless of when you start Social Security.

   • This means that if we recommend you delay your $3,000/month Social Security, it’s because we want you to take $3,000/month extra from your investments until your Social Security starts. It’s not an option to simply delay that income and go without it for years. It’s about what timing strategy results in the highest total income now, regardless of source.

   • When we do it that way, we know that the longer we delay, the higher the benefit will be, and the more we will reduce investment distributions once Social Security is finally turned on.

   • Almost always, delaying Social Security means our clients can spend more starting right now.

2. Social Security is not primarily an income stream, it is primarily an insurance policy against longevity i.e. living longer than you anticipate.

   • If we plan for you to wait to start Social Security until 70, and you die at 71, that is not a problem financially and does not mean it was a bad plan. You were not deprived of income from 62 to 70 (we were taking more from your portfolio than would be indefinitely sustainable). Beyond this, we are not spending all your investments assuming you will die at 71, so why take that approach with Social Security?

   • If, on the other hand, you start Social Security at 62 and have a reduced income that lasts into your 90s, this puts a much heavier strain on your investments to maintain an additional income source for decades and increases the chances that you’ll run out of money.

3. Couples should almost always delay starting the income of the one with the higher Social Security benefit.

   • Unless there’s a known chronic or terminal illness, chances are that any couple in their 60s working with us will have at least one spouse live until 90 or longer. When one spouse dies, the higher benefit remains and the lower benefit goes away. Delaying the higher benefit will provide much more income throughout a lifetime that can last decades after the maximum filing age of 70.

4. The solvency issue is a reason to delay your income, not to start it early

   • It is reasonable that many who are concerned with the solvency of the Social Security program want to start their income so they can “get it while it’s there.” Our advice is the opposite.

   • Given that there is not a concern that the entire program will vanish overnight nor that no future benefits will be paid (see funding discussion from last week), the main concern in a worst case scenario is that your benefit gets cut by 25%. If that were to happen, the question is if it’d be worth getting that 25% for a few years and then having a reduced benefit for decades.

   • If you need the income from Social Security and are concerned your benefit will get cut, it’s all the more reason to wait and have your benefit increased so that in the chance of a cut you still have sufficient income.

5. Starting Social Security income at a financially suboptimal time is okay if two other things are true.

   • Firstly, if you still have a high likelihood of reaching your financial goals, including your goal for consistent, safe monthly income that rises with inflation. If you put your monthly income needs at risk by wanting to start Social Security at a suboptimal time, our job is to help you be comfortable delaying, otherwise we’ll recommend you find another advisor who can do a better job than we can.

   • Secondly, if you consider the following trade-off to be net-positive. On the one hand you will have reduced total monthly income you’ll have to accept for life (and not be able to go back on this decision), and on the other hand you’ll have the peace of mind (ability to sleep better at night, etc.) knowing that you’ve already started your Social Security income.

   • We’ve had clients who gave up a few hundred dollars of monthly income for life because it meant they could start Social Security now, and they couldn’t get over the fact that it was harder to sleep at night knowing they hadn’t started their benefit. We reviewed their income plan and even with the reduction of income, they were still able to meet all their income goals.

   • As with any financial decision a client has to make, and any piece of advice we give, the goal is not ultimately to maximize income or net worth or investment returns. The goal is to give you the best life you can imagine. When those align with maximizing those things, that’s wonderful. But when there’s a trade-off, we weigh the non-financial as much as the financial.

Let us know

• If you haven’t started Social Security, when do you plan to start your income?

• If you have already started your Social Security income, what was the decision process as to when you started?

Until next time, happy reading!