"Show Me The Money," Later Perhaps
How to Maximize Your Social Security Benefits
Last Updated: July 17, 2019
During a year like 2018, when we experienced significant market volatility and an uncertain economic outlook, it can be easy to get focused on the short term. We’re reminded that one way to weather uncertainty is by refocusing on one’s time horizon and revisiting asset allocation to ensure your long-term plans can withstand volatility. As we start the new year, we are at the ready to discuss your current situation and how best to view the current equity correction through the lenses of your unique situation. Importantly, regardless of the swings in the stock market or moves in interest rates, one source of income for many of our clients in retirement stays somewhat constant: Social Security payments.
Background on the Social Security Act
For those curious, the Social Security Act was passed in 1935 and established the Social Security Board to oversee the two main trust funds, which provide old-age and disability-related payments to Americans. The annual report of the trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds usually doesn’t receive much fanfare. In fact, the tome—last year totaling 269 pages of tables, charts, graphs and actuarial predictions—contains plenty of tidbits, not the least of which include predictions of when the trust will run out of money.
While we will not wade into the debate about the relative solvency of the programs at question, we will offer our perspective on a question we often hear from clients as they approach their 60s: “When should I start taking Social Security?” As background, you can elect to take benefits as early as age 62 (or earlier if you are a survivor of another Social Security claimant or on disability) or wait until as late as age 70. The age at which you decide to start taking benefits should be based on your individual situation, as there is no “best” age for everyone.
Key Considerations for Optimizing the Timing of Your Benefits
Here at Segall Bryant & Hamill (SBH), we have various tools to help our clients make an informed decision regarding how to optimize the timing of their Social Security payments. One popular method of determining when to start receiving payments is a break-even analysis, which shows the point when total lifetime benefits received would be equal to the higher monthly payments that would come from taking Social Security at an older age. For example, taking benefits early works out if a client doesn’t live to the break-even age. However, the client who delays benefits in order to receive larger payments must live beyond the break-even point to benefit.
While break-even analysis can be a useful tool, it can cause some clients to be shortsighted. Clients may want to start receiving their Social Security benefits earlier if they are concerned about passing at an early age. Human emotions certainly play a part in this decision. Given a choice between receiving a lower benefit now, or a larger one later, most people prefer the earlier benefit. This makes us think of the well-known quote “Show me the money” from the movie “Jerry Maguire.”
The decision of when to start receiving Social Security benefits needs to take into account several key pieces of information. These include an individual’s outside assets and the longevity risk of living longer than expected. For example, a client with ample outside assets could easily afford to delay filing for Social Security benefits based on his/her existing pool of assets and use the increased benefits as an insurance policy against longevity risk. A financial plan can also uncover hidden opportunities such as a divorcee claiming Social Security spousal and survivor benefits from a former spouse. Widows also have more options for filing depending upon their deceased spouse’s benefits.
Helping You Make an Informed Decision
In the end, a client’s decision of whether to take benefits early is a personal one. At SBH, we are here to help you make an informed decision that takes into account the specifics of your situation. A good time to have us review your options for Social Security distributions is when you turn 60.
The information contained herein is for informational purposes only without regard to any particular reader’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors.