Most people really don’t understand Social Security, but they know they are eligible to take it at 62 years old or as late as 70. Most assume that it’s better to take Social Security while the getting is good. But, what is the best option for you? How much can you really make?
In the financial services industry, we’ve been telling clients for years that to protect your retirement accounts from running out of money before they die, and that they should only withdraw 6%. So if you had a $1,000,000 portfolio, then you could take out $60,000 a year and you should be safe. Then we found out that didn’t work and people ran out of money too soon. So about 20 years ago, we started telling clients that they should really only use 4% or $40,000 a year from $1,000,000. Then all hell broke loose in 2000 and again in 2008 and, once again, portfolios failed (they ran out of sufficient funds to continue the same distribution). So now we know, based on research, that 3.5% is probably the real number. So what does this mean?
How does Social Security play into all this? Well, quite frankly, it’s probably your only asset that will actually pay you an income as if you had $1-2 million dollars in a safe guaranteed portfolio, which will last as long as you live and, most importantly, index for inflation protecting your buying power.
Let’s do a case study on a boomer couple both born in 1953 named Tom and Mary. They both got good paying jobs in 1976. Mary stayed home for a few years, to raise two children. Mary eventually went back to work and her and her husband both plan on working for a few more years. We will assume a 2.8% COLA (cost of living adjustment). Tom’s PIA (primary insurance amount) is $2,400 per month at 66 and Mary’s PIA is $1,800.
Both are 60 years old, born in 1953. They are thinking about taking Social Security in two years at age 62. Sound familiar?
So let’s look at all their options and see if there is a claiming strategy that will give them the most amount of money during their lifetime and protect them from outliving their money.
Here are the Real Numbers:
To maximize their Social Security, it would be better for them if Tom “files and suspends” benefits based on his earnings record in December of 2019 at age 66 and 7 months. This makes Mary eligible for spousal benefits at age 66. At that time, Mary files what is called a “restricted application for spousal benefits” only in December of 2019 at age 66. Mary would then receive $1,340.00 per month. This is called a “file and suspend” strategy, turning on the benefits for Tom’s spouse, Mary.
Tom begins his benefits based on his earnings’ record in May 2023 at age 70. Mary then switches to benefits based on her own earnings in December 2013 at age 70. At that point, Tom receives $3,951 per month and Mary would then receive $2,963 per month.
These are what the numbers would be if they used the primary strategy of “file and suspend” verses taking Social Security early.
So in their first full year on Social Security at age 71, they receive $82,968 in yearly benefits. That’s a lot of money no matter who you are. So if we are looking at $83,000 a year and indexing for inflation, that’s like having 2 million dollars in a safe and secure guaranteed portfolio paying out 4.15% per year and growing for the rest of their lives.
By the time they are both 77 years old, they would be receiving $100,646 a year from Social Security. If Tom lives to 85 and Mary to 90, they will make over $550,644 more by waiting to take Social Security at age 70 years old than they would if they claim it at age 62. Also, their annual yearly income at 85 will be $125,514.00 per year versus $71,316. Wow, what a difference! Which amount would you prefer? The answer is pretty obvious.
Tom and Mary’s accumulative withdrawals using the primary claiming strategy are $2,028,621. Yet, by utilizing the early claiming strategy, their accumulative withdrawals are only $1,477,977. A difference of $550,644.
This number can be a lot larger, especially if we have two moderate income spouses who didn’t take years off to raise children.
Now, is this the Strategy for You?
I truly don’t know. I will tell you that every person and couple is unique and each case is different based on a lot of variables. There are many other strategies that may actually be better; you will need to talk to a qualified advisor who is truly an expert in “Social Security Income Planning” to determine the best strategy for you.
What I wouldn’t do is look at Social Security as a worthless program. It is the easiest program to fix and the most beneficial to you. It is a way to maximize your income, and adjust it for inflation to guarantee and protect you against one of our biggest problems going forward, which is longevity risk. In other words, outliving your money. We are living a lot longer than we ever thought and we need to maximize every income source so we can preserve our other assets.
If the average couple maximizes their Social Security benefits, they will receive around $65,000 or more annually. If we factor in that the wife took a few years off to raise children and therefore have a little lower Social Security benefit, they could still hit $100,000 at some point.