The decision to claim Social Security is probably the biggest financial decision most Americans will ever make. The difference between making the right decision and making the wrong one can easily surpass $500,000 over a joint lifetime. This is an irrevocable decision, thus it is incumbent upon all involved to truly understand the consequences— both short term and long term— before making their choice.
A little background
Since graduating from University of Wisconsin–Whitewater in 1974, I have spent my entire career in the financial services industry educating and training thousands of financial advisors across the United States, wearing a number of different hats and with a handful of different firms. I spent the first 25 years of my career dealing with Front 9 issues (the Accumulation Phase) of wealth accumulation. Since 2000, I’ve dedicated my career to Back 9 issues (the Distribution Phase) of income and distribution planning, thus the name Back Nine Financial.
Several years ago I came to the realization that no one truly understood all the unique nuances, opportunities and strategies in regards to claiming Social Security benefits. Nor do most people know how Social Security should be integrated with all other assets to create a predictable and consistent income stream for their retirement years.
Social Security is complicated
Think of Social Security as a pension that will pay you a fixed dollar amount for the rest of your life (adjusted for inflation) once you decide to claim benefits. The best way to get the most out of Social Security is to live a long life. The longer you live the more you get. Social Security has spousal benefits attached to the claiming decision; if you’ve been married for more than one year your, spouse can receive their own benefits or half your benefits, whichever is greater. When one spouse dies, the surviving spouse inherits the greater of the two benefits, but not both. Those are the Social Security basics in a nutshell.
If only it could all be that simple! There are 2,728 core rules, and thousands upon thousands of additional codicils in the Social Security Program Operating Manual, which supposedly clarify those rules. In the case of married couples alone, the formula for each spouse’s benefit comprises 10 complex mathematical functions, one of which is in four dimensions.
Why you should wait
Social Security is the primary source of retirement income for almost all Americans. I’m sorry to say that it also represents the only source of income for 50% of all retirees. Think about that: 10,000 Americans turn 66 every single day for the next 17 years, and half of them will only have Social Security benefits to survive. We are living longer. In many cases, much longer. For a husband and wife turning 65 today, there is better than a 50% probability that one of them will live to age 93. That’s a long time to live on Social Security benefits alone.
As far as claiming goes, 42% of people claim benefits at age 62, a full 95% will claim before their Full Retirement Age. Less than 2% will wait until 70. The difference in the check between 62 and 70 is double. You paid FICA taxes for 40 years to get x amount dollars at 62. If you wait an additional 8 years, you get x amount times 2. That’s why I say that 70 is the new full retirement age.
Using the Rule of 72, your money doubles. If your Social Security payment at 70 is double what it would be if you claimed at 62, that means that you earned 9% per year while delaying your benefits.* Where else can you earn 9% guaranteed without risk in today’s interest rate environment? You might be much better off long-term by drawing down on other assets, or continuing to work while waiting until 70. Build a bridge between 62 and 70, and you’ll see a huge difference in your earnings.
Most of us have been paying FICA taxes since we started working during high school. We’ve had well over $100,000 withheld from our paychecks (after tax) over the past 40 years. For those who own businesses, you’ve matched your employees’ withholding over those years, plus paid your own. This year FICA taxes are paid up to $118,500 of earnings, 6.2% paid by the employee and 6.2% by the employer. That’s 12.4%, or almost $15,000 for this year alone. Clearly it’s worth your time to examine how you can get the most benefit out of your many years of paying into Social Security.
In my articles over the coming months, I will cover married benefits and claiming options, divorce and survivorships issues, how Social Security benefits are determined, the solvency of the Social Security system, as well as proposed changes and other topics. I hope they will be a resource for you and your employees as you contemplate retiring and claiming benefits. In the meantime, please don’t hesitate to reach out if I can be of assistance.
*This is due to the guaranteed increase, and factoring in a 2% Cost of Living Adjustment (COLA). COLAs in Social Security have averaged 2.7% per year since they were indexed to inflation back in 1973.