The question of when to file for Social Security benefits is a frequent topic of conversation with our clients. Even with ultra-high net worth clients, the value of the income stream from Social Security is large enough to warrant a careful discussion. Indeed, the capitalized value of an inflation-adjusted income stream that pays several thousand dollars per month for the rest of someone’s life is worth hundreds of thousands of dollars.
When planning your financial independence and incorporating income streams like pensions and Social Security, it is important to get it right. Perhaps somewhat surprisingly, the decision of when to file for benefits is a fairly complex calculation. Every family’s situation is custom and must take into account their liquidity needs, health and comprehensive financial picture. Still, we can draw some important conclusions that apply to most folks. The following are some of the best practices of what to do and what not do, with respect to filing for Social Security benefits.
What Not To Do
If you are still working and between the ages of 62 and 65, you should not be taking your Social Security benefit. Full retirement age is currently at 66 and the earliest age that you can elect to take Social Security benefits is age 62. If you are still working at 62 and elect to take Social Security, your benefits will be reduced by $1 for every $2 that you earn above a limit of $17,640. In other words, by taking benefits early while at the same time earning income through work, you are permanently reducing your long-term benefit and reducing your payout in the short-term. It is a lose-lose decision.
A common fact pattern among married couples: a husband is older and has been the primary income earner for the family. As a result of being the primary earner, the husband’s Social Security benefit is much higher than his wife’s. The wife in this situation is slightly younger, and, actuarially, has an expectation to outlive her husband in retirement. An important financial planning exercise for all couples is to create a plan to provide for a widowed wife after her husband dies. The odds are that this is how it will play out for most elderly married couples. When a husband dies, the wife will then take over his Social Security benefit, if it is higher than hers. In this case, if the husband were to take Social Security early at 62, he would be permanently reducing an income stream that is applicable not just to himself, but to his wife after he dies. The takeaway: a high-earning husband should not take Social Security benefits early if his wife expects to take over his benefit.
What You Should Do
Consider your health and the health of your spouse. If you are both in poor health and have reason to expect a shorter lifespan, you should both take Social Security immediately. On the contrary, if one spouse is healthy and the other is sick, this might be the time to delay the Social Security benefits of the higher-earning spouse in order to boost the benefit that will be left to a surviving spouse.
Consider your cashflow and liquidity. The income stream from Social Security payments can be substantial and provide relief when you are lacking liquidity and cashflow from other sources. It often makes sense to delay Social Security past Full Retirement Age, but if your capital is tied up for other purposes (illiquid investments, a private business, or unexpected expenses, for example) then it may make sense to begin Social Security benefits earlier.
Consider prevailing interest rates. Social Security was established by Congress many decades ago, without consideration of what was happening in the financial markets. We are currently in a period of very low interest rates. It is difficult today to receive a risk-free return on bonds that is much above inflation, particularly net of taxes. Most recently, the 10 Year US Treasury Bond yielded just above 2.6%. But things were much different in 1994, when the 10 Year US Treasury Bond approached 8%. If you could receive Social Security benefits and re-invest those cashflows at a guaranteed rate of 7 or 8%, the argument for taking your payments early becomes fairly compelling. In today’s environment, re-investing Social Security cashflows at 3% yield or below is not nearly as attractive. As financial markets change and interest rates change, so should your analysis of when to take Social Security benefits.
Determining when to take your Social Security benefit is a custom decision to each family that incorporates medical health, liquidity, work history and future earning potential. Because it is such an important part of a family’s financial plan, even for those with very high net worth, it is critical that a thoughtful and detailed plan is created. We always welcome the opportunity to provide guidance to clients and prospective clients on how Social Security benefits should play a role in their financial independence.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.