On Determining When To File For Social Security Benefits
Written by: Michael Carbone, CFA, CFP®
The question of when to file for Social Security (S.S.) benefits may be difficult to answer, but it’s extremely important to get it right. Why? Because these benefits may pay for a significant percentage of your retirement spending and your decision is generally irrevocable after one year. Pre-retirees who make unadvised decisions about their S.S. benefits may lose hundreds of thousands of dollars in lifetime income. So, how can pre-retirees determine the appropriate filing strategy?
Pre-retirees’ may start by determining how much income they’ll receive at various filing ages. Generally, the longer you wait to start collecting, the greater your base of income will be, and vice versa. This is especially important because annual benefits will rise with the cost of living (i.e., inflation). So, the greater the base of income, the greater the annual increase (in dollar terms). This can be an incredibly powerful hedge against longevity.
Married couples should also seek to understand the rules around spousal benefits. I believe it’s especially important to make forward-looking decisions when considering spousal benefits. Why? because the surviving spouse will inherit the larger of two benefits, which may be an important scenario to consider from a retirement income planning perspective.
Once the pre-retiree understands how much they’re likely to receive at different ages, they may consider how their benefits will tie into their overall financial plan. Since Social Security is one of the few guaranteed benefits with inflation protection, I believe that the average pre-retiree should seek to identify the filing strategy that minimizes their risk of outliving their money should they live well beyond their life-expectancy. This can generally be accomplished by conducting a break-even analysis. This analysis will help the pre-retiree understand the age they must live beyond in order to benefit from filing later. For example, the analysis may conclude that if the higher earner delays benefits until the age of 70 at least one spouse must live until the age of 82 before receiving more in lifetime benefits than if they were to start collecting benefits at the age of 67.
Some pre-retirees may want us to incorporate investment scenarios into their break-even analysis. For example, they may want to consider the potential opportunity cost of not receiving benefits for a number of years. Since delaying benefits will require the retiree to spend down their assets (to replace the S.S. income they’d otherwise be receiving), the analysis may include the potential cost of this money not being invested during these years. The greater the potential return on the money, the longer it will take the break-even by delaying benefits.
It's important to also consider additional factors into your analysis. For example, the taxation of S.S. benefits is nuanced – and may affect the taxation of your other sources of income.
Social Security rules are very complicated. Pre-retirees hoping to make an informed decision may consult a professional who is familiar with social security planning. At our firm, we specialize in guiding individuals and families through retirement. We believe that it’s imperative that pre-retiree’s view their social security decision within the context of their overall financial situation – reviewing different scenarios to select the strategy that ultimately puts the odds of long-term success in their favor. We’re currently offering pre-retirees an opportunity to meet with us for a complimentary consultation during which we’ll analyze their filing strategy. Please reach out to me at email@example.com or 978-455-799 if you feel this would be a valuable exercise for you and your spouse.
Thank you for reading!
Eppolito Financial Strategies, LLC. is not a registered broker/dealer, and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Regarding Social Security issues, please make sure to talk with your S.S. representative. Media advice on S.S. is often incomplete, as the rules are very complicated and are subject to change.
Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Financial and investment planning inherently involve potential tax and legal implications, with which we are generally familiar. We do not, however, practice as lawyers or CPAs and cannot give specific legal or tax advice. You should always consult with your tax advisor, or your attorney, when making complicated legal or tax decisions, however, we’re glad to work with your tax or legal professional to help you meet your financial goals. Raymond James financial advisors do not render advice on tax or legal matters.