Financially Speaking
ENDLESS INCOME
One of the great things about Christmas is that almost everyone receives a present. It might depend on whether you are naughty or nice. As I write today, it is July 25, a day when some celebrate Christmas in July. Wouldn’t it be nice if we could capture that Christmas spirit forever? As we approach Labor Day, we think how wonderful it would be to have an endless summer. Summer is a time that conjures up many great memories, and we wish that feeling could last forever.
Well today, I want to speak about something that can affect your happiness — not forever, but at least until the day you die. That is lifetime income. Although most of you reading this might have other assets, Social Security might be the only thing providing you an income for life. It is something that most of us will receive when we reach full retirement age. Full retirement age is 66, if you were born before 1954. It increases 2 months each year until full retirement age is 67 if you were born in 1960 or later. Why does this matter? When you decide to elect Social Security could impact the quality of your life.
Throughout my career, probably the No. 1 question I have been asked is when someone should apply for Social Security. There is no simple answer. It depends on a number of things, such as your health, income, debt, and life expectancy. The average life expectancy at age 65 is age 82 for a man and age 85 for a woman (based on the Social Security actuarial tables). If you live to an average life expectancy, your lifetime income from Social Security will be about the same, whether you claim your benefits early (age 62) or later at age 70. But, if you live longer than your life expectancy, waiting to claim a bigger Social Security benefit could mean a more secure retirement. If age 66 was your full retirement age, and you waited until age 70 to receive Social Security, you will enjoy a maximum delayed retirement credit of 32%. This means your Social Security benefit increased 8% each year from age 66 to age 70.
The earliest you can collect Social Security is age 62 (age 60 if you are a widow). If you claim your Social Security benefit early, your benefit amount will be approximately 75% of what it would have been if you waited until your full retirement age 66. Also, if you elect Social Security early at age 62 and are still working, there is an earning restriction. You will lose $1 of Social Security benefits for every $2 you earn more than $21,240 (if you are younger than full retirement age for the entire year). There is a different earnings cap in the year you reach full retirement age, which is $56,520 in 2023.
Unfortunately, many choose to elect their Social Security benefit without getting all of the facts. One woman I spoke with recently told me she elected her benefits at age 62. I asked her why and she said that her best friend told her to take her Social Security benefit at 62, since Social Security was going broke and she may not get it. Misinformation is a killer. This woman, now in her late 70s, is upset since her monthly benefit is low, and there is nothing she can do about it. Some people want their Social Security as early as they can get it. They fear their benefits could be cut in the future if the Social Security trust fund dries up before Congress fixes it.
There are those who elected benefits so they could take advantage of the 8.7% Cost-of-Living Adjustment increase in 2023. Anyone who is 62 or older in 2023 will automatically receive the COLA when they apply for Social Security in the future. Basically, any COLA that is awarded from the time you become eligible at age 62 until you file for Social Security will be automatically included in your future benefit. So don’t panic and elect Social Security for fear of missing out.
Every election cycle, the Democrats and Republicans blame each other about wanting to cut Social Security benefits. These statements are designed to invoke fear, which it generally does. It is highly unlikely that Congress will vote to cut benefits for those near retirement or for current retirees. It would be political suicide and the quickest way for a politician to not get reelected. Not that I’m cynical, but if a politician’s lips are moving, they may be lying.
When you’re deciding when to start Social Security, different claiming strategies make sense for different people. If you are married, it’s sometimes recommended for the spouse with the higher Social Security benefit to wait until age 70 to file, so they can collect the largest monthly benefit while both are living. More importantly, it creates the largest possible survivorship benefit for the surviving spouse. Upon death, the larger Social Security benefit will continue for the balance of the surviving spouse’s life, while the smaller benefit they were receiving goes away. At the same time, it makes sense for the spouse with the lower benefit to collect their Social Security benefit when they attain full retirement age, or sooner if not working. This can help increase the couple’s cash flow while waiting for the other spouse to claim their maximum retirement benefit at age 70.
Claiming retirement benefits early results in a permanent lower lifetime benefit. This will have no effect on them receiving the survivorship benefit (the higher amount their spouse was receiving), as long as they are full retirement age when their spouse dies.
If both spouses are high wage earners and are eligible for substantial Social Security benefits at their full retirement age, they may want to hedge their bet. Have one spouse claim Social Security at full retirement age (when the earning restriction ends), while the other spouse delays electing Social Security until age 70. Although waiting until age 70 will provide them the maximum lifetime cash flow, they may not realize a survivor benefit since the benefit of the deceased spouse was the same or smaller.
If you are single, it probably makes sense to wait until full retirement age, especially if you are still working. If you wait until age 70, your monthly benefit may be larger, but the main benefit of waiting is to provide a larger benefit for the surviving spouse.
If you are divorced and were married for at least 10 years, you are able to claim Social Security benefits based on your ex-spouse’s earnings record. Social Security will pay the higher benefit available whether on your own earnings or your ex-spouse’s earning record.
Before you decide when to take your Social Security, sit down with a counselor at the Social Security Administration to get all of the facts. Write down all of your questions before meeting with them to get the best results available to you. In addition, you may also want to read Mary Beth Franklin’s book, “Maximizing Social Security Benefits,” which features this great quote: “Claiming reduced benefits out of fear is a bit like selling stocks in a down market: you are guaranteed to lock in a loss.” I couldn’t agree more.
Now that you have made the decision on when to collect your Social Security benefit, relax and head to the beach with your favorite beverage, book, and chair, and dream of an endless summer. Don’t forget the sunscreen.
