When it comes to social security, most people have little knowledge of how the system works. Sure, they know that when they reach a certain age, they can claim benefits, but they don’t know the nuances of social security or how to use it strategically to supplement their retirement income.
As such, the tendency for those in their 60s is to start receiving benefits at age 62. However, depending on your situation, delaying your benefit may be a better strategy. Consider these facts:
• At birth, a man’s life expectancy is 74.8 years. For women, it’s 80.1 years;
• At age 65, a man’s life expectancy increases to 81.6 years, and a woman’s to 84.5; and
• Regardless of gender, there’s a 50 percent chance of living beyond your life expectancy.
So what does this mean for you? Even though no one can predict how long you’ll live, chances are you’re going to live beyond age 65, and you’ll be more likely to need money when you’re over age 80, since by then you’ll have spent a good portion of your retirement savings. And with medical advances extending life expectancy, you may live into your early 80s and beyond.
Even if you have a high net worth and a $5 million portfolio, social security is an issue you need to address. After all, it’s your money and your retirement, and you want everything you deserve. So as you think about social security and how it can supplement your retirement, use the following strategies:
Wait until age 66 to receive benefits. Delaying social security benefits from age 62 to age 66 increases the benefit by 36 percent. So if your benefit at age 62 is $2,000 per month, delaying that benefit to age 66 will increase your amount to $2,720. Over a year’s time, that’s an additional $8,640 you have for your retirement years. Depending on your financial situation, $8,640 may mean the difference between affording your medications or not. If you’re well off, that money could fund the cruise you’ve always wanted to take.
With this strategy, your break even year is age 76. That means if you were to start social security at age 62 and put all the money into an account and never touch it, by age 76, you’ll have accumulated the same amount of money that you’d have collected had you delayed your benefits to age 66. So you’re not losing any money if you delay your social security—you’re simply getting it at a different rate.
Better yet, wait until age 70. Delaying benefits to age 70 increases the benefit by another 35 percent. Using the figures from point number one, if your benefit is $2,720 at age 66, delaying that benefit to age 70 will increase your monthly amount to $3,672. Over a year’s time, that’s an additional $11,424. Comparing the benefit from age 62 to age 70 is even more impressive, giving you $20,000 more per year. With this strategy, your break even year is age 79.
Use your gender wisely. Since we know that women typically outlive men, if you’re a married female with no major health problems, you can safely assume you’ll outlive your husband. Additionally, women who haven’t worked full-time will have a lower social security benefit than their husbands. Therefore, most women should consider taking their social security benefit at age 62.
“But wait a minute,” you may be thinking. “You just said to wait until age 66 or age 70.” That’s true. But the woman’s benefit will be temporary, because upon the death of her husband, social security will issue her the greater of her benefit or her late husband’s benefit. For example, a woman’s benefit at age 62 is $200. If she waits until age 66 to start receiving benefits, she’ll get $272. Waiting until age 70, she’ll get $367 per month. None of these figures are very impressive. However, her husband’s benefit at age 62 is $2,000 per month, at age 66 it’s $2,720, and at age 70 it’s $3,672. Such figures can impact a couple’s monthly income.
Let’s further suppose that the woman starts taking her $200 per month at age 62, but her husband waits until age 66 to receive his benefit. Ten years later, the husband passes away at age 76. At this point, the wife will stop receiving her $200 per month and will instead receive her late husband’s benefit of $2,720 per month. Since her benefit was low no matter when she started claiming it, and she’d receive her husband’s larger benefit upon his death, delaying her benefit wouldn’t reap the couple much reward.
Continue working. Even though we’ve been taught that age 65 is the magic year to retire, consider working until age 66 or longer to maximize your social security contributions and benefit at age 70. Plus, the additional earnings will supplement your retirement years. Realize, too, that if you decide to take your benefit at age 62 and are still working, you’ll get penalized and will receive less social security than if you weren’t working.
Also remember that when age 65 was declared the magic retirement year, people weren’t living into their 80s and 90s; only into their late 60s. So when the concept of social security began, it was designed to help retirees for a few short years, not 20 years or more. Therefore, if your health is still good, work a few extra years and continue contributing to your retirement.
Start planning today. While many people in their 20s and 30s doubt social security will exist in its current form 30 years from now, these younger workers should still start planning for their retirement now by saving as much as they can and maxing out all available retirement options.
But if you’re in your 50s and 60s, start planning now how social security can be a part of your retirement strategy. Even if you’re independently wealthy, you’ll want to carefully assess when to start social security. Therefore, figure out how much money you’ll have coming in and what your expenses will be. By using social security strategically, you’ll be better able to supplement your retirement income and truly enjoy your golden years.
Tim Delaney is managing partner of JDH Wealth Management, LLC, in Santa Rosa. Tim works with high net worth clients who want to simplify their financial life so they can pursue their retirement dreams. Contact Tim at tdelaney@jdhwealth.com.
