In a world where word gets around fast, it can be hard to discern the difference between the truth and what is probably more like the end of a game of “telephone”. Take Social Security for example. Some people say it’s going broke. Some people say you’ll lose all benefits if you continue to work.
Don’t quit your job just yet though. We know it can get confusing, and there are many things to consider when looking ahead at this next step in life. To help you ask the right questions, we broke down some of the most common questions about Social Security and the decision you will need to make when nearing retirement.
Do you need guidance in your financial strategy? Schedule a consultation today!
Should You Wait to Withdraw Social Security?
It can be tempting to take the money and run as soon as you’re eligible, which is typically age 62. After all, it is your money, and you’ve been waiting a long time for it. But, if you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits and for every year you delay your claim past your FRA, you get an 8% increase in your benefit. That means you could receive at least a 24% higher monthly benefit if you delay claiming Social Security until age 70.
As we think about this, let’s run some numbers. If you were eligible to receive $2,000 per month at age 67 (assuming this is your FRA), this would increase to $2,160 per month if you wait until age 68. At first glance, this seems like a no-brainer. But, let’s consider a little thing called “opportunity cost.”
In order to receive the increase to $2,160 per month, you had to miss out on $2,000 per month, for a whole year. That’s $24,000 in retirement income checks you haven’t received yet. To make this money back in the yearly percentage increase, it could take several years. So, waiting actually isn’t the best strategy?
It depends. Other factors like your current health, other sources of retirement income, and desires for your next phase of life also play an important role in your choice to withdraw Social Security. Talk to your financial advisor to determine which withdrawal strategy is right for you!
Do You Lose Benefits By Withdrawing Before Full Retirement Age?
As we mentioned above, claiming Social Security before retirement age can result in up to a 30% loss of benefits — if your income exceeds a certain amount. As of 2021, for every dollar earned over $18,960 ($1,580/month), you will lose 50 cents in benefits.
But, this limit only includes active/earned income. If you have dividends, an inheritance, IRA distributions, any forms of passive income (such as rental properties), pensions, or a spouse’s income, these will not be considered for lost benefits. In reality, if you have additional sources of income, these lost benefits will not have a significant impact on your retirement.
Even so, it’s only a temporary loss of benefits. Once you reach full retirement age, you will get any lost benefits back in the form of a slightly-higher monthly check. So, if your intended strategy is an early withdrawal, the “threat” of lost benefits should be a consideration, not necessarily a deterrent.
Should You Withdraw From Social Security or Your IRA First?
Many people have been told to spend their IRA first. However, most reliable investment advice suggests that spending taxable assets first (Social Security, stocks, bank accounts, etc.), tax-deferred assets second (401(k)s, traditional IRAs, etc.), and tax-free accounts last (Roth IRAs, etc.) is the best strategy. If you have most or all of your money in tax-deferred accounts, you are often going to be much better off withdrawing from Social Security for support in retirement.
While the best approach will ultimately be unique for everyone, there are a few common strategies to consider when deciding which accounts to draw down first:
- Stay in the 12% tax bracket as long as possible, due to the big jump between the 12% rate and the next bracket (22%).
- Use your Roth IRA in conjunction with your other tax planning.
- Itemize your deductions to donating appreciating assets from your taxable account for charitable contributions OR if you don’t itemize, make a Qualified Charitable Distribution (QCD) from a tax-deferred account.
Each account type has its own advantages, and with the right planning, these accounts can work together to support your retirement.
What Other Income Should You Have Besides Social Security?
Retirement income looks very different from income during your working years. Instead of a single stream of income, you likely receive income from multiple sources, including Social Security, one or more individual retirement accounts (IRAs), a pension, and any investment accounts.
Social Security will make up a significant part of your retirement income. As much as it benefits retired workers, there are two major reasons why you shouldn’t rely solely on this safety net during retirement.
- High healthcare costs
- Uncertainties surrounding the future of the program
While Social Security isn’t “broke” and there are several years until expected changes in the program, additional sources of income can have a significant impact on your retirement.
If you don’t have an employer-sponsored 401(k) or other defined-contribution plan, reach out to an advisor today!
Using Social Security for Your Financial Future
Whether retirement is on the horizon, or you still have several years left before you make that decision, these retirement and Social Security opportunities are important to consider now. Our greatest desire is to help you live well and finish well. We want your retirement years to be fulfilling, purpose-driven, and impactful, and questions like these are a good place to start.
To talk about your retirement plan, current financial strategy, or investments, contact us today!