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Financial Fitness and Social Security: An Approach to Help Find your Optimal Strategy

Claiming your Social Security Retirement Benefit is an important decision.  There is no “perfect” decision (because we can’t predict the future and, more specifically, how long you will live).  However, we can make a “best” decision, which considers important aspects of your personal situation.

Background:  The average Retirement Benefit in June 2018 was $17,000 per year ($1,413 per month).  Although this seems like a very modest amount (and it is when you consider the short-term), with longevity increasing and many living into their mid-80’s and 90’s, this $17,000 per year can really add up.  In addition, because Social Security is inflation-adjusted.   For some, Retirement Benefits may accumulate up to $500,000 or more.

Here are some steps you can take and a few "Guide Posts" to consider:

  1. Know where you stand now

    • Log onto the Social Security Administrations website and create an account SSA.gov
    • SSA no longer sends out statements, so you need to log on to review
    • Audit Page 3, “Your Earnings Record”
    • Audit for accuracy (you have just over 3 years to correct)
    • The Benefit number SSA provides is only an estimate, Page 2.  Utilize this estimate when calculating when to apply for SS Retirement Benefits.  SSA takes your best 30 years of earnings history
  2. Understand important Social Security Retirement Benefit terminology and basics on how it works

Here is a great resource from the SSA, which depicts how the program works (https://www.ssa.gov/thirdparty/materials/pdfs/educators/What-is-FICA-Infographic-EN-05-10297.pdf).  Social Security was created a public safety net (“Insurance”) for Old Age, Survivors, and Disability (“OASDI”).  Wages are withheld at a rate of 6.2% (additional 1.45% for medicare) and your employer matches that same amount, for a total of 15.3% withholding amount each paycheck.  The funds are placed in a public fund where it is held until you are eligible, and you claim Social Security.  Your retirement benefit is calculated based off of your best 30 years of earnings.  

The age at which you will receive you full retirement benefit, is named Full Retirement Amount (“FRA”).  The FRA ages were all 65, until 1983 when lawmakers increased FRA’s.  It is 65, if you were born prior to 1937.  Age 66, if you were born between 1943-1954.  Age 67, if you were born 1960 or later.  SSA also has a calculator:  https://www.ssa.gov/planners/retire/ageincrease.html

You will receive your full retirement benefit, which is named your Primary Insurance Amount (“PIA”) at your Full Retirement Age.

“When should I claim Social Security?”- Guide Posts to consider

As you get closer to the age of 62, it is important that you consider your options when it comes to claiming Social Security.  

Do you file at age 62, your FRA, or delay until 70?

The 3 most important "Guide Posts" are:

1. Do you need your SS Retirement benefit now?

Do you need it?  For someone who worked their entire adult life, their Social Security Retirement Benefit will replace about 40% of their pre-retirement income.  For low wage earners, Social Security may replace about 50% of their income.   

The first item to consider, is that you will receive a permanently reduced (by 20-30%, depending on your birth year) Social Security check until you die.   And so will your spouse’s benefit, will be reduced later.    

If you decide to claim early and you plan on continuing to work, be careful of this “Work Related Earnings Test”, which could be a serious downside.  First, the test only considers earned income, which is typically substantiated on a W2 or sometimes a 1099 tax form.  The test does not include investment income- dividend, capital gains, etc.  

  • If you are between 62 and your FRA and if you fail the test (and are above the income threshold) the SSA will keep $1 for every $2 you are above the threshold.
  • The year you reach your FRA, the penalty goes down to $1, for every $3 above the threshold.
  • The month of your FRA, the penalty goes away.

In short, if you continue to work and collect an early SS Benefit, be aware that your SS check may be reduced by up to 50%.

2. What is your marital status?    

  • Have you ever been married before?
  • Are you (or were you) the higher wage earner?

These is one of the most important questions (and follow-on) questions (especially if you are the higher wage earner), because what you decide can impact the outcome of your spouses Social Security benefit.  Spousal benefits are 50% of Primary Insurance Amount at your FRA (what your spouse would have received at FRA), which is not necessarily their Social Security check amount.  If the spouse takes the spousal benefit early, there is a 30% permanent reduction in benefits.  There is no additional benefit for waiting past the age of 65 for spousal benefits.  If the spouse is the higher wage earner, after the spouse dies, the surviving spouse can claim the spouse’s full (and larger) benefit.

If you were married at one time, but not currently, you are still eligible for a spousal benefit based upon your prior spouses PIA.  

3. Longevity:  How long will you live?

It is well documented that Americans (due to healthier living habits, economic opportunities, and advancements in medicine) are living longer.  According to the April 2019 SSA data, the average American will live until the age of 78.5.  Men have a about a 50% chance of living until they are 82 years old.  Women have a 50% chance that they live until the age of 86.   If you are married, there is a 50% chance one of you will live until you are 90 years old.

Given your Family History, your personal Health History (prior illnesses, BMI, eating and exercise habits), and your marital status….what is your “best bet”…will you live past the age of 78.5?  If you are married, will your spouse live past the age of 78.5?

For a lot of folks, their biggest risk is longevity and out living their retirement funds.  Social Security provides a powerful remedy to this risk, especially because it is inflation adjusted.

After you have answered these three questions, you can move on to the most important and final step of the process:

3. The Decision:  The Math behind your Decision (Financial Analysis)

Depending on your comfort level with financial analysis, you may want to seek professional advice from an experienced Financial Planner, preferably a Certified Financial Planner™ professional.

Model your 3 Social Security Options, and understand pros and cons of each scenario, in order to determine an “Optimal Strategy”:

  • Taking SSA Immediately when first eligible at 62
  • Waiting until Full Retirement Age
  • Delaying until 70
  • Note:  
    1. If you have a spouse , who also was a wage earner, it is important to factor in strategies which account for their wage benefit as well as their spousal benefit.  It can be a bit complicated to determine an optimal strategy for this type of scenario, without complex financial analysis.
    2. If you were married at one time, but not currently, you may be eligible for spousal benefit.  In addition, if you were married for longer

SSA.gov provides a useful calculator.  This is a great resource if you feel comfortable navigating this process on your own.  https://www.ssa.gov/planners/calculators/

At Enduro Financial, Certified Financial Planner™ professional Michael Bisbee will conduct a thorough interview helping you answer the above three questions (qualitative), providing you with a financial analysis (quantitative) of your options, coaching you through the pro’s and con’s of each option in order to help you make the best decision possible for your personal decision on when to claim your Social Security retirement benefits.

Here is a sample of a Social Security Analysis report you will receive, comparing your Optimal Strategy with Full Retirement Age, As Early As possible, and Age 70:

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