The Social Security Administration trustees reported unfunded liabilities totaling $12.5 trillion in present-dollar terms over a 75-year timeframe. This is an increase of $1.2 trillion from last year's estimate. To close the 75-year liability through payroll taxes alone, the government would have to permanently raise the Social Security payroll tax rate by 2.76 percentage points, to 15.16 percent. Alternatively, Social Security benefits would need to be cut by 17 percent for all of Social Security's 61 million beneficiaries. In addition, the trustees report indicated the trust fund can only pay scheduled benefits through 2034.
In partial effort to address the funding issues, the Bipartisan Budget Act of 2015 (Public Law 114-74; November 2, 2015), made some changes to Social Security’s laws about claiming retirement and spousal benefits. Section 831 of the law (entitled “Closure of Unintended Loopholes”) made several changes to the Social Security Act and closed two complex loopholes that were used primarily by married couples.
So, with the concerns about the solvency of Social Security, along with the impact of potential legislative changes, how does one determine the “best” time to turn on one’s Social Security benefit? Fortunately, Social Security is not dead yet, and neither are you. So how do you go about determining the right decision for your situation?
The final decision will come down to priority and actual length of life. The questions to ask include:
- Do I want to maximize my lifetime benefit? And, if so, how long am I going to live?
- Do I want to make sure my spouse, assuming he/she outlives me and that I am the higher wage earner, will get the maximum survivor benefit possible?
- As a couple, can we take advantage of the spousal/personal retirement benefit loophole based on our birthdates, and then does it make sense to do so?
- When is an incoming Social Security benefit most important to me?
So, let’s look at these questions as a whole. It may be hard to maximize a lifetime benefit if one doesn’t know the extent of one’s lifetime. Obviously, some individuals don’t ever collect Social Security because their benefit was never turned on before passing.
Looking at a survivor benefit, the uncertainty can be similar. Of course, if the lesser earning spouse is significantly younger than the higher earner, this strategy could be compelling.
The spousal/personal retirement benefit strategy is quickly becoming applicable to fewer and fewer couples, but it still may make sense to some.
But when will a Social Security stream of income be most important to you.
Most individuals and families in retirement have several sources of income. Pensions, Social Security, rental income, and supplemental income, the sum of which must add up to the income they need to live. Let’s look at an example:
John and Susan are both retiring, 62, and eligible for 75% of their Full Retirement Age (FRA) Social Security benefits ($2200 each at FRA). They need roughly $80,000 annual income to enjoy the retirement life they have planned for. The question now becomes, do they turn on their Social Security benefits early, or do they delay, growing their benefit amounts? If they both delay to age 70 and live long lives, that would certainly maximize their lifetime benefits, but does that make sense.
Assuming John and Susan’s pensions and rental income account for $40,000 annually, they now need to make a decision regarding how to generate the additional $40,000 they need to live.
Let’s look at delaying Social Security to maximize lifetime income:
$40,000 pensions and rental
$ 0.00 Social Security
$40,000 from personal assets
How will John and Susan generate that $40,000 in supplemental income each year that will protect against selling assets in a down year and at a discount? And consider that once these assets are spent, they can no longer generate additional income and/or growth. John and Susan are what we would call “stressing their own assets” in order to possibly enjoy maximum lifetime Social Security benefits.
Now let’s look at taking their Social Security benefits at age 62:
$40,000 pensions and rental
$39,600 Social Security ($2200 x 75% x 12 months x 2 benefits)
$ 400 from personal assets
In this case John and Susan only need to supplement their income with $400 per year from their own assets while spending (stressing) “Uncle Sam’s” assets (I realize Uncle Sam’s assets were yours at one time). They are giving up the chance at maximizing the payments from Uncle Sam, in order to save their own assets, allowing those assets the opportunity to grow and/or generate income.
Looking at the 8 year difference between turning on benefits at age 62 versus age 70, and not accounting for inflation, that calculates to $320,000 of spent assets before the first Social Security check is received. Does it make sense in your personal circumstances and with your priorities?
The Simplicitree® analysis discussed in the associated video shows what this type of comparison might look like to someone thinking about when to turn on Social Security benefits.