In this month’s edition of “Money Matters,” Scott talks about the many factors to consider when making the decision to start taking your earned social security benefits.

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Money Matters: Deciding When to Take Social Security Benefits Transcript

0:00:00.4 CJ: WTIP is pleased to bring you another addition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. Scott joins us now by phone. Welcome Scott.

0:00:25.1 Scott Oeth: Good morning, CJ.

0:00:26.0 CJ: Good morning to you. So, what should we know about social security retirement benefits?

0:00:33.7 SO: Yes. Well, there's a lot to know CJ. It's a complex area. I imagine we'll barely scratch the surface on this. And everyone's situation's unique, so this is definitely one of those areas where I encourage listeners to take the time to do their own homework, consult with a tax advisor, and ideally also I think a knowledgeable certified financial planner, but it's a remarkable system. Social security, right now there's 90% of the people over 65 are receiving benefits—nearly 65 million Americans. And they'll receive over $1 trillion in social security benefits this year. So, it's a lot, and for many Americans, it's the bulk of their retirement income. Even affluent retirees, people with quite a bit of outside other assets, it could really be a substantial portion of their cash flow. So, the decision making when, and if you're working during social security, it's spousal benefits, it's you'd think it's pretty straightforward, but there's quite a few really impactful decision points.

0:01:36.3 CJ: Okay. So, let's start with deciding when to claim social security benefits, and, I mean, there's quite a range there.

0:01:46.0 SO: There really is. So, for most people listening, it's gonna be age 66 or 67, which is considered your full retirement age, where you get 100% of your accrued benefit based on your earnings over your working years. However, you can actually start claiming benefits as early as age 62 and something that a lot of people don't know about is you can delay your benefit past that full retirement age up until age 70. So, there's pros and cons either way, and I know just at sort of a gut level, a lot of people it's a bird in the hand is worth two in the bush type feeling. I say, well, I've accrued these benefits, and I want to get them, and I want to start turning on the tap, and I certainly understand that.

0:02:35.3 SO: I certainly understand that, but there can be financially some benefits to waiting. It's pretty amazing. If you take, let's say your base benefit is $1,000 a month at age 66, your full retirement age. If you take that benefit early at age 62, it equals a 25% reduction. It's a reduced benefit if you take it early. So, it'd be $750 a month. Now on the flip side, if you go past age 66 and you're $1,000 per month full benefit, you can delay up until age 70 and each year that you delay can be an 8% buildup. That's what's been credited, and it could actually end up with 132% of your base benefit or $1,300 a month. Then, really important—especially in an environment like today, CJ—is annual inflationary adjustments on your social security retirement benefit.

0:03:29.1 SO: So, if possible, if you have other savings, if you have some earnings, if you feel optimistic about your longevity, building up a bigger benefit which you then get inflationary adjustments on can be really important. I see just a few key questions to start with and it's when do I plan to stop working? That's important because working while you're receiving social security benefits can have an impact on what's paid out, and the taxation. A big one, do you need this social security income now? I think lot people see it. They can take the cheque, they want it. Do you really need it? You are working out a retirement budget and worksheet and figure out if you can delay even a little bit longer because it's not an all and none, it's not 62 or 66. At any month, once you reach 62, you can always turn it on. Will you have to pay taxes on it? That's very important to consider. Social security benefits can be taxed. And how long will you live? Well, no one knows the answer to that question, but you might have some idea based on family longevity, your health, your fitness level, things like that might give you a sense of, "Boy, I should take the money and run and enjoy it while I can." Or my mom's still living independently and she's 96 and shovels the snow off her roof or something like that. You might want to say, well, gee, maybe I delay for a bigger, I have a feeling I might be around for a while.

0:04:55.1 CJ: All right, so, if you wait until 70 to begin collecting, and you'd choose to work for a few more years, are you hit by taxes come April 15 that you might not be prepared for?

0:05:11.1 SO: Yeah. Good question. There's kind of two interrelated issues here that's computed. So, working in relation to social security, if you are working and earning before your full retirement age, again, for most people, it's going to be 66 or 67, your benefits are reduced, and they're reduced pretty significantly. So, if you're, let's say you take those benefits at age 62, and you have a job, you're working your age, 63, 64 for every dollar, well, if you earn over $18,960, your benefits are reduced by $1 for every $2 over that limit. So, it's a significant reduction. It's recalculated. You effectively get the money back later after your full retirement age. So Social Security Administration keeps track of how they reduced your benefit, but it does reduce your benefit. When you hit full retirement age there's no limit on your earnings. Okay. So that's one thing.

0:06:11.6 SO: The taxation is another issue and that has to do with... There's an earnings test and they take a look at your social security benefits, half of that, your taxable income and your social security benefits are either tax free. And for married couples, that's about a $32000 a year limit for individuals $25000 or up to 50% of the benefit is taxable. Or if you are higher income from those sources that are accountable up to 85% of your benefit can be taxable. So, okay. Kind of two different related things are, will your benefit be reduced by working before your full retirement age and then how will your benefits be taxed?

0:06:54.8 CJ: And is there anything in the works of social security not being taxed after you start claiming it, or is that wishful thinking?

0:07:07.8 SO: I'm afraid that's probably wishful thinking. In fact, I think it's probably going to go the other way. There's a lot of concerns about the solvency of the social security system and is there enough money there? For a long time, we had more people working and the system was collecting more dollars than it was paying out. And with baby boomers retiring and the changing demographics, it's really starting to flip and now the system is paying out more benefits than it's taking in. And so there's continual sort of discussion of the solvency and how funded social security is. The benefits originally weren't taxed at all. And then they started adding these tiers of taxation. First, it went to up to 50% of your benefits could be taxed and then 85%. I suspect my personal theory is that for higher income people, wealthier folks in retirement, my guess is they'll very likely see that get bumped up at some point to 100% of their benefits being taxed and some other modifications like that, pushing out the full retirement age. And so, I suspect it might get worse, not better CJ.

0:08:14.0 CJ: Okay. All right. Any other thoughts about social security in retirement?

0:08:19.5 SO: It's a big decision, it is a lot of money. I mean, if you look at the present value of that income stream for folks, it's a really significant financial decision point. So, I would encourage you to do some reading, do some homework, talk to some experts and really try and run the numbers and figure out what makes sense for you. And not just wing it, because it could be a lot of money down the road. I think I've seen many general personal finance type articles and often they really hinged on just sort of this idea, this concept of a break-even. If you start taking benefits early at age 62, the money starts coming in. But if you delay to your full retirement age or delayed retirement, how long would you have to live with that larger benefit to hit a break-even point? So that's one way of looking at it, but what's absent in that type of analysis is what else is happening in your financial situation? Do you have required minimum distributions coming in? Could you potentially do Roth IRA conversions? If you had sort of a tax-free window there by delaying benefits, there's just a lot of other factors that come into play and, so it's an important one and do your homework.

0:09:35.1 CJ: All right. Well, thank you so much for that information, Scott, we will check back with you next month. That's Scott Oeth, and we talk finances with Scott on the first Wednesday of the month on North Shore Morning.