I have been working with a new client whose previous financial advisor had recommended she begin receiving her Social Security retirement benefits checks once she reached her early claiming age of 62.
“Susan” had begun receiving her direct deposit of her benefits to her investment account in August of last year for approximately $1300 per month. She didn’t “need” to draw these benefits as Susan was still working and had a good job. Since she earned more than $34,000 per year 85% of her Social Security she received was taxable. Had she waited until her full retirement age of 66, she could earn as much as she wanted without any of the Social Security she was receiving being subject to income tax.
More importantly, by claiming her benefit early, Susan had locked in a benefit that was 25% less than she would be receiving beginning at age 66, and that reduced benefit would be applicable for the rest of her life. Since Susan seems relatively healthy, she can be expected to live another 25-30 years. Susan’s mother is still alive and in good health well into her 90’s.
Furthermore, if Susan had delayed filing for her benefit until age 80, she would be guaranteed an increased annual payout of 8% per year every year after 66 until she turned 70. Since Susan is still working, and Social Security bases its benefit on the highest 35 years of earning, her current years of earning would be replacing her early working years when her income was significantly lower.
Filing for Social Security benefits at age 62 is expected to cost Susan over $200,000 over her expected lifetime.
Fortunately, Social Security allows a one-time chance to withdraw an application for receiving benefits if it is filed with Social Security Office within the first 12 months of receiving benefits, and the all received benefits are repaid back to the Social Security office. I have recommended to Susan that she pay back her benefits and withdraw her application. Based on the advice we provided Susan, she will most likely enjoy more than $8500 more tahper year in benefits over 30 years.
To put this in perspective, Susan would need to save more than $250,000 over the next 8 years in additional retirement savings at a withdrawal rate of 4% in order to provide the same additional after-tax income that delaying her Social Security would provide.
When to draw Social Security is a complicated decision, and optimizing benefits is made even more difficult with divorce, widowhood and significant differences in spousal ages and earnings history. If you want help deciding what path is best for you, give us a call.
Keith Piscitello is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors a broker/dealer (Member SIPC) and a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. S2 Wealth Planning is not affiliated with Lincoln Financial Advisors. CRN-292590-012920