A&I Wealth Management > Blog > Selecting The Right Start Date for Social Security Income: A 6-Step Solution

Selecting The Right Start Date for Social Security Income: A 6-Step Solution

Welcome back! In the previous post discussing common obstacles to knowing when you should start Social Security, we introduced Natalie, a hardworking healthcare professional unsure about when to begin claiming her Social Security benefits. The common challenges Natalie and many of others face when grappling with this decision is explored, from uncertainty about lifespan to confusion surrounding the complex calculations.

Now, discuss a step-by-step guide that will empower you to take control of your Social Security timing and maximize your benefits. This actionable plan will help you cut through the noise and confidently navigate the complexities, ensuring you make the most informed decision for your unique financial situation.

Proposed 6-step solution

To determine when to start your Social Security Retirement Income, here is a six-step program to follow:

1. Learn your income at full retirement age
2. Learn how much you get if you start as early as possible
3. Learn how much you get if you wait until age 70
4. Calculate your break-even age
5. Understand there are some complexities and ask for advice from a professional
6. Make it real

Learn your income at full retirement age

A great place to start is to know your forecasted income at your Full Retirement Age (FRA). Visit the website, SSA.gov, and complete the information requested by the website. It might be surprising, and unnerving, how much the Federal government knows about your history. Once you validate your identity, the website will show you how much income you receive at your FRA, at the earliest possible age, and at the latest possible age (70).

Learn how much you get if you start early

If you start at age 62, you will have a permanently reduced income. Every year you start benefits before your full retirement age reduces your income by 8% per year. So a person who starts age 62, or five years early, gets 60% of what you would get by waiting until age 67. This can have a huge impact later in life. So be careful before making that commitment.

Learn how much you get if you wait until age 70

On the other hand, waiting until the latest possible age, which is 70, provides 25% more income than starting at FRA. So measure this decision with care and prudence. If you are in good health, and you expect to live a long life, giving up three years of income for 25% greater annual income may be the best financial decision.

Calculate your break-even age

If you are going to start your SSRI early, then you are betting that you will not outlive the increased benefits of deferring SSRI. At some point in time, the person who waited will receive more total income than the person who took it early. But you might not live that long, so you want to know the breakeven age. Then you can decide for yourself what is the best decision for you. All of this would be a lot easier if you knew the unknowable—when you are going to die.

To do the math, create a spreadsheet. In one column, input your monthly income for the earliest age, and then start a column beside it which sums all the income already received. Repeat this process for many, many rows. You have just calculated your lifetime expected income if you start SSRI at the earliest possible date.

Hint: annualize the income, this reduces the work (number of rows).

Repeat this process for your SSRI for age 70. Now compare the “sum” column from each spreadsheet. At some point, at some age, these numbers will be the same. This is your break-even age. If you live longer than that age, your lifetime benefits will be greater by starting your SSRI at age 70. If you are going to die young, you would benefit by starting your SSRI early. Once again, the easiest thing to do is call a financial planning professional who will do this for you.

Understand the relevant complexities

Now that you have the basics of your situation firmly in hand, you want to make sure no complexities are going to derail your plans. First of all, it is important to know that SSRI is taxable.You may be in a high income tax bracket because you have income from other sources. Retirement income includes distributions from retirement accounts, real estate, pensions and inherited IRAs. In this case, you might benefit by deferring your SSRI until a later date. Second, SSRI bend points may be important to understand. This is particularly important if you are working today. Bend points make Social Security a progressive tax, providing more benefits to the lower income taxpayer than the wealthy. The details of Bend Points are discussed elsewhere in this website. Suffice it to say, if you are in a higher income tax bracket, and if you have a choice over how you take your income, you may want to defer more or less to Social Security while you are working. And finally, SSRI and Medicare work hand-in-hand. Your Medicare premiums are paid directly out of your Social Security income, once you start taking SSRI. An unpopular tax called IRMAA, discussed elsewhere in this website, may affect you if you have a big increase in income. IRMAA increases your Medicare premiums, which are pulled from your SSRI. So if you foresee selling a business, a liquidity event, selling a home, inheriting someone’s IRA, among other financial events, you might want to learn more about IRMAA. Any of these complexities may affect your ideal SSRI start date.

Make it real

Sometimes it helps to bring the complicated decisions about when to start SSRI back to reality. So here are some good rules of thumb:

1. Control what you can control—hint, it’s not the government.
2. Gauge your happiness now vs later and decide which matters most to you.
3. Include your required distributions from retirement accounts, and other future income, in your decision.
4. Spouses have more choices, talk with a financial planner to understand each of these.

By following these six steps and seeking personalized advice from experts when needed, you can gain a clear understanding of your Social Security options and make a decision that aligns with your individual goals and circumstances. Remember, the “right” time to start Social Security is different for everyone. It depends on your health, financial needs, and overall retirement plan.

Don’t let uncertainty cloud your judgment or fear dictate your choices. By taking a proactive approach and utilizing the resources available, you can confidently unlock the full potential of your Social Security benefits and secure a comfortable and fulfilling retirement.

Remember, your financial future is in your hands. Take charge, make informed decisions, and pave the way for a retirement that truly reflects your dreams and aspirations.

 


Now, Back To Natalie

Natalie was reluctant to talk about her money at all. She preferred to work with a female financial advisor and did not want to feel judged, or talked down to. She wanted to be heard. Her planner:

  • Listened to Natalie’s differing desires
  • Helped Natalie envision a different future
  • Gave her time to think and process
  • Gave Natalie the financial flexibility to change her mind
  • Helped her decide what to do now

Once Natalie became confident in her own finances, she found a new artistic passion. She had skills and talents she did not even know she had. She started drawing, painting and playing music. Her friends came to her for advice, and she introduced them to her financial planner. Imagine how the tables had turned for her!

About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.