We were recently working with a couple who were living off his Social Security benefits and his required minimum distributions from his IRA. She was not claiming her Social Security benefits in hopes that she would receive more by delaying. Overall, this is a common strategy we see amongst retirees who are looking to optimize income during retirement.
As life goes on, circumstances change. He passed away. As his IRA beneficiary and his surviving spouse, she was able to roll his IRA into her own and treat it as if it were her own assets. Because of her age, she wouldn’t be required to begin minimum distributions for a few more years. With her set of circumstances, we recommended she apply for Social Security survivors’ benefits.
Her question was simple and expected, “But if I’ll receive a reduced benefit today, why on Earth would I not delay until I can get more from the government?” The reason is twofold: First, taking benefits today can help you keep more of your money in your portfolio.
In general, we recommend taking your Social Security benefits sooner than later. You have been paying into the Social Security fund your entire working life. These are benefits that you are owed. We believe you should take them as soon as possible in most situations.
If you are withdrawing assets from your portfolio for living expenses, you have likely allocated an amount equal to 10 years of liquidity needs to a conservative investment like bonds that will help protect the principle. This will help you avoid having to sell stocks when you need cash. If you are not supplementing your retirement account withdrawals with your Social Security benefits, that means you will need to have a larger portion of your portfolio in a conservative investment to cover your spending needs, which can mean missing out on the growth traditionally found in equities. Furthermore, you should be able to grow your equity assets in your retirement accounts faster than the yearly increase you can get by delaying Social Security benefits.
Secondly, to accurately calculate the optimal time to take your Social Security benefits to get the most money possible, you need to know exactly when you will die. While that is quite a morbid thought, the reality is that your death is unknown—it can only be estimated. While you can certainly delay benefits to increase your monthly amount, in many scenarios we’ve run for clients, we have seen about a 12 ½-year payback for delaying benefits from full retirement age until age 70. For example, if your full retirement age is between 66 and 67 and you delay taking your benefits until 70, you may have to live until 82 ½ to recoup the money you could have had access to from full retirement age through age 70.
Furthermore, it is important to remember, Social Security generally does not have a beneficiary. If you have delayed benefits in hopes of having more money later, and you die before you turn 70, you will get nothing, and neither will your heirs or estate. However, your heirs or your estate will receive what is left in your retirement accounts; therefore, the more you can keep in retirement accounts, the more you can pass to beneficiaries.
If you have questions on managing your Social Security benefits and your retirement account withdrawals, the experts at Henssler Financial will be glad to help: