You don’t have to go very far to find yet another article attempting to tackle the daunting topic of retirement. Everywhere you turn, there’s another tip, hint or confusing formula. And usually, part of that equation concerns what to do about Social Security, something that can be misunderstood by even the savviest investor. We also know there’s fear that Social Security’s reserves will “run out” at some point in the future.
The good news is that it’s completely possible to make Social Security work for your best interests, and to know when and how to make that happen.
Recently, we had a caller on our radio show whose 62-year-old husband had about $100,000 per year in retirement pension income. The question she asked: “When should he collect Social Security?” Contrary to what you might have heard as the standard advice or rule of thumb, we advised her to tell him to start collecting right way. Here is why:
Social Security Changes Affect Top Earners
In 1983, to shore up Social Security’s shaky finances, Congress changed the rules about benefits drastically in order to help the program last until 2058. Under the new rules, roughly 50% of Social Security benefits were taxed off of top earners and savers. This was in part because these people were considered to be financially “set” and less likely to need the money than their lower saving and earning counterparts.
The tax was bumped up again in the 1990s, with up to 85% of benefits included in the tax plan for top earners and savers. In both instances, this bucket would most likely include those like our 62-year-old $100,000-per-year example.
As a result, time (and Congress) are the proof that although a majority of us pay in, everything after that is potentially fair game; not everyone gets a Social Security payout based upon the amount they’ve contributed. In short, and put to a real-world example, it’s possible for your neighbor to put in twice as much as you do, and for you both to receive roughly the same payment when it’s time to cash in.
Flashing forward to present day, we don’t all use our Social Security benefits in the same way: For many people these benefits are a lifeline, but for others they are more of a financial side note. The numbers show the disparity. A Wharton School of Business study found that 71% of retirees rely on Social Security for more than half of their retirement income, and in fact for 46.6% it represents 90% or more of their retirement income. Based on what happened in the past, if changes to Social Security are needed in the future, this segment of recipients can expect that their benefits will likely be protected. Meanwhile, the people who save more and have higher retirement incomes — such as the remaining 29% of benefit recipients for whom Social Security represents less than half of their retirement incomes — they probably can’t expect that their benefits will enjoy the same protections.
In addition, the timeline for the life span of Social Security benefits has tightened, with a cashshortfall expected by 2020, according to the 2019 Trustees of the Social Security and Medicare trust funds report released in April. The same report says that the reserves that make up our Social Security trust funds look to be depleted in 2035.
So the Wait-Until-70 ‘Rule’ Isn’t Best for Wealthier Recipients
While Social Security is there to be a measure that protects everyone, it doesn’t protect everyone in the exact same way, and knowing how to make it work for you is key. Sometimes, we are advised to “hold off” on collecting until age 70 to earn delayed retirement credits and get the highest benefit amount possible. And in certain cases, that is sound advice. For instance, a recipient in good health who works past the earliest time they can collect Social Security and who anticipates they will rely heavily on it to supplement a large portion of their retirement could hold off (if they are able). This is, of course, with the expectation that they will receive a bigger payment if they do so.
But for retirees like that 62-year-old with $100,000 in retirement income, I recommend collecting immediately. Unlike recipients who will rely on Social Security more, he falls within the parameters of recipients who can’t count on receiving payments if Congress changes the laws again. My rule of thumb remains the same for top earners and “set” retirees: Collect as soon as possible.
As stated above, twice already, over the years Social Security benefits have been reduced through taxation for this category of investors and these changes have only affected those with ample incomes. As a financial adviser, when I'm trying to evaluate the risk of any type of income source — from a pension, bond, interest, payment or stock, it doesn't matter what it is — I’m trying to evaluate any and all associated risk, past, present or future. And where Social Security is concerned, clearly there is some risk for high-income retirees that they could see some reduction in benefits down the road, due to changes Congress might be forced to make to shore up the system. And I think it would be foolish for anyone to think otherwise, particularly based upon history.
When in doubt, have the conversation with your adviser about the correct, purposeful way to approach Social Security as it pertains to your specific situation. A good adviser will be able to tell you if you need to hold off on taking your Social Security benefits or if you should collect right away based on what your financial picture looks like. This will help clear up any confusion you may have. An adviser on the pulse of your financial profile will be able to take a frank look at everything contained therein and to help ensure you can feel more financially sound — not just for now, but for the long term, regardless of how much Social Security you end up using to supplement your retirement.
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