Back to the Basics Social Security Planning 101

In Articles, Articles: Kansas City Office, Back to the Basics, Tax Planning, Winter 2019 by Scott Dougan

Just a Few Drops Into the Ocean

One of the core building blocks of a retirement income plan is Social Security. Earned over decades of working and paying taxes into the system, Social Security recipients have turned the corner and are now extracting income from this unique asset. But what’s so surprising is how nonchalant many retirees are about this component of their wealth. I wonder if that’s because we don’t see Social Security for the huge asset that it is.

If a retiree is receiving $2,500 per month in benefits from Social Security, the amount of income they’ll receive over a lifetime adds up to a big number, a very big number. For example, $2,500 X 12 months X 30 years = $900,000! Add to that number a cost of living adjustment that occurs most years and you’re looking at an asset that far exceeds $1 Million! And that doesn’t include a spouse’s benefits. But because the income flows to the recipient so slowly, that drip doesn’t feel like the ocean of wealth it really is.

I share all of this to illustrate that it pays to know
the options available with the receipt of Social Security benefits.

Here are some basics of Social Security to consider:

• Workers can begin receiving Social Security benefits as early as age 62.

• By waiting until reaching full retirement age (ages 66 and 6 months to 67, depending on your birthdate), the recipient will have grown their income by 8% each year. This growth can continue until age 70, after which point the benefit of deferring ends.

• A spouse can file for spousal benefits against his or her spouse’s worker benefit – even if never having worked outside the home – and generally be entitled to 50% of their spouse’s benefit.

• A widow or widower is entitled to continue receiving their spouse’s benefit even if it’s larger than their own (the smaller of the two benefits ceases after the first spouse dies).

• Social Security generally adds a cost of living increase to benefits, even when a person chooses to wait to receive benefits until later. This means they’re not only experiencing the 8% annual increase for waiting, but also add the COLA to that 8%.

The dynamics of Social Security are such that waiting to receive benefits means more income every year until death, which may or may not be a long time. As a result, we have some decisions to make. If a person chooses to wait one or several years to ‘turn on’ their benefits, they’ll increase their income BUT also receive benefits for fewer years. As a result, a ‘breakeven’ analysis is an important consideration.

While every situation is different, many people – especially couples – will benefit by waiting until after age 62 to begin benefits. However, there are many reasons to start benefits earlier too, like a health issue, a job loss, death of a spouse, and more. The key, however, is to be thoughtful in making these decisions.

If I asked you to consider how you’d like to handle a $2,500 monthly income, you’d consider it for sure, but would you see it in the same light as a decision concerning $1,000,000? Beware the context trap. Naturally, viewing this decision in the context of a comprehensive financial and retirement plan can be very valuable. In fact, it’s not uncommon when building plans for families for us to discover hundreds of thousands of dollars potentially lost in a retirement. Once you see Social Security in the proper light, it’s much easier to make the tough decisions.