(And Why It Can Help You Get More, And Keep More Of Your Benefit)
There are perfectly legitimate reasons for starting a reduced Social Security benefit early. In fact, that will prove to be the best move for many people. Unfortunately, for many others it will be a horrible mistake. One that will prove to haunt a great many people throughout their retirement. The key to understanding the importance of correctly timing the age when a person starts their Social Security benefit is to understand that you can significantly increase your monthly benefit by waiting.
If you are age 66 the maximum Social Security payment you can receive this year would be $2,513 per month. That is one-third more than if you had started your benefit earlier at age 62. And if you wait until age 70 to start the benefit is benefit would be about $3,350 per month which is one-third more than the age 66 benefit. The difference between starting the benefit at the earliest age of 62 and the latest age of 70 is about $1,660 per month for life.
Each year you delay the start of Social Security the income amount scales up (until age 70).
Generally speaking, for decades the position of the financial services industry was in favor of taking a reduced Social Security benefit early. Detailed present value calculations have often been used in break-even analysis to provide support for this position. One failure of this work was that the impact of future taxation was minimized or not fully considered.
Advisors who understand the advantages of tax-efficient distributions from Roth IRAs and investment grade life insurance appreciate the importance of focusing on the after-tax results when comparing alternatives. It is important to consider Social Security on an after-tax basis as well. Because Social Security is extremely tax efficient, the more we can do to increase the amount of the benefit, the greater the potential tax advantages our clients can receive.
Under current law a minimum of 15% of the clients Social Security income will be tax free regardless of how much income the client has or the sources of that income. Better still, an advisor who understands how to generate additional tax-efficient income using Roth conversions and/or life insurance cash value loans could possibly increase Social Security’s tax free portion to 50% or better. How much better? For some clients strategies could be used that could make this income entirely tax free.
With proper planning, when you include the tax benefits, projected cost-of-living adjustments, spousal benefits and survivor benefits made possible by the Senior Citizens’ Freedom to Work Act of 2000, it is clear that many of our clients can “supersize” their retirement income simply by delaying the age when they claim their Social Security benefits.
Should everyone delay the start of their Social Security? No. But with the potential of providing ten thousand dollars or more of additional tax-efficient, inflation adjusted, lifetime guaranteed income for a client and surviving spouse these are strategies that many of you should at least consider.