Ready For Retirement

What Age Should I Collect Social Security If I Don’t Need It?

July 25, 2023 James Conole, CFP®
Ready For Retirement
What Age Should I Collect Social Security If I Don’t Need It?
Show Notes Transcript Chapter Markers

For many people, Social Security will be their primary income source in retirement, but some individuals have sufficient assets or income from other sources, making them less dependent on Social Security benefits.

James explains the factors that can affect when you should collect Social Security and how to create a dynamic strategy.


Questions Answered: 
What if you have sufficient assets/ income that you don't depend on Social Security for your retirement needs?
How should that change your approach to collecting social security?

Timestamps:
0:00 Intro
2:36 If you don't need Social Security
5:40 First thing to look at
7:48 Listener's situation
10:11 Working in retirement
12:50 The second thing to look at
14:30 The third thing to look at
15:44 The fourth thing to look at
17:15 Examples
20:18 Needing cash down the line
24:49 Final thoughts
25:22 Outro




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Speaker 1:

For many people, social security will be their primary income source in retirement. They're only income source, but certainly their primary source. But what if that's not the case for you? What if you have sufficient assets or sufficient income outside of social security such that you don't depend upon those benefits for your retirement needs? That's the case. How should that change your approach to collecting social security? Well, that and more is what we'll be discussing on today's episode of Ready for Retirement. This is another episode of Ready for Retirement. I'm your host, james Cannell, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. It's fair to say that social security is a pretty important component of just about everybody's retirement plan. However, the extent to which you depend upon those benefits or you have other assets or income sources to supplement those benefits in large part is what's going to drive your decision as to when you should collect and how you can most effectively capture that and incorporate those benefits into your plan. In today's episode it's going to be based upon a listener question. This question comes from Isana, and Isana says quick question, but just says we're 59 and 62 and we are retired. We don't need social security. However, should we take it now versus take it later? Also, what do we do when we need cash and we're in a down market? So pretty short, pretty sweet? That's entirely the question. Thank you, isana, for submitting that, but it's important because, as I said, for some people they retire and if social security is your only income source, you really don't have any other option but to collect it right then. However, if you retire and you do have other assets, other income sources, then you have a little bit more flexibility as to when you do collect social security, and the decision to do so should depend upon a few factors of which we're going to be going through today together. Before we jump in, as always, I like to highlight the review of the week. Thank you to all of you who have taken the time to do so, but it really means quite a bit to me and it helps a lot of other people to find the show. This review comes from username Love and Neezer, and Love and Neezer gives the show 5 stars and the review says there are dozens of retirement podcasts out there. I've listened to a ton of them. Ready for retirement is far and away the best. James is a gifted educator. He chooses relevant topics and presents often complex information in a remarkably clear and concise manner. Well worth your time to listen. Thanks, james, for a wealth of very useful information. Love and Neezer, thank you very much. I always smile real big when I get reviews like that. So thank you for taking the time to do so and please, if you've enjoyed the show and you've gotten value from it, please take a quick moment to leave a 5 star review so that more people can find the show as well. So with that, let's jump in. And as we're talking about when should you collect social security if you happen to be in a situation where you don't necessarily need it? Here's what you shouldn't do. Most people do one of two things. On the one hand, they'll say you know what tomorrow's not guaranteed, take it now. And while there's some truth to that advice, if you are just looking at from that standpoint, oftentimes you just tend to be rationalizing an inability to delay gratification. Or maybe it's not an inability to delay gratification, but it is an inability to think forward into the future, to think about yourself at 70 and 80 and beyond, and it becomes a very short sided decision and I'll get pushback on that. Sometimes People say well, james, what if I die at 65? And they'll use that as the be all end, all reason and justification to collect early. Well, if you die at 65, it's certainly a tragedy, but the tragedy here is a life cut short. The tragedy is not gosh, I could have collected social security for three years and I didn't. You're not going to be on your death bed and massively regretting the fact that you missed out on all those dollars that you otherwise could have collected. So, yes, there is truth to this. And if you knew for certain that you were going to die at 65, then yes, take social security as soon as you can, because the numbers and the odds are in your favor that you're definitely going to get more out of it than you would if you delayed the problem. None of us actually have any idea how long we're going to live. And to add on to that, I've met with many people who are in their 70s, who are in their 80s. They collected as soon as they could because of the same rationalization Tomorrow's not guaranteed. Take what you can when you can and leave it at that. And that felt real good for some time. But then, later on in life, once that social security benefit didn't stretch quite as far because of inflation and because it exhausted their other resources. They look back with profound regret that they collected so early and ended up sabotaging their future. So that's people on the one hand. Now, on the other hand, I've met with a lot of other people or talked to a lot of other people who say you know what your benefits max out of age 70,. Therefore, it only makes sense to collect age 70. Well, that too may be the wrong approach, especially if, by delaying your benefits until 70, you convinced yourself that you need to work a job you don't want to be working at until that point. Now here's the thing For some people, collecting at age 62 might be best, for other people, waiting until 70 might be best, and for still others, somewhere in between might be best. But the reason or the goal of this conversation is to help you understand what are the actual factors you should be looking at to determine that decision, as opposed to just looking at it from the standpoint of take it as soon as you can, as fast as you can, because we don't know what's guaranteed in the future, or, on the other hand, wait as long as possible in all situations, therefore delaying much of your benefit. So, if those are the wrong ways to approach this decision, what's the right way? Well, there's a number of things that you want to look at. Put to start, here's the first thing that you want to do. You want to start with an accurate comparison. So the first thing that you're doing is you're looking at the numbers of it. What makes most sense, what's going to put the most cumulative dollars into your pocket, based upon some set of assumptions we're making, one of which, of course, is how long you're going to live? So when you look at this, here's what most people do. They look at what would your benefit be if you collected at age 62, and they project that out for say, 20, 30 plus years. And they say what would your cumulative benefit be if you collect at age 67 or 70? And they project that out 20, 30 years. And what they're looking for is what's called a break even point. So if you collect earlier, it's a lower benefit, but you have more years of collecting. So it initially favors you. Because you're collecting earlier, your cumulative benefit is larger than otherwise would have been if you delayed benefits and collected zero for some time, versus if you wait all the way until 70, for example. Well, now your monthly benefit is much larger, but you've only collected it for a shorter period of time. So what you start to look at is you're looking for what's called a break even point. At what point does it make more sense to collect at 70? Because, yes, you've collected for fewer years, but because it's a higher amount, it's now exceeded the total dollars that you put in your pocket by collecting early. Well, when you look at that, depending on which ages you're comparing, you might get a break even point somewhere around age 80 or 81. So conventional wisdom says this. It says look, if you're going to retire, if you think you're going to live past the age of 81, well then you delay your benefit, you want to maximize that, what that monthly benefit would be, and, yes, you're going to collect for fewer years, but if you live at least until age 81, you're going to have sufficient cumulative benefits to offset what you could have collected by collecting earlier. Now, that's right to an extent. If you're just looking at that in a vacuum and you're only looking at the social security numbers, that analysis is right your break even point somewhere between age 80 or 81 or thereabouts is true. You can look it up, you can make an Excel sheet. There's nothing wrong about that, until you start to understand that that doesn't take into account other factors, primary of which is opportunity cost. Let's take a look at Isana's situation, to use her as an example. And now, granted, I don't actually know how much she has in her portfolio, but what I do know is she says that she and her husband don't need social security. So either they have a pension that's covering all their basic needs or they have a portfolio that's covering all their basic needs. For a second, I'm going to assume that they have a portfolio that's covering all their basic needs, to the extent that they don't need social security. Well, let's look at her situation. If she and her husband were to wait to collect social security at age 70, instead of collecting age 62, they're in a position to do so. But where's income going to come from between ages 62 and age 70? Well, it would come from their portfolio. They'd have to draw that portfolio down, even if their portfolio could support it. They are drawing down assets to live on. Well, what's the opportunity cost of these extra dollars they spent by pulling money from their portfolio between 62 and 70 that otherwise could have continued growing. So it's not as if you can just wait until 17 has no other impact on the rest of your plan. It means you're either you're working longer, you're saving less, you're drawing down your portfolio more. There are trade-offs to doing so. So when we factor in those opportunity costs and when you look at the fact that collecting early means your portfolio can't keep growing more than it otherwise would have, well, then all of a sudden the break-even point is pushed out several years. It does depend upon what rate of return can you get from your investments. If you're getting no rate of return on your investments, then it hasn't changed that break-even point at all. But if you're getting a positive rate of return, the higher that rate of return, the more it pushes out that break-even age. And From there it's not unrealistic to think that the new break-even age is somewhere in your mid to late 80s or even beyond. But again, it does come back to what rate of return could you get on your assets that you otherwise would have been drawing down. So that's where I'd start. You have to look at this accurately. Don't just look at it to say okay the decision comes down to am I gonna live to 80 or 81 or beyond, or am I gonna die before that? You have to understand the accurate break-even, which is dependent upon your specific factors, like your other income sources, your assets. Are you continuing to work or not? It really does depend on your situation. From there, here's what I then look at an Isana situation to make the ultimate decision. Number one is do either of you intend to work at all? Why I ask this is even though you don't need income. It sounds like Isana from what you've told me in your question. Some people they retire and then they get bored and they say you know what, I'm gonna go start doing something part-time, and part-time turns into full-time and before you know it they're working and earning a lot of money again. Or some people retire and they say you know, I'm gonna do some consulting work or maybe just tinker on the side, creating this thing. That really then turns into a much bigger thing. Then they originally thought it could be now, if that's the case, that's great. But here's the thing If you're collecting social security and you're under full retirement age, then the limit of how much you can earn before social security starts withholding some benefits for 2023 is 21,240 dollars. After that point, every two dollars you earn above that threshold, social security withholds one dollar of benefits. Now it, to an extent, gets paid back or does get paid back at a later date. But what you are doing is you're locking in a lower benefit and maybe shouldn't have otherwise done that. So if you think there's a good chance that you will go back to work before your full retirement age, which in this case is gonna be age 67, then it might make sense to withhold or not take benefits yet. Now you could always file for benefits, and I've done this with clients before where they filed for benefits. They've collected six months, eight months, ten months goes by and they say, oh geez, I actually am earning income that I did not anticipate I would earn. Social security does allow you to pay back those benefits and essentially act as if you never filed, and then there's no earnings test that you have to worry about. So if you know for certain you're not gonna work, then it would be okay to collect benefits before full retirement age. If you think there's a strong chance you will work and that any income from that work is going to exceed the earnings limit. Well then it might make sense to delay collecting until you're not working anymore. One other side note on this that's important to understand is this is specific to the individual. So let's assume that he saw on our spouse they both retire and he saw me goes back to work, but her husband stays retired. Well, he saw no, it be subject to the earnings limit. She couldn't earn more than twenty one thousand two hundred and forty dollars without her social security being penalized, assuming she was collecting benefits. But her husband could, because he's not working in this instance. So it's not looking at your joint income, it is looking at you specifically in any income that you are responsible for. And another thing to note is this only applies to wages. So if you have a pension or investment income or rental income, that type of income doesn't count against this earnings limit. It's really just earned income that is going to count against that. So a couple important things to note with that. The second thing I look at when determining when to collect social security if you don't need the money is still longevity. So regardless of whether you need the money or not, you still want to look at it from the framework of what's going to help me maximize the impact of these dollars within my financial plan or within my financial strategy. So a big factor of that, maybe the biggest factor in that, is longevity, as we talked about, there's a break-even point and while I disagree with the way people typically talk about that break-even point, I absolutely agree that you need to factor in a break-even point and that break-even point should factor in outside details like opportunity cost. So if you're looking at this and saying, okay, I really don't need these social security benefits, but I'm in really poor health, my spouse is in really poor health, we don't have a family history of longevity. We probably don't have that long to live. That's a pretty compelling reason to collect social security early Versus Isan. I'm going to pick on you again or use you as an example. Let's assume you and your spouse are in wonderful health and you say you know what my parents both lived until the late 90s. I even had an aunt that lived to 100. You start looking at it from that standpoint. Well, you probably, if you're in good health and have family history of good health and longevity, it probably makes more sense to consider pushing that age back. So your longevity is still a crucial factor in deciding when should you collect social security, but make sure that you're looking at it from the right standpoint of what's the true break-even age for your specific situation. Hey everyone, it's me again for the Disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. The third thing I'd look at when considering when to collect benefits is do you have any children under the age of 19 that are still in school? If so, well, that may seem fully irrelevant. If so, you can get additional social security benefits. So social security will actually pay you more if you're of social security age and you're collecting benefits. If you have a child that's under 19 and they're still in school full time, you're getting extra benefits. So what does that do? Well, this goes back into that break-even calculation and pushes the break-even age out even further, because now, by collecting early, not only is there not a negative opportunity cost by having to take more from your investments, but now there's actually more income, at least in those initial months or years, from doing so. So when you're looking at social security, there's not just your benefit. There's your benefit that's based on your earnings record and that's called your primary insurance amount, and that's what you're eligible for at your full retirement age, which is between ages 66 and 67. Now, on top of that, there's spousal benefits, there's survivor benefits, there's children's benefits, there's all kinds of other benefits, and you do need to be aware of how this would impact you and your potential strategy, or your best strategy for when you should collect your social security. Then the fourth thing is preferences. Now, this is not mutually exclusive, but, for example, if I were to present you with two options, one of which is maximizing guaranteed income and the other is leaving money to kids or heirs, which do you prefer, Okay? So your initial thought might be James, what on earth do those have to do with social security? Well, if you chose the former of hey, I would really want to maximize guaranteed income. Well then the best way to do that is you delay your social security benefit and if you collect at 70, there's a guaranteed income source that's fully maximized. It's the highest level that you can get from social security. So now, at age 70, in addition to having a good portfolio or pension, you have a few thousand extra guaranteed dollars coming in per month. So if you're looking at your situation and want that extra guarantee, that's a pretty attractive option. Now what if, instead, you said you know what, I don't necessarily care about more maximized guaranteed income, but I do really care about leaving money to heirs or leaving money to kids or whoever it might be? Well, if you collect social security early and put that money into a growth-oriented investment account because, remember, we're assuming that you don't necessarily need those dollars in this situation Well then all of a sudden, that money, if you need it, it's still yours, but if you don't, then it passes to the kids. So keep this in mind. Many people think of social security as an investment. How do I maximize my investment here? But social security is not an investment. It is intentionally designed as insurance or as a social safety net. Let's take a look at an example to compare this. Let's assume that you have a term life insurance policy. Well, if you have a term life insurance policy and a thousand other people have that same exact term life insurance policy, then even if everyone's paying the same exact premium, not everyone is going to receive equal benefits. By design, most people won't get as much out of their policy as they put into it. Assume it's a 20-year term life insurance policy. You paid premiums for 20 straight years. Most people will get nothing out because they'll still be alive after 20 years and the death benefit won't ever pay out. So you might pay your premium for 20 years, 30 years and then stop. There's no return on investment versus you. Compare that to someone who maybe only paid their premium for four years or five years but then they died. Well, their errors will get significantly more from the insurance company than they ever paid in. Now, that's how it's designed. It's insurance that's designed to be an investment. So when you're looking at social security, understand that it's from the same standpoint. It's insurance. It's old age insurance. If you get old and don't have money the longer you live, there's a social safety net according to the design that will help you meet your needs. Or even if you paid a ton of money into social security but you passed away before the age of 62, you don't get any benefits. Now your survivor might, but you personally don't get any. If your spouse also dies before that age, then all that money it essentially goes poof. And it doesn't go poof. It's still there, but it's paying out other people, it's not going back to you. So if you wait until 70, thinking you're maximizing your investment, but then you die right at 70, well then your non-spouse heirs don't get anything. Yes, your spouse will get spousal benefits, but your children if you're trying to maximize something for them, they won't continue to get your benefits, regardless of how much you've paid in. Now, if you want social security to be more like an investment, then you could view it as such. But what you would have to do is you'd have to start collecting early and then take that income and then invest that income into something else that you could pass on to your heirs. So you collect at 62, for example, you get a couple thousand dollars per month. You could direct deposit that right to an investment account, have it invested, and now if you pass away at 70 or whenever you pass away, it's not as if your benefit ceases. Your ongoing benefit certainly ceases, but whatever you've accrued in that account that can pass on to heirs. So when I say that, the fourth consideration comes down to preferences, this is what I mean. Would you rather maximize your guaranteed income? Well, if so, wait until 70 versus. Would you prefer to leave more money to kids or to heirs, regardless of when you pass? Well, in that case, I may be more inclined to say collect earlier, because you could start taking money out of the system, putting it into a different investment account, which is still fully available to you if you need it, but if not, that's money that can pass to the next generation. So neither is right nor wrong, but more comes down to your personal preferences and what you're trying to accomplish with your plan. And then, finally, the last part of Isana's question. She says also what do we do when we need cash and we're in a down market? Now, this may seem like it has nothing to do with the rest of the question, but it actually does. Now, whether you are or aren't collecting social security, the goal is still the same. The goal, and what I'd recommend is don't sell your stock or be in a position where you don't have to sell your stock investments when they're down in value. Now how do you do this? You could have cash set aside that you live on during a bear market, you could have a bond allocation in your portfolio that you live on in a bear market, or you could live off of other income sources. Here's how this ties into the social security decision. Let's assume and again I have no idea how much Isana has in her portfolio. I don't know she has anything in her portfolio. It could be a pension or rental income that she's living on. But for a second, let's assume that her expenses again I'm making this up, this is not from her question let's assume her expenses are $6,000 per month and she and her husband have $1.8 million in their portfolio. Well, if they collect 4% per year of their $1.8 million portfolio, that covers exactly the $6,000 per month, or $72,000 per year. So that specific example, or this specific example, could be an example of how she doesn't quote unquote need social security. However, it would still benefit and we can see that right here. So let's assume again, they're taking $6,000 per month from your $1.8 million portfolio, but then the market drops and they don't have cash to live on. Let's assume they don't have a bond allocation to live on and they don't want to have to sell their stock investments. Well, what do they do in this situation? Well, one thing they could do. Let's assume they are both 62 at this point, but they both turned on social security. I don't know what their social security benefits would be, but let's just assume that each of them are eligible for $2,000 per month. Well, now, all of a sudden, they have $4,000 per month coming in. That's not dependent upon their investments, but they still want to live on $6,000 per month. Well, the remaining $2,000, that's what would need to come from their portfolio. Now, $2,000 per month or $24,000 per year, if you divided that by their portfolio value of $1.8 million in this example, now, all of a sudden, that represents a 1.3% withdrawal rate. When you look at that, you'd say, oh James, well, they still have to take out 1.3% of their portfolio. Doesn't that mean they still have to sell 1.3% of their stocks? Well, no, because ideally and again, this depends on how you're invested but even just a basic stock portfolio, assuming it's well-diversified, should be yielding more than that, just in dividend income. So dividends alone, they're not making you sell any of your stocks, and that income alone could supplement social security in this situation. And if you're in that position, then a down market all of a sudden does not have as much of an impact on you as otherwise would have. If you still need to come up with that 4% or 5%, or whatever your withdrawal rate is, to meet the entirety of your needs. Now you could say, james, wouldn't it be great to reinvest those dividends when the market's going down? Sure, but at some point there's what's financially right and there's what actually makes sense for us. We don't want to delay spending down our portfolio because of the bear market. Or do we just want to live on dividends and call today and not be too concerned if we're not reinvesting those for maximum profit over time? So sure, it would be great to reinvest those dividends, but as long as you could just live on those dividends and not have to sell your stock, well then what that means is that's giving you the income necessary without having to sell stocks in a down market. So we saw in this question that you do have of. What do we do in a down market? Well, the same thing that you'd always do try not to sell investments that are down in social security, or turning on social security could be one way in which you do this. And another thing that this brings up just a quick side note is what this question shows is that your social security strategy should be dynamic. For example, I might have clients that retire at 60 and we'll map out their plan and their income strategy. We say, okay, here's what we're going to live on from 60 to 67. And 67 comes around that's when it makes most sense for you to collect social security. And we look at it and we determine that's their social security strategy, what we're not locked into, that that's not set in stone and something that can't possibly deviate, because what we're doing is we're gauging their portfolio each year and we might run into a scenario where we say, look, inflation in down markets, it's just putting too much pressure on your portfolio to have to support all of your needs between 60 and 67. And while we thought that 67 would be the ideal age, what we're seeing now I'm using this as a hypothetical, not saying this is a recommendation to everyone, but what we're seeing now is maybe one or maybe both of you actually collect social security earlier than we originally anticipated. So, yes, have a strategy for your social security, but don't be afraid to revisit that each year, based on what's happening in the market, what's happening with inflation, what's happening with your spending, what's happening with your assets, your other income sources. This can and should be something that you're at least revisiting once a year to see if it still makes most sense to do so. So that is all I have for today's episode. Isana, thank you very much for that question. I hope that answered your question or at least gave you good framework to think through, and for all of you other listeners. I appreciate you taking the time to tune in. I hope that was helpful for you as well. If you've not already done so, please leave a review for the show if you're enjoying this content, and if you've not already done so, be sure to check us out on YouTube under channel name root financial. We can find this podcast that we're doing right now, and you can find other great content about how to create a better, more meaningful retirement and to help you get the most out of life with your money. So that is it for today. Thank you for listening and I'll see you next time. Thank you for listening to another episode of the ready for retirement podcast. If you want to see how root financial can help you implement the techniques I discussed this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call to one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.

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