Don’t Claim Social Security Before Doing This!
a Social Security Breakeven Analysis Can Provide Valuable Information To help you make your decision When To Claim Social Security.
***VIDEO TRANSCRIPT***
Are you trying to decide when you'd like to claim social security?
Are you torn between claiming early and getting a lower amount for the rest of your life or claiming later and trying to get as much as you possibly can?
Perhaps a breakeven analysis will help you make this decision.
Hi, My name is JP Geisbauer Founder of Centerpoint Financial Management. I am a certified financial planner professional, a certified public accountant, and this channel is dedicated to people trying to maximize their lives and minimize their taxes as they transition into retirement.
In previous videos, I've discussed reasons why it may make sense to claim Social Security early or why it may make sense to claim Social Security later. You can find links to those videos in the description below.
In this video, we'll go through a breakeven analysis and see how the age at which you claim can affect your benefit.
But before we do this, let's discuss the general framework for claiming Social Security.
Americans can generally claim social security between the ages of sixty-two and seventy. For most retirees, age sixty-seven is considered full retirement age, and that's when you will receive one hundred percent of your primary insurance amount benefit. If you claim at age sixty-two, you will receive seventy percent of that benefit. However, if you wait until age seventy, you will receive a hundred and twenty-four percent of that amount.
So there lies the rub. You can claim earlier and get money sooner. Or you can claim later and try to get the maximum amount. As long as you live longer than your breakeven age, then delaying social security might be the right decision for you.
But that raises the question, "How do we know what our breakeven age is?"
Let's take an example. Let's take a look at a simple breakeven chart for Jack. Jack is currently 60 years old, and he has an average male life expectancy of eighty-four years. His projected primary insurance amount at full retirement age is three thousand dollars.
Here's the graph depicting the total cumulative amount of Jack's Social Security benefit by Jack's age. The green line shows the activity if he claimed at age sixty-two. The yellow line shows the cumulative amount of Jack's social security earnings if he claimed at age seventy. Looking at the yellow line, you can see that there are eight years where Jack is receiving zero in Social Security. However, at age seventy, he begins to receive his benefit. If Jack claimed early, his monthly benefit would be about twenty-six hundred dollars per month. But by waiting until age seventy, Jack's projected monthly benefit is forty-five hundred dollars per month. Because he waited until age seventy, the amount he is earning every month is greater, and the yellow line has a much steeper slope than the green. By age seventy-nine the yellow line will overtake the green line meaning that if Jack lives longer than age seventy-nine, he will earn more in Social Security by delaying.
The analysis stops at age eighty-four. Why? Because that is the end of Jack's life expectancy in this particular example. In that year, the projected monthly benefit would be about three thousand four hundred dollars if he claimed at age sixty-two. The monthly amount at that age had he waited to claim until age seventy would be about six thousand dollars a month.
But what if the graph continued for five, ten, or even fifteen more years? We would see the difference between the green and yellow lines widen even further. Why? Because each year, the amount would be increased by the cola or the cost of living adjustment.
So once you get past your Social Security breakeven age, the difference between the two strategies widens even further.
So that was Jack as a single person.
Now, let's say Jack is married. And, in the interest of being super creative, we will call Jack's spouse, Jill.
Jill is currently fifty-five years old. Her life expectancy is age eighty-seven, and her primary insurance amount at full retirement age is fifteen hundred dollars.
As you may have noticed, there is a difference of fifteen hundred dollars in the primary insurance amount between Jack and Joel. There is also a five-year age gap. In addition to that, Joe's life expectancy is three years longer than Jack's. So, all of these things combined, Jill is anticipated to live eight years longer than Jack.
Now, this is a good time to discuss Social Security survivor benefits. This is a complicated topic worthy of its own analysis. But in the interest of time, let me give you the broad strokes.
When one spouse dies, the surviving spouse is able to get a monthly benefit based on the deceased spouse's earnings record. The amount of the benefit can be seventy-five percent if claimed at age sixty-one or one hundred percent if claimed at full retirement age. Again, there is a lot of complexity around this. So, you will want to do an analysis based on you and your spouse's long-term retirement plan.
Now, back to Jack and Jill.
So this is Jack and Jill's chart under two scenarios. The blue line shows them both claiming early. The orange line shows the total Social Security benefits received when Jack claims at age seventy, and Jill claims that her full retirement age of sixty-seven.
As you can see, it's much like the initial chart we looked at when we looked at Jack by himself.
However, because Jill has a longer lifespan and is expected to live eight years beyond Jack. The fact that she's able to claim on his Social Security record just has that much greater a benefit given the time frame.
So, what is the takeaway here? By running this breakeven analysis, you give yourself more data as to when the optimal time is for you to claim social security.
But there are two key points to consider.
Number one, make your decision about claiming Social Security based upon your long-term retirement plan.
There is not a one-size-fits-all strategy to claiming social security. Make sure you evaluate your and your spouse's situation to make the decision that is right for you. There are so many factors that go into this decision: age, health, earnings record, whether or not your earnings were subject to social security, previous marriages, cash flow needs. All of these different factors should be considered as you're making your decision to claim Social Security.
Do the analysis and make the decision that is right for you!
Number two, understand your advisor's bias. A recent CNBC article indicated that affluent households that work with brokers typically claim Social Security earlier than those that don't. Now, there could be a lot of different reasons for this. But, there's one that probably deserves mentioning.
Most brokers charge fees based on the amount of assets that they manage. The higher the amount, the greater the fee.
If you're going to be delaying claiming social security, you may need to draw down those assets to help you make it through the years when you don't have any of that social security income coming in. Also, if you're claiming early and don't necessarily need the additional money, you may decide to put that money right with your broker so that it can earn the investment returns to which you are accustomed. Both of these scenarios result in the broker having more assets to manage. But is it the right decision for you?
In the context of your financial plan, does it make sense to claim early, or should you wait?
Suffice it to say your broker might be a little conflicted with looking at this and giving you their best advice. Their best interest might not necessarily be aligned with the decision that you need to make. This is the importance of working with fee-only, fiduciary financial advisor who is well versed in social security claiming strategies.
Well, if you have made it this far, I thank you for watching.
If you have any questions or comments, please put them in the comments section below.
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Thanks again for watching. I'll see you next time.
About the author:
JP Geisbauer is a Certified Public Accountant, a Certified Financial Planner ®, and the founder of Centerpoint Financial Management, LLC, a financial planning, investment management, and income tax planning firm located in Irvine, CA. JP Geisbauer is dedicated to helping California-based business owners and executives transition into retirement. He has been quoted in many news outlets including Forbes, Newsweek, US News & World Report, MarketWatch, YahooFinance, CNN and NerdWallet.
Need help with your transition into retirement? Schedule a complimentary 30-minute call with JP here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article or related video constitutes individual financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article and video, consult with your own financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.