Social Security Cards

When Is the Right Time to Take Social Security Benefits?

Social Security Cards

Americans who are near- or in-retirement are faced with the vexing question of when to take Social Security benefits.

For a married couple, this complexity is multiplied by consideration of spousal benefits and life expectancy issues. Those who've divorced or might be survived by another spouse also have choices to make about supplementing their investment income after leaving the workforce. 

So let's go over a few of the basics. Retirement benefits provided by Social Security -- we'll use the shorthand of SS -- can often be considered as acting something like an annuity that's indexed to inflation. In this case, such payouts are tied to the U.S. Consumer Price Index. (You'll probably hear these referred to as cost-of-living adjustments. The Social Security Administration annually announces how much these COLAs will be prior to the coming year.)

For a single person deciding when to take retirement benefits, the important thing to understand is that Uncle Sam doesn't care when these are taken. The government's actuaries have calculated the benefits so that someone with an average life expectancy will collect the same present value of benefits regardless of when the benefits begin.

In such a formula, a key question is how does the life expectancy of the claimant compare to the national average on a unisex basis.

This unisex consideration is especially important for women because they tend to live longer than men. In such a respect, an annuity can prove to be more valuable to them. Furthermore, a male in good health could also assign a higher value to deferring SS payments. 

As a result, a case can be made for a male who is in excellent health and doesn't smoke or drink to excess -- and thereby can be expected to live to age 90 or beyond -- would be wise to consider delaying benefits to age 70. On the flip side, an overweight diabetic smoker might decide to begin taking benefits as soon as possible.

The important inputs to determining when to take Social Security benefits, aside from earnings history and projected future earnings, are as follows:

1.) Maximum reasonable age at death. The higher this is, the more likely that delaying benefits will be the superior option.

2.) Expected earned rate-of-return on investments. This is used essentially as a discount rate (after deducting inflation) to determine the value of future benefit payments, so a higher value makes it less likely that delaying benefits will be recommended.

3.) Expected rate of inflation. This is subtracted from the expected earned rate-of-return on investments to produce the real rate-of-return. A higher value makes it more likely that delaying benefits will be recommended.

Once we start considering the SS possibilities for a married couple, the complexity quickly becomes overwhelming. Several independent authorities on SS have written about how confusing and difficult to understand such a complex way of figuring benefit streams can be to novices and experts alike. A software platform that can prove helpful in sorting through such government benefits questions is "Maximize My Social Security."

It was designed by Professor Laurence Kotlikoff, a long-time researcher and academic who has studied such issues. He's helped to develop an online tool to analyze each person's unique benefits claiming options. For most individual users, however, there is a cost attached to taking advantage of this sophisticated software package.  

But given how complex coming up with an appropriate SS benefits strategy can be at any given time, IFA has purchased an advisor license to use this analytical tool. As part of our fiduciary menu of services, clients can work with an IFA wealth manager for assistance in creating a detailed report to help choose an approriate risk-adjusted plan-of-attack tailored to your circumstances and personal financial needs. We've got an in-house planning staff to help, too, as well as expertise in tax-related questions through IFA Taxes, a tax planning, accounting and tax return preparation division of Index Fund Advisors. 

You will need to supply your advisor with a personalized SS report, which can be generated at the Social Security Administration's website. Also, if you're married, you'll need the one for your spouse as well. If you're interested in learning more about IFA or becoming an IFA client, please give us a call at 888-643-3133.