3 Factors To Consider Before Taking Your Social Security Benefits

My name is Brian Scribonia, and on this episode of the Common Sense Financial Podcast, one method for deciding when to take Social Security benefits involves calculating the breakeven point. This is the future point in time when the value of one option equals that of another. For example, if your full retirement age again, your FRA benefit is $2,000 a month and $1,400 at age 62. There's a $600 a month difference. So it's important to understand that if you opt for this reduced benefit at age 62, this becomes your permanent monthly amount and remains unchanged even when you turn 67.

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There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. The complexity of Social Security calculations can cause some confusion around when someone eligible should file and claim their benefit. The best place to begin is understanding your eligibility. Like most government programs, Social Security has many layers and it's not always clear when and how someone should begin taking their benefits, because being eligible doesn't necessarily mean you should turn that benefit on. Social Security benefits can be turned on as early as age 62, and each year the benefit is delayed. You receive what is called a Delayed retirement credit, or DRC. These DRCs guarantee an 8% automatic increase to your Social Security benefit every year you delay up to age 70. In the middle of this age band, there's something called your fra, or Full Retirement age. This is the age when you are eligible to receive the full benefit without any offset for having earned income. And earned income is income from employment, and it's different than income received from investments, pensions or annuities. So for Those born in 1960 or later, your FRA is age 67. The benefits are calculated by the Social Security administration by taking 35 years of earnings that are indexed for inflation. Any years you didn't work, a zero is added to your record which negatively impacts your benefit. These annual amounts are then totaled and divided by 420 months to arrive at the monthly figure known as your average index monthly earning or aime. However, this is not your benefit amount. The SSA then applies a formula to your AIME that determines your primary insurance amount or pia, and this is your monthly Social Security benefit. If you choose to take your benefit before your fra, which is your full retirement age while employed, there's an offset that can significantly reduce the benefit. If Your income exceeds $21,240 in 2023, this reduction is $1 for every $2 of earned income over the limit in the year you reach your FRA again full retirement age. The limit increases to $56,520 in 2023 with a benefit reduction of $1 for every $3 of earned income over the limit. Now, after you've reached your fra, there's no earning limits and you receive the full benefit with no income offsets. When it comes to taxes on your Social Security, there's something called provisional income. Once your benefits are turned on, there are tax rules that are different from ordinary income that you need to understand. Your provisional income is calculated by taking your adjusted gross income plus half of your Social Security benefit. That total is your provisional income. If that total is less than $25,000, your Social Security benefit is not subject to federal tax. If above $25,000 but below $34,000, 50% of the benefit is taxed. And if it's above $34,000, 85% of the benefit is taxed. So there is never a situation right now anyways where 100% of your Social Security is taxed. And these income amounts are based on somebody who is married. As you can see, there's just many factors that contribute to how the benefits are calculated. But there are a few other rules worth mentioning. If you're a government employee, there's something called a windfall elimination provision or wep. And there's also a government pension offset or gpo. There are also rules and benefits for non working spouses that allows them to use secondary or what they call auxiliary benefits calculated off their spouse's work record. And that's different than a spousal benefit and you also have a widow and divorced benefit available. But we're not going to get into all these details right now. There's just too many to cover. In my book Common Sense, I take a deeper dive into these other areas and explain how to navigate different filing strategies. You can also access more information by going directly to the Social Security website, and I'll link to those in the show Notes now that the foundation has been laid, there are three things I want to share with you that are common conversations that I have with clients as it relates to Social Security. However, the decision when to take your benefit, it does require a comprehensive evaluation of your situation. So what I'm getting ready to share here is not meant to be advice. Again, these are just common conversations that I have with clients the first thing is Determining the Break Even Point One method for deciding when to take Social Security benefits involves calculating the break even point. This is the future point in time when the value of one option equals that of another. For example, if your full retirement age again your FRA benefit is $2,000 a month and $1,400 at age 62, there's a $600 a month difference. So it's important to understand that if you opt for this reduced benefit at age 62, this becomes your permanent monthly amount and remains unchanged even when you turn 67. If you begin your benefit at age 62, you'll receive a reduced payout for five years before your full benefit would have otherwise begun. So age 62 through 67 during this five year period, the benefit total amount equals about $84,000 and that's just $1,400 a month times 60 months compared to if you delay your benefit until age 67 and then begin receiving that $2,000 a month. So your break even point on that would occur at 11.6 years. In other words, prior to the 11.6, you would receive more from Social Security by beginning the benefit at age 62. However, after the break even point, more would be received by delaying the benefit. Now, something to keep in mind. By taking a benefit early, you reduce the amount of spousal benefit made available since the benefit in and of itself has been reduced and this could be an important consideration when weighing your choices. The second thing relates to one's health and longevity. I often hear clients argue that they may not live 11 more years, making this a significant factor in their decision making process. Factors like poor health or family history could prompt someone to start collecting benefits as soon as they're eligible, fueled by concerns about missing out if they die prematurely. From this perspective, it could be a win win situation. They start receiving benefits early and if they live longer than expected, the payments of course continue. While it may be easier to make this decision if we knew our lifespan, it's really up to you to decide what's best for your situation. However, if you're in poor health, taking benefits early might be a reasonable option. The third thing involves a person's retirement income need. We have covered the higher level considerations inside of Social Security itself, but there are other factors in play that take priority over waiting for the maximum benefit, and that is the need for current income. Many clients we work with see Social Security simply as a piece of the retirement income strategy and aren't necessarily concerned with break even points as much as they are with maximizing their assets and their resources. If income is needed and there's a choice between allocating assets for income or turning their Social Security on early, we have found that many people do elect to go with their Social Security benefit. The reasons for this are many, but in most cases it's the desire to maintain the growth of their existing assets. Yes, the delayed credit of 8% is guaranteed growth backed by the government, but there are other considerations at play. If we use the $1,600 per month example from earlier and calculate what it would take to generate this amount of new income, we find it a little difficult to calculate. And the reason it is difficult is because there are unknown variables, specifically the stock market and economic policy at this time. Anyways, interest rates are higher than what we would consider normal and markets are not reliable enough to provide a consistent income stream long term. So determining how to create the income can pose a problem. We can make assumptions about market performance, but Social Security is a sure thing that's backed by the government who has access to actually a money printing machine and our human propensity is typically to find shortcuts and rush to conclusions. But this is not a decision to rush. The conversation about Social Security is actually not a conversation about Social Security as much as it is about retirement income, and that requires careful planning. Therefore, it is imperative to speak with a financial planner who knows how Social Security works and understands how to generate income from assets. To learn how to prepare for your retirement, you can access my retirement checklist by visiting my website@Brian Scribonia.com that concludes today's show. I'm Brian Scribonia. Thank you for listening to the Common Sense Financial podcast Foreign thanks for listening to today's show. If you liked what you heard. Be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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