Deciding when to begin taking Social Security is not an easy feat – even for financial advisors.
There are many factors to consider, such as health, wealth and family situations.
Naturally, the devil’s in the details. And, as with any government program, there are lots of them.
ThinkAdvisor spoke with Michael Lonier, retirement management analyst and head of Lonier Financial Advisory near Sarasota, Florida, about the ins and outs of Social Security planning.
Lonier gave his views on misconceptions, myths and flawed – or at least confused – thinking on the best time to take Social Security benefits.
Read on for a discussion of nine myths of Social Security worth busting:
1. You should claim early, before your full retirement age, in order to “get back what you put in.”
This is a fallacious argument, says Lonier. “The basic issue you are dealing with is that people want money sooner rather than later and find reasons to justify that.”
Blame human nature, he says. “It has to do with the declining utility theory and the diminishing value of returns, I guess.”
While sooner may seem better, there are lots of reasons it may not be the best retirement scenario.
For example, if you retire at age 62 in 2016, the maximum monthly benefit would be $2,102, according to the Social Security Administration.
However, those waiting until their full retirement age, 67, receive a maximum benefit of $2,639 in 2016. And those retiring at age 70 in 2016 have a maximum benefit of $3,576.
2. It’s best to take it early, since you don’t know how long you will live.
Longevity continues to increase.
According to a recent study conducted by the University of Michigan published in The American Journal of Public Health, the average woman can expect to live to 85.5. For men, that figure has “risen significantly” to 83.
Yet, few people “delay getting their Social Security to age 70, which is unfortunate,” explained Lonier. “The longer you wait, the greater amount you get each month.”
This amount significantly affects retirement, “since Social Security is a big part of people’s incomes,” he adds.
The rate at age 70 can be almost double that of age 62, which “is terrific,” the advisor states.
“Those who have not worked or saved as much as others would most benefit from waiting, but most don’t have income to spend while waiting,” explained Lonier. “Thus, many are forced to go and take Social Security early, as it is their only source of income.”
Unfortunately, by taking it early, “You are not able to get more over time,” the advisor explained.
3. By taking benefits early, you will be able to pay less in taxes.
There’s a widespread notion that retirees should first tap into Social Security and then begin withdrawing funds from their IRAs and other private savings vehicles.
However, by reversing that strategy, some retirees may be able to lower the taxes they pay over their lifetime.
Consider that Social Security benefits are taxed at a preferred rate. This means at least 15% of Social Security income is tax-free.
With a traditional IRA, 100% of withdrawals are taxed at ordinary income tax rates.
Plus, some retirees taking both Social Security and IRA withdrawals find themselves facing a so-called “tax torpedo.” This is when Social Security benefits get taxed and retirees move into higher tax brackets.
“There really are some things that are in the realm of control of retirees — and that really matter,” explained Lonier, like using some savings early on to increase the tax-advantaged benefit you get in later years.
“Thus, if you can tap some savings first, retirees can boost their Social Security income later in retirement and lower their taxes,” the advisor said.
4. With political gridlock and other problems in Washington, you can’t expect Social Security to stay solvent forever, so you should take benefits as soon as you can.
A report by the Social Security trustees say the program’s trust funds will be depleted in 2034.
Once that happens, payroll taxes will be its sole source of funding. Researchers estimate that the taxes would cover between 75% and 79% of benefits.
Voters concerned about the stability of Social Security should elect those to office who share their views, says Lonier.
Perhaps, if the majority of voters give politicians in Washington a clear message on what they want for the program in the future, their elected representatives will protect it or adopt specific reforms, he adds.
The advisor reminds retirees and investors that there are no guarantees.
“Anything can happen,” Lonier said. “And you have to have the same assumption with Treasury bonds. There are no risk-free investments.”