Social Security Income (SSI) is an important component of retirement planning for many Americans. However, the decision on when to start claiming benefits is complex and has lasting implications. Disciplined SSI decision-making requires the consideration of a variety of factors that each contribute to determining the ideal age for individuals to begin taking benefits.
Life Expectancy & Health Considerations
One of the primary considerations in the timing of the social security income election is life expectancy and overall health. Individuals in good health with a family history of longevity may benefit from delaying SSI, as this can result in higher monthly benefits. On the other hand, individuals with health issues, or a family’s predisposition toward a shorter life expectancy, may find it more advantageous to claim benefits earlier. The chart below clearly illustrates how American’s life expectancy over the last century has progressively increased.
Financial Goals & Living Expense Needs
A thorough analysis of an individual’s financial goals, annual cash flow needs, and financial assets is also essential in determining the ideal age for an individual to claim SSI. We suggest utilizing a Certified Financial Planner (CFP®) professional to provide a comprehensive assessment of a family’s existing financial resources. These would include bank account balances, investment portfolios, annuities, life insurance cash value, 401(k)’s, IRA’s and employee pension benefits. Wealth management professionals can recommend personalized inflation-sensitive strategies to optimize the productivity of an individual’s financial assets. One optimization goal is to efficiently diversify those financial resources to generate stable long term income streams that complement the Social Security Income election decision. Individuals with sufficient retirement savings and income from other sources may choose to defer claiming SSI to increase their benefit amount once their income elections is made. Alternatively, individuals with immediate financial needs can opt to claim benefits earlier.
The graph below illustrates the amount an individual’s Full Retirement Age (FRA) benefit is reduced by taking Social Security early and, on the other hand, the percentage a benefit is increased by delaying Social Security benefits beyond FRA.
The tax implications of claiming SSI at different ages are a key aspect of the decision-making process. Coordinating other sources of retirement income is an important consideration if the retired individual plans to continue to work or earn income from a second career. These other income sources could affect the taxation of SSI benefits. Delaying SSI can sometimes offer an individual more flexibility. Strategies that optimize the timing of SSI should be explored to minimize tax liabilities and enhance after-tax retirement income.
Market Conditions & Economic Factors
The economic environment and financial market conditions can influence the decision on when to claim SSI benefits. Prevailing economic conditions, interest rates and inflation are all considerations to maintain a well-informed perspective on the longer-term purchasing power of future Social Security income. If individuals have the financial flexibility to withstand financial market volatility, it may be advantageous to delay claiming benefits. Delaying benefits may provide an opportunity for investments to grow. On the contrary, economic downturns or uncertain financial market conditions may prompt individuals to consider claiming benefits earlier to secure an immediate stable income stream.
The illustration below shows the significance of a decision to collect benefits after Social Security Administration’s “Full Retirement Age” (FRA). For an individual born after 1960, FRA is 67. If that person begins receiving benefits at age 67 they receive 100% of their monthly benefit. As described above, if they delay, their benefit continues to increase. The Social Security Administration requires everyone to begin taking their social security benefit no later than age 70. The chart below illustrates an individual age 67 must live beyond 82.1 years to “break-even” from the decision to defer benefits to age 70.
The decision on when to begin taking Social Security Income is nuanced and requires careful consideration of an individual’s circumstances. Life expectancy, financial goals, tax implications, and financial market conditions should all be considered when making an informed decision. Ultimately, as retirees navigate this significant decision, a comprehensive approach examining both quantitative and qualitative factors will lead to a more informed and personalized decision based on their long-term financial objectives.