Figuring out how and when to elect Social Security can be downright puzzling, especially when it comes to ensuring you’re maximizing what you’re entitled to. Good thing a retirement planner knows what to do. And it all starts with the development of a personalized plan for how you’ll make every dollar go the distance.
Why You Need a Strategy
First, let’s talk about why this discussion is so important. It’s not uncommon to worry about outliving your wealth. There’s even a term for it: longevity risk aversion. But even though many of us share the same fear, what’s not the same from one person to the next is how they plan to fund their retirement. Hence why there’s no one-size-fits-all strategy for which accounts to draw from first, or when to take Social Security.
You might be thinking, “But if I’m planning for Social Security to be my primary source of income, what is there to strategize?” Good question. A retirement planner looks at your assets as a whole and considers how to maximize each. Many people think of this simply as an investment discussion, focusing on ensuring enough growth to sustain their lifestyle for the totality of their retirement. But when you’re in or near retirement, the growing is done, which means the focus shifts to making that money last. That’s an exercise in risk mitigation. So, what are we mitigating? Factors like taxes and electing Social Security too soon (or too late!), which can chip away at your pot of money for retirement. Let’s take a closer look.
Tackle Your Tax Plan
When considering what role Social Security will play in your retirement, we first need to consider how to minimize your taxes, not year over year, but over the entirety of your retirement. That could mean spending down a taxable asset first, before tapping into your tax-free accounts, or making withdrawals from a taxable asset above the required minimum distributions to take advantage of a lower tax rate. This is especially important for avoiding the widow’s tax, which refers to the higher tax rate a surviving spouse can pay when their tax filing status changes from married to single.
So where does Social Security fit into the discussion on taxes? Certainly, if you delay Social Security, you could pay higher taxes when you begin taking benefits, since the payments will be more. But again, the idea is to reduce your tax burden over the course of your retirement as a whole. So even if you’re paying more taxes later in life, if the strategy increases the longevity of your assets overall, then it’s a win.
Elect Social Security at the Right Time
That brings us to another term you may hear often: your breakeven age. That’s just a fancy way of saying the age at which you’ll have earned more money by delaying Social Security, instead of taking it early. Remember, if you take Social Security early, your checks will be smaller, but you’ll get more of them. Take it later, and you’ll get fewer checks, but they’ll be bigger. Your breakeven age provides a tool for evaluating which of those two choices would be better for you—more checks or bigger checks? For instance, if your breakeven age is in your 70s, but you don’t expect to live past 75 due to family history, health, etc., then receiving Social Security sooner (and getting more checks) could yield more money overall for you.
As you can see, figuring out what role Social Security will play for you is a bit like putting together a puzzle. Social Security is just one piece in a bigger picture that can include things like required minimum distributions, annuities, taxable accounts, non-taxable accounts, taxes, and more. With so many pieces, it can be hard to see how they all fit together on your own. That’s why working with a retirement planner who can visualize the big picture and knows how the pieces fit together can make the process so much easier. If you’re ready to make the puzzle less puzzling, schedule a no-cost, no-obligation consultation to learn more.