Social Security Timing and Retirement Withdrawal Rates

With most people living longer, but not necessarily working longer, you may need to plan on maintaining an income stream in retirement longer than you might expect.  For most retirees, a primary source of income is their social security retirement benefit.

Your social security retirement benefit, or “primary insurance amount” (PIA), is the amount you will receive if you begin receiving benefits at your “full retirement age” (FRA) based on your earnings history.

If you were born in 1954 or earlier, then your FRA is age 66.  If you were born in 1960 or later, then your FRA is age 67.   And if you were born in between 1955 – 1959, then your FRA is age 66 + 2 months for each year in that range (i.e. born in 1955 = 66 + 2 month; born in 1959 = 66 + 10 months).

You can claim your social security retirement benefit as early as age 62 or delay starting your benefit to as late as age 70 depending on your personal needs and financial situation. Deciding when to claim benefits will have a permanent impact on the benefit you receive.

Your benefit is reduced between 6.00% – 6.25% (depending on what year you were born) for each year that you take benefits before your FRA.  Conversely, you benefit increases by 8% for each year that you delay past your FRA.

If you were born between 1955 – 1959, then your benefit will be reduced to between 74.2% (1955) to 70.8% (1959) of your FRA benefit at age 62 and increased to between 130.7% (1955) to 125.3% (1959) of your FRA benefit if you delay to age 70.

There is no “one-size-fits-all” and the range to begin collection from age 62 to age 70 remains available to most anyone.  Some may start their benefit early at another age, like when they retire at age 63 or 65, while others may choose age 68.  When to start depends on what you need and what works best for you.

Delaying benefits is appealing given the guaranteed 8% increase for each year past FRA and because each year you delay will provide increased social security income later in life.  The tradeoff is that you may need to bridge the gap in your income in the early years of retirement until your delayed benefits are received.

Mr. & Mrs. Smith are age 55 and 56 and their social security retirement benefits are projected to be $3,262 and $1,631 per month at their FRAs.  Depending on when they claim their benefits will have a permanent impact on their annual and cumulative social security retirement benefits.

Trying to determine what’s best depends on how long you expect to live.  If Mr. & Mrs. Smith only expected to live until ages 79/78, then they would be better off claiming social security at age 62 as they would have received more on a cumulative basis up until ages 79/78.

The breakeven for the Smith’s delaying to age 70 is a bit further, ages 82/81, as more years pass before they claim the benefits.  In this case, they will have received more social security retirement benefits on a cumulative basis up until ages 82/81 and delaying only begins to pay off when they are older than 82/81.

These are not the Smith’s only options, of course.  If Mr. & Mrs. Smith plan to work until their FRA, then they still have a decision as to whether to claim when they retire or to continue to delay until age 70.  In this case, their breakeven is even further out as they are starting later.

When starting at these later ages, delaying to age 70 only starts to payoff once the Smith’s have lived beyond the break-even ages of 85/84.

You ACM Wealth Advisor can help you determine these breakeven ages and your optimal social security timing given your projected social security retirement benefit and life expectancy.  If you are unsure of your social security benefit, then you’ll need to login to www.ssa.gov or register yourself as the social security administration no longer mails an annual statement of your projected retirement benefits.  You may also want to check out the Society of Actuaries and American Academy of Actuaries “Longevity Illustrator”.

Beyond these tradeoffs created by social security timing, another consideration is whether and how to “bridge the gap” between when you retire and when you start your social security retirement benefit.

If the Smith’s plan to retire at age 67/66 with $1,500,000 saved and $75,000 of annual expenses (not including income taxes), then they’ll likely want to consider whether it makes sense to take benefits immediately or delay until age 70.

The below compares the early years of the Smith’s retirement based on taking social security at their FRAs vs. delaying until age 70.

If the Smith’s delay social security, then they will have withdraw 5.00% from their assets to cover living expenses each year for the first three years of retirement, which equates to about $166,000 by the time Mrs. Smith starts collecting.   That’s more than 10% of their initial retirement portfolio and may feel like a lot to withdraw, particularly if the first few years of retirement are unfriendly from an investment standpoint.

Note that the “cumulative social security” received at ages 95/94 is about $200,000 more ($1,917,278 vs. $1,722,336) if the Smith’s delay, however, the projected end of year (EOY) value of their portfolio is not materially different ($4,509,764 vs. $4,606,154).  In fact, the ending portfolio value is slightly larger in the case where the Smith’s received less cumulative social security benefits.  This is the result of having more assets ($166,000) available to grow in their portfolio (assuming a 5% growth rate) during the first few years of retirement.

As appealing as delaying social security appears in terms of the pure “cumulative benefit” over a long lifetime, social security timing is only one factor in determining the best retirement income path for you.  Like many other financial decisions, it’s part math and part emotion and there is no one-size-fits-all.

Trying to figure out what’s best on your own can be challenging, particularly if you are doing it once in a lifetime.  As we mentioned last week, social security timing is just one of several key retirement considerations and working with an advisor who routinely helps folks to make these decisions may add a lot of value.

Reach out to us if you have questions.  Your ACM Wealth Advisor can assist you with understanding the dynamics of establishing a retirement income stream and evaluating your investment strategy to ensure that it fits with what you need your assets to do for you in retirement.

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