When to Take Social Security + How to Fix a Common Mistake
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today I'm going to be talking about a very common mistake that people make with social security and how you can fix it. I'm also going to talk about the best strategy for taking social security. And I want to put some just kind of basic numbers to it so that you can make an educated decision for you and your family.

For all the details, links, and show notes, head over to youstaywealthy.com forward slash 41. And as always, if you have any feedback or questions for me, go ahead and shoot me an email at podcast at youstaywealthy.com. Okay, let's dive in.

One of the most common questions around Social Security is, when should I take it? And it's a simple question, but if you're a listener of the show, hopefully you know that there are a lot of other factors to take into consideration. Like nothing is ever that simple when it comes to money and financial planning. Now, my goal for this show is to simplify this stuff and make it really easy to understand, but I'm going to talk about a few of the things that I take into consideration.

But that doesn't mean we don't have to factor in other things in our financial life. So before we address some of those other things I want you to consider, the simple textbook answer is to delay Social Security to age 70 if you have the resources to do so.

Why is that? Because on average, you're going to earn more money over your lifetime by delaying social security. As you might know, each year you delay social security beyond full retirement age, you get an extra 8% boost to your 12-month social security payment. So for every year you wait, you get an extra 8% bonus on your social security payment.

Now,

Now, the Social Security Administration actually puts out an annual guide to taking your benefits. So this year they have the 2019 Guide to Taking Social Security Benefits. I'll link to it in the show notes if you're interested. But like most things put out by the Social Security Administration, it's not so easy to understand. But in that guide, they attempt to address the following question, which is, would it be better to take my Social Security benefits early than

but get paid a smaller amount for a longer period of time? Or should I wait, wait for those larger payments, but I'm going to get them for a shorter period of time? So what's better? And I want to attempt to answer this in a really simple way and put some numbers to it so you can start to think through it for yourself and your family. So let's

Let's use a simple hypothetical example. Let's say that you're 62 years old and you're just itching to take your social security. Your monthly benefit, let's assume, is $2,100 per month. So you're 62. You really want to take the social security check and your benefit is about $2,100 per month.

Now, if you're patient and you have the resources and you delay social security at age 70, let's say your payment could be $3,800 per month. You might say to yourself, okay, like the quick math, if I delay for eight years, I'm

I'm missing out on about, let's just say $200,000 that I could have had in my pocket. If I would have been taking those benefits from age 62 to 70, that's like $200,000 that I could have had in my pocket during that time period. Now I'm going to start up at age 70 and I'm

Is it worth missing out on that $200,000 just so I can wait for a payment that's about $1,700 per month more? And I think that's the question a lot of us are asking ourselves. It's like, wow, you add that up and $200,000 is a lot of money. Now, on average, the answer is yes, you should wait. You should delay. Yes, $200,000 is a lot of money, but on average, you're going to come out ahead if you delay.

waiting for that extra $1,700 per month is actually the right answer. However,

It does depend on a variable that nobody can predict, which is how long are you going to live? Now, we can look at the life expectancy tables and make an educated guess, but nobody knows exactly how long they're going to live, which makes answering this question kind of tricky. If you delay Social Security to age 70, and then God forbid something happens to you at age 71, you're

then delaying social security wasn't such a great deal for you. On the other hand, if you live to 85 or 90 or even later, then you've made an awesome financial decision.

And the more closely you look at these numbers, the more obvious the answer gets. Over the rest of your lifetime, the difference between these two benefits, between taking it early and delaying and taking it late, is huge. So let's put some numbers to it. If you start taking benefits of $2,100 per month, if you take it early at age 62, you're

and you receive them all the way to age 90, you would get about $730,000 from Social Security during that time period. If you wait until age 70, you get that higher benefit. Now you're getting that $3,800 per month.

So you get $3,800 per month from age 70 to age 90. You'd get just over $900,000. So that's a difference of almost $200,000 in your pocket by delaying Social Security, again, if you live to age 90.

What most people are often most concerned about isn't how much more money am I going to have in my pocket, but what's that break-even point? What's the point where those two things intersect? What's the break-even? And for most people, the break-even point is that early to mid 80s. So let's just call it 85 for the sake of keeping it simple. For most people at age 85, that's the break-even point between taking it early and delaying

And so for every year you live longer than that break-even point, you're just going to have extra money in your pocket. So if you anticipate living well into your 80s, you have the resources, then delaying to age 70 is going to be the right answer. Also, and then I'm going to move on from this and go on to the next topic, but

I always like to say that there's a textbook answer and then there's your answer. And maybe the math says to delay social security, but maybe you just want the money now. Maybe you're financially successful. You've worked really hard your whole life. You've done a great job saving and you just want to take the benefits and maybe

If that aligns with your goals and your financial plan, then I'll just say go for it. If that's what's important to you and that's what you want to do, go for it. Just because the textbook and the math says to delay Social Security doesn't mean you have to do it. It's just on average going to be the right answer. So I'm...

I'm most concerned with making sure that everybody has the relevant information so that they can make an informed decision. So you don't have to follow the textbook answer. I just want you to know what information you should be taking into consideration before you decide what to do.

With all of kind of the basics out of the way, the best answer for most people, the textbook answer, figuring out where that break-even point is, I want to make sure we talk about some of the other factors that you should consider before going ahead and taking social security. So maybe using my last example there and saying, well, heck, I've worked really hard for this money and I don't know how long

I'm going to live. I'm just going to take my social security. So that's fine. But one of the things I want you to think about, and if you're a listener of the show, if you listen to episode 38 on how to lower your taxes in retirement, I talk about tax planning and how important taxes play into this decisions.

And one of the things I mentioned is that you could have a higher tax bill in retirement than as a working professional. If you add up social security and required minimum distributions, maybe you have a pension, maybe you have other investment income, real estate income, it can be a really high number.

And nobody likes paying more in taxes. So again, maybe you want that social security payment now just because, but you got to think about how much more you might be paying to Uncle Sam if you make that quick rash decision.

To combat some of the tax issues, you can delay Social Security and do some partial Roth conversions during your gap years. The gap years as a reminder are those years between when you retire and when RMDs or required minimum distributions and Social Security kicks in.

So during your gap years, if you delay Social Security, you can do some partial Roth conversions and you can combat a lot of the tax issues that come up at age 70 and beyond.

So by delaying social security, doing partial Roth conversions, we have seen some people literally save tens of thousands of dollars in taxes over their lifetime when this is done correctly. Also, you might not think, but your investment portfolio has to be taken into consideration as well. Your investment portfolio is related to answering this question. And to put it really simply, the

The more conservative your investment portfolio, the more it makes sense to delay Social Security. Now, how do you know if your portfolio is really conservative? I like to break portfolios up into two. You have bonds and you have stocks. Bonds is the safer stuff and stocks are the riskier stuff. So if you have more of your money in bonds, the safer stuff, and less in stocks, the risky stuff, you've got a conservative portfolio.

And if you have a conservative portfolio, it usually makes more sense to delay Social Security. And that's because you're likely going to have a higher return from Social Security, that 8% bonus every year, than you'd ever make on your investment portfolio.

So you have to look at your investment portfolio and taxes before making this decision. Now, if you're a really risky investor, again, you have other resources and you're able to have more stocks in your portfolio, you might consider taking Social Security early if those numbers work out and that fits into your financial plan. But if you have a conservative investment portfolio, it starts to make even more sense to delay Social Security.

To sum this all up, taking Social Security early has two downsides. One, you're likely going to receive less money in Social Security benefits over your lifetime. Two, you're probably going to pay more in taxes in your lifetime because you're not going to have as good of an opportunity to do those partial Roth conversions. Now, if you're listening to this and you're kicking yourself because you took benefits early, you're

I want to mention that there's this little known fix that might just apply to you. You might have the option to repay benefits that you've already received. The catch is to qualify for this, it has to be less than a year since you started receiving social security benefits. So,

If you've been taking them for longer than a year, this doesn't apply to you. But if you've recently started to take them and you're listening to this and saying, shoot, you know, I kind of want to reevaluate this. You'll need to submit a form that's called SSA-521. And I'll link to that form in the show notes, but you'll complete and submit that form. And once you do that, the Social Security Administration will let you know how much money you owe them.

Now, we can all agree that it's not fun to give your money back to the government. Again, we've worked really hard for this money. We've saved. We've waited. It's not fun to write a check back to the government. But if it means that you're going to have more money in your pocket, you're going to pay less in taxes over your lifetime, I think we can all agree it's probably a smart financial decision to look into this.

Wrapping this all up, there are a lot of moving parts to this. Again, the simple answer is to delay Social Security to age 70, but there are other factors to consider. Again, if you're interested in learning more about taxes and retirement and how Social Security plays into that and required minimum distributions, go back and listen to that episode, episode 38.

And I talk more in detail about this, but there are other things to consider. It's not a simple cut and dry answer. So talk to your trusted advisors, talk to your CPA, talk to your financial advisor, talk

Go through your financial plan, crunch the numbers, talk to your spouse, and then make an educated decision that's right for you and your family. And again, I'm going to give you permission to make a decision that's not the textbook answer. It doesn't have to be the textbook answer. I just want you to have all the information so that you can make an educated decision.

For all the resources, links, and show notes for this episode, you can go to youstaywealthy.com forward slash 41. Thanks for listening as always, and I will see you in two weeks. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪