Ep #146 The Big Social Security Timing Debate

Social Security election options can be confusing and when to elect is one of the biggest retirement questions out there. The answer isn’t always what the math alone tells you. In our latest podcast, Adam and Ben unpack the numbers, psychology, and strategies behind this critical decision, so you can make the choice that best fits your health, work, and financial goals.

Chapters

0:00 Introduction to A/B Conversations

0:36 Diving into Social Security Benefits

1:05 Claiming Strategies and Considerations

2:50 Filing Early: Pros and Cons

6:05 Delaying Benefits: Is It Worth It?

7:09 Working While Claiming Social Security

9:48 Marital Status and Spousal Benefits

15:29 Tax Implications and Other Factors

17:31 Conclusion and Final Thoughts

19:38 Disclaimer and Closing Remarks

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Full Transcript:

[00:00:00] Adam Werner: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now.

[00:00:28] Ben Haas: What's up Adam, how are you today?

[00:00:30] Adam Werner: Hey, wonderful. How are you?

[00:00:33] Ben Haas: I'm excellent. So good. So very good. Today we're gonna dive into a topic that I would say every retiree is going to want to figure out, right, social security benefits. So a lot to dive into here, but we're really gonna focus on, I think, like claiming strategies, you know?

'Cause that's often, yeah. We're gonna get, do I take money as soon as possible at 62? Do I wait until full retirement age? Is it all the way to 70? So we can dig into whatever you want today, right? Yeah. World is your oyster Adam. Numbers, emotions.

[00:01:08] Adam Werner: So for anybody who's listened to us before, here's the great news, social security, it's extremely black and white.

There's very simple answers. We're gonna get right to the point. Just kidding. Like everything, like every, like everything else. It feels like the answer is often, well, it depends and it's very situational. So yeah, I think social Security, you said it. Most people, I think there's very few exceptions, which we've had some of these where, you know, people have a government pension for example, may not have paid into social security and therefore don't have the access to the system.

But the vast majority of people that, that are going to retire, this is a decision that needs to be made and it is a big one. 90%, there's the study, 90% of retirees are relying on social security in some way. Sure. And 40, at least 40% rely on it for more than half of their income. So something to get right if and there again, I don't only, I don't even love that framing because that makes it sound like there's a wrong answer.

It really is a sliding scale of maybe not so great to the most efficient or kind of maximizing the idea. Yeah. But often it just comes down to longevity.

[00:02:24] Ben Haas: Yeah. We're gonna talk about a lot of factors. I'm glad you started there, because we're like many things in planning, we're operating with certain assumptions, and one of the biggest assumptions is how long are you going to live, right? Yeah. So you and I know we've set it in the conference room, we've set it in meeting with clients. That's the biggest variable, right? Longevity. You tell us when you're gonna pass away. We know can, we can then do the math to say, here's when you should select. But I think there's gonna be some other things we'll talk about. So if we kind chronologically, about a third of people will file for social security right away at 62.

I think there are maybe multiple reasons why people might consider that, but let's just start at the beginning. Yeah. They need the income, right? Whether they wanted to retire early, decided to retire early, maybe it was job loss. I hope it's not because of a lack of savings, but let's be honest, some people just need that income and go all the way back to why Social Security was created and why this system was created a long time ago. It is a needs-based system. It was to create some sort of foundation for people to have a retirement.

[00:03:28] Adam Werner: Exactly and you said it right. The factors there or maybe the reasons for filing early.

One of the ones that we hear the most commonly is, I paid into this system. Yeah. I want to get something back out. You hear all of the stories or the articles and all the headlines, multiple times a year of, you know, when the Social Security Trust fund is theoretically going to be insolvent or the payments going into it aren't going to cover the payments going out.

So that is one that, that I think we run into a lot is just people's personal feelings on, I don't know how long I'm going to live, so I'm gonna get something out. Even if I'm not maximizing my lifetime benefit, I don't care. I want to get something for what I put into the system. That's a huge one.

[00:04:13] Ben Haas: It may also be just health or longevity concern. Yeah, for sure. Which is why, you know, one of the calculations, one of the things that we'll want to do for people if maybe they don't need to take it right now, but they are having that question, you're like, but yeah, should I delay?

We'll do what we call a breakeven analysis and that's just basically saying if you're gonna, if you're gonna forego certain paychecks, let's say between 62 and full retirement age. For most people, that's 67. Now, if you're gonna let go of those five years worth of paychecks, you're doing that because your age 67 benefit's gonna be higher to start.

But how long do you have to live for those higher paychecks to make up for five years worth of paychecks that you gave up? And it's, yeah, oftentimes not until somebody's in their late seventies, early eighties. So that gives somebody, I think, a concrete decision on how do I feel about my health, longevity, family history, and kind of that whole idea of is delaying really worth it if I don't live past that age?

[00:05:15] Adam Werner: Yeah. And that is, that's no you said it. And we often say this and that's the biggest unknown. Right? And I think the bulk of this podcast will probably will talk about longevity so many different times because that is one of the primary driving factors. The individual situation matters too.

Which we'll get into some of those details, but yeah the math will always show,

[00:05:36] Ben Haas: yeah,

[00:05:38] Adam Werner: assuming right life expectancy or that people are going to live a long and healthy life well into their eighties or nineties.

The math will always say delay, delay delay. But the reality of many situations is that may not be possible. So then what's the best next option? And that's again, just situational. So then maybe we'll switch gears to the, if claiming early. Here were some of the factors. What's the benefit to delaying as long as possible? Well, number one, I think a lot of people do know this. There is a benefit.

You get essentially an 8% credit, a delayed retirement credit. For every year that you would delay beyond your full retirement age. So age 70 is the latest. So if you have not started your benefit by age 70, you're basically forced to start it at that point regardless. But that those increases for delaying are guaranteed inflation adjusted increases.

So it's, hard, it's hard to beat that, but you have to have some other resources or most people would need some other resources to be in the situation to delay and try to take full advantage of the system.

[00:06:50] Ben Haas: Because I, I think there are, even if somebody stops working, sometimes the question for us is, okay, you stop working, but should I take Social Security right away?

You know? Now, Now I think we're bringing in a lot of different variables, like you said, on what other savings do I have available to me? Are they retirement accounts that would be taxable if you took money out? Am I working part-time? We may get into some of those. But I think that the part that I would wanna talk about here in delaying is, if you are continuing to work, it probably does make sense to continue to delay, because there are rules on how much you can earn before you would start to lose some of the benefits or delay some of the benefits that would be coming to you. Yeah. But I think if you are continuing to work, recognize that those are probably some of your highest earning years, and that is based on the formula here.

Social security's gonna take your 35 highest years of earnings. They're adjusted for inflation. There's a weird calculation here. But you continuing to work at a higher income probably than you were certainly inflation adjusted 30, 35 years ago, just means that money is delaying giving you a higher benefit.

But the math that's going into what your base benefit is going to be is going up because you're, you have higher earnings.

[00:08:00] Adam Werner: Yeah. It's like a compounding benefit, right? You're getting it from, you're getting a tailwind on both sides. So yeah, that is certainly beneficial. So then let's just stick there on, on that other factor of if you're going to continue to work, especially prior to full retirement age, you kind of hinted at it, there are limits on what you can earn and still collect your benefit.

And for 2025, that limits around 23,000, between 23 and 24,000 above that limit for every $2 that you earn above that limit, $1 of your benefit is essentially held back. So for many people, if they're working full time and earning, you know, I'll say $75,000 or more, and they're only expecting a 20 some thousand dollars benefit, there's certainly a world here where you could file and really not get anything based on your earnings.

So that goes back to your point. If you are continuing to work full time. It probably doesn't make sense to start social security while you're also working. Biggest caveat there being the full retirement age. Once you hit full retirement age, those earning limits go away. You can essentially earn as much as you want and still collect your full benefit in the year in which you turn full retirement age.

That formula for the withheld benefits changes a little bit. The income limit jumps up. The one $1 held back for every $2 over, I think it's like $3 over, then a dollar is held back, but that earning limit is much higher, so it gets a little bit more flexible the year in which you hit full retirement age, and once you hit full retirement age, the gloves are off, you have much, much more optionality to continue to work and receive your benefits, if that makes sense.

[00:09:46] Ben Haas: Work's a big one. We also, we'll play a lot of games with just marital status. That being, you and a spouse, if there are two people in the situation, do not have to have the same file strategy. You don't need to both wait till age 70, you're both decide at 62. So depending on the age gap that you have, if there is one, depending on again, work situations yeah, we won't be very thoughtful about who's claiming what and when, because, survivor benefits when one of those spouses passes away, you're only allowed to collect on one social security. It will be the higher of the two benefits.

But that does mean that maybe the higher earner not only is does their decision very important for their own benefit, but if we do project out, that does affect what that survivor benefit would be.

[00:10:35] Adam Werner: That's a big one that. It's maybe those unintended consequences of filing early, right? It's that domino effect of, I, I want to get something back outta this. I'm gonna file early, but God forbid something happens. Now, you are kinda locked into that, not only for yourself, but potentially the spouse and the survivor benefit as well.

So, yeah, that's a tricky one.

[00:10:56] Ben Haas: I probably didn't say there in this section of like marital status, there are spousal benefits too. Oh yeah. I don't know if you want me to throw you that softball or you want me to take it?

[00:11:07] Adam Werner: Oh man. Well, go with where your head's going.

Yeah.

[00:11:10] Ben Haas: So I think it's maybe becoming a little less common that there, there was just a situation where husband, wife, and I'll say it was usually the wife was more of a homemaker. Social security decisions in there that said, well, just because you weren't out there earning doesn't mean you're not entitled to something.

So, yeah. It can be, that if one spouse was earning and the other one maybe didn't have as much in the earnings category that, that lower earner income, that lower earner could actually elect benefits called spousal benefits on the other one's, earning history, capped at 50% of what their benefit was. So there are sometimes these games of trying to figure out, okay, what's my highest benefit that's available to me?

And if it's not on my own earning history, it could be on percent of your spouses, although that does get reduced to 35% if you file early. 

[00:12:01] Adam Werner: Going back to where I started with, it's very black and white, super simple. Yeah. There's so many of these little nuances in if this, then that.

And that's really what makes it so specific to someone's individual circumstance, because even if the, you know. I'll use two like, sample scenarios, husband and wife. In each, they earned the same amount. One spouse worked, the other didn't. You know, the same scenario, but in one scenario, someone wants to retire at 62 and in the other scenario, they're willing to work till 67.

That can completely change the strategy that can be used for a couple because it is, it's just, it's so hyper specific when it comes to the amount of options to claim your benefit, and then now you add in another person, right, when you have a couple, just the, it's, there's just so many different pathways.

I can't imagine somebody just kind of going through that just blindly on their own without some sort of feedback.

[00:13:08] Ben Haas: You don't even need to be married to collect on somebody else's benefit. As long as you were married to someone for 10 years. Yeah. It 50% of their benefits more than your own benefit you can collect on that ex-spouse. Right? Yeah.

[00:13:22] Adam Werner: Okay. There again, specific rules, but yeah, it's a great point. It's just another way to, to illustrate how complex what theoretically should be a relatively straightforward decision, but it's just not, because there's just so many different moving pieces.

[00:13:37] Ben Haas: So we talked about age, work, marital status, what other factors play in here?

[00:13:43] Adam Werner: Yeah. One of the other big ones that I know we've talked about before is and in your scenario earlier on, right, if somebody's going

to retire and maybe not collect social security right away, some of that decision is based on, well, okay, but if I need to fill an income gap from somewhere, do I have the savings to make that happen?

What type of savings is that coming from? How is it taxed? Is kind of really one of the main factors. If it's coming from a retirement account, maybe it's a coin flip, you know? Again, some of that just comes down to personal preference. Would I rather start Social Security or would I it? 'cause you could run the scenario, if I'm expecting 30,000 in Social Security benefits.

I could take $30,000 from my retirement account. All things being equal, right? Taxes being similar in either circumstance, which one is better for me in the long run? Again, tell us when you're gonna pass away, and then we can tell you which, which strategy to go with. But the key there being, if you do have those other savings or investments to lean on, that becomes a much easier way to delay your benefits to try to maximize.

But again even just saying that as a blanket comment isn't necessarily fair because it really does matter where those dollars are coming from.

[00:15:01] Ben Haas: Well, and I'll take it one step further and then jump into the next topic. Yeah. We've still have clients that we're in that situation.

You could delay because I don't want to down these assets, but then we've gone the other direction where somebody has claimed, because they've said, look, I can't give social security to my kids. I can give my assets to the kids. Right? Yeah. So there's a situation where what somebody valued played a huge role in that election strategy.

[00:15:26] Adam Werner: Yeah, for sure. For sure.

[00:15:29] Ben Haas: I'll just briefly touch on taxes and what you just shared, we would want to think about, all right, if you are gonna pull from retirement accounts, what are you paying in taxes relative to what those credits would've been on Social Security. But social security itself, it's good for people to know.

Part of that benefit that you're receiving from the government because you paid into this, they will hold back based off you are gonna pay taxes on that. And a percentage of what you earn is going to be taxed. We've seen very low percentages if somebody has no income, other income. If people do show, I think, what more than 44, $45,000 of income?

[00:16:05] Adam Werner: Yeah.

[00:16:06] Ben Haas: 85% of your social security benefit will be taxed at whatever your tax bracket is. So it's just, it's good to know that this isn't a tax free benefit.

[00:16:17] Adam Werner: Right. Right. That's fair. And in the realm of taxes, one of the, maybe potentially unintended consequences. I think it's, I think it's called IRMA, but that stands for Income Related Monthly Adjustment amount.

And all that means is Medicare is going to look back at your tax return from two years ago and say, if you earned over a certain amount, then here's the premium that you're going to pay to be on Medicare once you're over the age of 65. And it's a sliding scale, right? There's just the standard. Here's the monthly premium for Medicare.

But once a married couple filing jointly is over $212,000 of adjusted gross income, essentially, those premiums will start to increase and it will there. There are several layers to that, but that could be an unintended consequence of, well, I'm gonna continue to work and I'm gonna start my social security benefit at the same time, a couple years from now that may have the impact of, that's great, but now I'm gonna pay much more for my Medicare premiums because I had, I was earning over that limit. So just another little caveat to keep in mind and to try to plan for.

[00:17:31] Ben Haas: So maybe here's the takeaway, unless you have other things you want to kind of hit on. You know, big picture here, this whole social security decision.

This is why you do planning, right? There is a full financial picture here of all the things we mentioned. Work, relationships, savings, taxes, all of it. And we didn't mention any of the personal preferences on here's what matters next to me on family, legacy plans, you know, what I value. So it's really important, you know, to get this decision right.

Especially, knowing that this is a, it's essentially an irrevocable decision.

[00:18:08] Adam Werner: Yeah. Yeah. And this, I mean, we've often said it, right, planning is not a one size fits all idea. This is a perfect example of, yeah, there's no way that this can be a, you know, a very general, here's what you should do if you are this age like that.

It just doesn't exist, 'cause like you said, you can talk about the different factors, but those different factors are going to be influenced by the person and their preferences and what they value. Like you just said. That perfect example of, but if I start Social Security, 'cause I can't pass that to my kids, but I want to pass something to my kids, then maybe I should start social security earlier and preserve my assets.

Just something as simple as that. I want to leave something to my kids can change the whole claiming strategy. So yeah, this is not a one size fits all idea. And it's, it, as maybe we've pointed out, it can get very complicated very quickly. There's a lot of moving pieces that are interacting here.

Nothing happens in a vacuum.

[00:19:07] Ben Haas: I'd love to see what the prompt in a, a Google search or with a oh my goodness, for somebody to get the response because you'd have to be putting a lot of inputs to get the personal advice that you need there. So maybe the takeaway. Yeah. You know, get a human involved.

[00:19:24] Adam Werner: That's a good idea.

[00:19:26] Ben Haas: Alright, my friend. Appreciate this. Till next time.

[00:19:29] Adam Werner: All right.

Yeah. Talk to you then. Bye.

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.  are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. 

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