The Social Security Decision Tree

Social Security Retirement Income has evolved into the foundation of retirement planning for most workers, representing most of the retirement income, on average, for older Americans. Remember that Social Security Retirement Income is subject to cost-of-living increases, making it a very valuable income source for your retirement. This means making the right decision about when to begin taking Social Security is of vital importance. Making this decision can be both confusing and difficult. Making the wrong decision can cost you tens of thousands of dollars.

Broadly, I think of this process as a ‘decision tree’, where answering ‘yes’ to one question leads you down a specific branch or ‘no’ leads you down a completely different branch. So, let’s start with health and family longevity.

Are you healthy and have a family history of longevity?

If your answer is yes, this branch leads you to strongly consider delaying taking Social Security until age 70. By doing so, you maximize your lifetime monthly benefit. Each year you delay taking your benefit beyond FRA (Full Retirement Age), age 66 or 67 for most people, your monthly benefit increases by 8%. This is particularly important if you are the higher earner and older than your spouse. This is because your younger, lower income-earner spouse will ‘step into your shoes’ should you be the first to die. As a result, the surviving spouse will receive your higher benefit for their lifetime.

If your answer is no, you should consider the advisability of beginning your Social Security benefit sooner…typically at your FRA. You could begin as early as age 62, but if you are still working, you may face a reduction in your benefit until you reach FRA. For 2023, the Social Security Administration will deduct $1 in benefits for each $2 that person earns above $21,240. At FRA, this penalty goes away.

Do you need the income now?

If the answer is yes, consider starting the benefits early. This may be a decision out of necessity.

If the answer is no, you significantly add to your options. Before you decide, think about your other financial resources.

  • Do you have the option to continue working? Or is there a hobby you can turn into a small business? Adding a few years of income can allow you to postpone taking Social Security and significantly boost your lifetime benefits.
  • Do you have money in a company retirement plan? If so, withdrawals can help you pay living expenses while you postpone starting your Social Security. In addition, if you are not working, these withdrawals may be subject to significantly lower income taxes.

I’m married. How does this affect my decision?

For married couples, the decision becomes a bit trickier. Example: Let’s assume you are the higher earner and older of the two. You might consider having your spouse take their benefit at their FRA while you postpone until age 70. That way, you begin receiving some benefits early, and either you or your spouse will ultimately receive the higher benefits for as long as one of you is still living.

These are some broad examples of how to begin considering when to take Social Security to maximize lifetime benefits for yourself and your family. But, as you can see, it is complicated, and making a wrong decision can have a significant negative impact. So, before you pull the trigger on beginning Social Security Retirement Income, visit your tax or financial advisor.

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Stewart-Welch-Financial-Advisor-Birmingham-AL-The-Welch-GroupStewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of SuccessJ.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaireand 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch GroupConsult your financial advisor before acting on comments in this article.


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