The Smart Take:
Join us on this eye-opening episode of Retire Smarter as Tyler Emrick, CFA®, CFP® delves into the intriguing world of Social Security benefits. While delaying your benefit is often the obvious choice, we challenge conventional wisdom and explore scenarios where taking Social Security early can actually be a smart financial move.
Here’s some of what we discuss in this episode:
- We’ll explore an article listing reasons why you should claim early.
- The typical considerations that come into play when picking a strategy for Social Security.
- People often retire earlier than they planned because of health issues.
- Delaying Social Security can lead to you relying too heavily on your investment portfolio.
- The situational circumstances that we often see.
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Today on Retire Smarter, it’s all things Social Security. The research is in, the data is clear. There’s a compelling argument, of course, to delay taking your benefit, but is that right for you? Settle in as we explore those unique situations when starting your Social Security early just might be the right choice.
It is our final episode of 2023. Walter Storholt here alongside Tyler Emrick, CERTIFIED FINANCIAL PLANNER, as well as a chartered financial analyst and wealth advisor with True Wealth Design. We have a great episode for you today as we take things to the basics and talk Social Security to wrap up the year. Never a bad time to discuss some of the best nuances regarding that topic. Tyler, it is great to be with you. Happy to be celebrating these final couple of days of the year with you, my friend, and hope you’re enjoying the holidays and ready for a fresh start in 2024.
Oh, absolutely. Happy to be here. I mean, holidays have been great this year. Kind of excited to settle in and see how things progress here over the final week of the year we got to settle in here.
So pretty pumped and excited.
We talked a lot about Halloween decorations a couple of months back, and we were getting into talking about Christmas ones. I think you were saying you had to step up your game. Did I tell you on the last episode about the Santas that popped up in our neighborhood and the big deal with all of those?
I think you did. But if I remember correctly, you were the odd man out, right?
We were the holdout. We were the holdout.
And you guys had to go a different direction.
Yeah. So the update was right before Christmas, it ended up being a big deal that made the news. The news came out and our neighborhood was just a crazy ridiculous traffic jam for weeks leading up to Christmas because people heard about it on the news and started coming in from all over the place to basically do a light show driving through our neighborhood at two miles an hour. And so it was constant traffic.
We were the only holdout without a Santa, but our neighbors were gracious enough. They had bought a Santa and then realized it was way too small compared to everybody else’s. So then they went out and bought a second one that was enormous. And so they gifted us the mini one that they… I say mini, it’s still a nine-footer, but they gave us their nine-footer. It still looked so small next to all the 14 to 20-foot ones that people put out.
Wow. Yeah, they need to work on that definition of mini. That’s a great update with the news, catching a hold of it and going in. In that situation, you cannot be the odd man out. You can have the smaller Santa or the mini Santa, but certainly can’t be the odd man out. Oh, that’s fun. That’s awesome.
Especially because we were the last house on the street in the turn. It was like, oh, these people at the end don’t want to participate. We got rid of that Scrooge mentality and joined in on the fun right there at the end. So anyway, just had to give you an update on the Santa craziness that took over the neighborhood this year.
Oh man, that’s awesome. Well, good deal. I know you travel a little bit for the holiday season as well, so I hope everything goes safe and have no issues or no travel delays and it all goes pretty smooth. And that 5:00 AM wake-up call on Saturday when your flight goes out works out all right. We’ll keep that between us.
Connie’s not super excited about that, but we’re going to try and bribe her with food and other exciting items. So I think I’ll survive to our first episode of 2024.
Perfect. You ready to dive into Social Security?
Let’s do it, my friend.
It’s always a good one, like you mentioned.
I guess our tenor of a Social Security show is about the benefits of delay, but you’ve promised me some compelling reasons for why, okay, not everybody is going to be the best fit for delaying it. There are some times where taking it earlier is better or the better fit at least. And so you promised that you would give us some of those details on today’s show.
Absolutely. I think we’re always looking at new ideas and trying to approach the show from a little bit different light and trying to add value where we can. We always have, I think, the meat and potato Social Security question and topics and go through those, like the typical, hey, what’s the cost of living adjustments going to be? Is it going to be there? Those type of things. So if you’re interested in those, hey, we’ve got them. They’re back in the archives and you can find them. And we dive into those topics quite a bit.
But you’re right, I think a different approach today was how I wanted to end the year and really starting to look at this, well, hey, conventional wisdom holds that retirees are financially better off delaying their Social Security benefits to get that fatter payout, that bigger amount. And there’s a really compelling argument there. But there are certain circumstances and these little nuances in what might be your specific situation that comes through to where, hey, taking those benefits early could be the right decision.
So I wanted to explore those. I also wanted to explore some of the stories and some of the situations that you run into from public articles and things like that that say, hey, this is a consideration of when you might take it early, and just give you my two cents on, hey, how should you approach that decision? What are some of the levers and what should you be thinking about with your specific situation and these circumstances where, hey, we should evaluate the Social Security and the timing and potentially go in a little bit early.
But as with almost every Social Security podcast I do, I’d like to do a little bit of an overview of Social Security, Walt. I know there’s a lot of information out there and data, but I think understanding the basics of Social Security is extremely important. And for those listeners that haven’t necessarily had the time to digest or dive into Social Security, having a very brief overview I think might be helpful. So we’ll dive in with a little bit of an overview, and then we’ll jump right into these actual situations where I think taking it early might make sense. Sound like a plan?
Never know when somebody new has tuned in and may not be as educated as another listener when it comes to these matters. So yeah, give us that primer on Social Security and then we’ll get into the nitty and gritty.
All right. So as you think about Social Security, the way I always explain it is there’s three magic ages that you need to be aware of, and the general concept of Social Security is every year you wait, you get a little bit more. So the first year you can take your Social Security is actually when you turn 62. You get increases as you continue to wait and delay that benefit actually all the way up until age 70. So 70 is that second magic age where you get no more benefit from delaying past age 70.
So if you’ve waited that long, 70 is when you want to actually kick it in. And the third age, which is probably the most important and some might’ve heard the term called full retirement age, they actually denote this on that Social Security statement that you get each year if you’re still getting them mailed to you, and that is going to be between the age of 66 and 67, depending on the year that you were born. And the reason why that full retirement age is so important is for a couple different reasons.
The first of which is that if you take your benefit before that full retirement age, you’re going to take a little bit of a haircut. And the math can be a bit complex, but generally speaking, you’re looking at about a 30% haircut if you take your benefit early at the age of 62, which is, I mean, that’s a substantial amount. And then the other big caveat with that full retirement age is that if you take your benefit before then, you got to watch how much money you earn for an earned income.
Because if you make too much money, they might actually take that Social Security payment away. Once you hit full retirement age, you can earn as much as you want, you can double dip, you can start it, and they’re not going to take that Social Security benefit away. Now, there are some caveats with what I mean by earned income. I’m not talking about money from a pension plan or money you pull out of your IRA. I’m talking about money that you actually earn by working through a W-2 or a 1099.
So that full retirement age really plays a pivotal role for a lot of families as they’re starting to think about Social Security. So much, much more, but I think that’s a little brief highlight to get us started today and keep those rules and that thought process in your mind as we’re talking about this, hey, kicking it in early and what are we talking about.
But as we dive in, I think that first key scenario that I want to touch on is in a situation where you find yourself in potentially declining health and you’re starting to have increased bills and you’re really looking at maybe your life expectancy or your situation a little bit differently than you might have before finding out that news. So as with everything, when we dive into these podcasts, we always like to see, well, what studies are coming out? What’s the data show?
One of the places that we go to for that data is the Employee Benefit Research Institute, which does a lot of retiree studies. And one of the ones that they had was they’re trying to dive into retirees and trying to find out and say, “Hey, let’s send out this survey and find out how many individuals or families actually retired earlier than they expected because of a health problem or a disability for them or their spouse.” And the numbers are quite shocking to me, frankly.
About a third of those individuals in that survey actually said that they retired earlier than they expected due to some type of health concern in the family. I don’t know, Walt. Does that feel a little high to you? It felt high to me when I first looked at it, but I was like, hey, that’s pretty substantial.
It is. I mean, it’s a little nerve-racking, right, to see that.
Oh, absolutely. And you’re dealing with that diagnosis or that health concern and then you’re trying to make potentially some really long-term lasting financial decisions based off of that too. I think it can be a little bit tough to wade through. So as I think about this potential scenario where, all right, we should really look at taking our Social Security early, what’s those levers that we need to be mindful of when we’re thinking about that decision? Because there’s no doubt that life expectancy is a critical factor when you’re thinking about when to take your Social Security payment.
And I’ll start with the first lever that I want to make sure that is pretty clear is there are a few different benefits that are afforded to you through Social Security, and one of the ones I think that might get lost in the shuffle is Social Security Disability. So when you’re dealing with a health issue and diagnosis, when you’re looking at potentially taking that Social Security early, you also need to think about, well, would I be approved for Social Security Disability?
And the reason why that is important is twofold. I gave you the basics of Social Security. I alluded to the fact that, hey, if you kick in your Social Security early, you’re going to take a haircut off the top. Well, that haircut is much lower if you actually are approved for Social Security Disability than it would be if you say you kicked your benefit in at 62 for some individuals.
So getting that approval for Social Security Disability could increase the amount of payment that you’re getting on a month-in and month-out basis and get it started, which is always helpful when you’re going through a situation like that and you’re thinking about, hey, I want to maximize that income coming into me.
Yeah, it’s important.
Oh, absolutely. Well, and there’s also another little caveat there. I mean, I think back to my mother’s situation. My mother actually was on Social Security Disability. She was diagnosed with cancer and fought it for a number of years and just got to a point where her mobility was gone and qualified for Social Security Disability. And we went through the application process, and I think in her mind she actually didn’t even think that she would get approved for it. I think there’s a lot of misconceptions out there.
I mean, it can be difficult to get that approval, but it’s always worth going through that process to see. In her case, she got approved for it, and she was on disability for a little over two years before she had passed. And the reason why I bring up that two-year mark is because when you start that Social Security Disability, if you actually get approved for it, you actually would qualify for Medicare after two years of being on Social Security Disability, which I think is a huge, huge benefit to actually starting that Social Security Disability application early.
Because if you can get approved for it, one, the benefit might be higher, but then two, they’ll backdate when you first started that application process and start that two-year rolling clock to where, hey, if you’re in your early 60s, you go on disability for a couple years, you might not have hit 65, which of course, 65 is that magic age for Medicare. Well, after two years you might qualify and not be quite age 65 yet, which from a healthcare perspective can be extremely beneficial for certain families. Extremely.
Yeah, I can see that being a big needle mover for a lot of folks, Tyler.
No, absolutely. So health is I think a major driver as you’re thinking about, hey, that timing on Social Security, but also you need to look at that Social Security Disability, but you also need to look at, I think, your whole family picture. And what I mean by that is that a lot of times there might be spouses who both pay into Social Security and have both got a benefit.
And if we look at that decision on, okay, well, what if your higher income earning spouse is the one that actually becomes ill, and you’re thinking, oh wow, their life expectancy might be a little bit lower, we should consider kicking in your Social Security benefit. One thing you got to keep in mind, going back to these other benefits from Social Security like Social Security Disability, is that there is a survivor benefit or a widow’s benefit that’s afforded through Social Security.
So what happens is if you kick in that benefit early and you’re the higher income earning spouse, you might get more payments. But then once you pass, if your spouse survives you, that widow’s benefit would be affected and would be decreased. So that idea of protecting that higher income earning spouse’s Social Security because it’s a bigger amount, you’ve got to make sure you’re juggling and understanding how that’s going to affect both individuals in the family and all the benefits that are afforded to you through Social Security.
I had a family who I’ve worked with for a number of years, and the wife had actually been diagnosed with a major health concern. And so when we were talking, we were going through the plan update and talking through the situation and, hey, they were trying to wrap our arms around, what are the decisions we need to make here? What’s our financial plan look like? How do we navigate this in the most financially responsible way? Social Security was a big part of that conversation, as you can imagine.
So we really looked and dove into that whole scenario of, well, should one of them actually kick in their Social Security early? She was actually the higher income earning spouse, and that was a very explicit conversation that they had brought up to me. And when you actually get down and do the numbers, it’s very situational.
And for them, after running through the numbers, they actually decided that he would kick in his Social Security and she would continue to delay because they wanted to pick up and maximize that potential survivor benefit if something were to happen to her where it would help him out. So he kicked his in, she delayed, and you can see how they play off each other.
And I think it’s just extremely important as you’re thinking through and you’re going through a situation like that to understand, well, what are all these options and levers? Might make sense to kick it in early. Well, who kicks it in early I think is another decision point there that we need to be mindful of.
So many different levers that you can pull. You’re right. I’m picturing you guys in the offices of True Wealth Design with just 45 levers in front of you and you’re just sort of like… For the movies, you’re just like…
What about this? What about that?
What’s this lever do? All right, all right. Does this affect…
How does this impact it? Yes. And I think that the big caveat I always say is like, hey, we just want to make sure we’re getting you the best information possible so that way you can make whatever decision’s going to be right for you and your family. Because at the end of the day, sometimes there’s a right or wrong, but you got to be comfortable with whatever that decision is that you end up going with and you got to make sure that it puts your family in the best foot forward going forward.
So health situation is a big key and a big caveat there where picking it up early might be good. So let’s move on to a couple other ones. And there’s one I’m going to slide in here that I think is very situationally based, but it actually comes up in the form of, well, hey, should you start your Social Security early to help fund a cashflow shortfall. Hey, you retire at 65, you’re going to need to have some type of income coming in. Does it make sense for you to use your assets that you’ve worked very hard for and saved and continue to delay that benefit?
And where I had got this idea from and the article that it came from actually said it’s a little different now because, well, you got to take a look at your assets and what their return expectations are going forward. And they alluded to the fact of the higher interest rates and the better yield that we’re getting on cash and so on and so forth might for some families trigger them to say, hey, if I can get this much earnings on my cash, should I actually start those Social Security benefits and let my investments continue to grow?
Now, that was their argument. I wanted to bring it up in the podcast because I get that quite a bit. I’m not completely sold that this is one of those arguments where I would say, yep, this is one of those triggers where we’d kick it in. I know I said that’s all I would talk about, Walt, but this is one where I hear a lot.
And I think when you actually get down into the numbers, you need to be very, very mindful of that cost-benefit analysis and really taking a good hard look and saying, well, hey, what am I doing by delaying my benefit, and what am I doing by kicking it in early and saving some of those assets that I’ve worked hard to save? Because there are some, again, very compelling reasons to delay and that benefit increase in Social Security is pretty substantial.
So when you look at your actual underlying investment vehicles and what you’re invested in and return expectations, you just want to make sure that you’re using a very, very comparable analysis. I’m not saying it doesn’t ever make sense, but it’s one that I get quite a bit and I think you really need to make sure you understand your numbers before you make that early decision to kick it in just based off of that.
People default to it too soon where there may be other options still on the table. So let’s not ignore those.
You got it. You got it. And then there are a few other situational circumstances that I think where it makes sense. I’m going to roll through a few of them here just back to back. So as I think about a married couple and those income streams throughout long working years might be a little different. So one spouse might’ve earned substantially more than the other.
And that’s a situation where you can really use the Social Security rules to your benefit to where maybe that higher income earning spouse continues to delay and the lower income earning spouse actually kicks in their benefit early. So you’re hedging your bet a little bit, almost like a split strategy.
I alluded to it a little bit with the healthcare conversation we had earlier where you’re being mindful of protecting that spouse that has the higher benefit and making sure that that’s the one where if you’re going to delay one, that’s the one you delay and you kick in lower income earning spouse’s benefit. Because if you look at survivor benefits or widow’s benefits, you can’t get two.
So if something happens to your spouse, it’s not like you’re going to just add on their Social Security and it’s going to keep coming. Social Security’s going to look at your situation and say, all right, hey, you’re going to get the higher of the two benefits between you and your spouse. You can’t have both. So that’s why protecting that higher one and letting it continue to grow can be so advantageous.
But that doesn’t mean that the lower income earning spouse should continue to delay their benefits too. Because if something were to happen to them, well then that surviving spouse isn’t necessarily going to get a bump up in benefits. Does that make sense, Walt? Am I explaining that right? I feel like I’ve talked around it a little bit, but that’s a very clear distinction there as far as like, hey, who it benefits and why it might make sense to kick one in earlier.
Absolutely. I would imagine any time when you have spouses making different amounts of money, especially if there is that significant, I’m going to try and sound smarter here, that significant delta between the two.
I like it. I like it
Not just in Social Security, but really all matters of retirement planning it probably has an effect, or at least many of the matters, right? One spouse has a huge 401(k) and the other one might just have a small IRA or Roth or something like that. And so figuring out how to navigate that disparity between earners who were unequal over the years in terms of what’s on paper, yeah, I could see that just being an extra little bit of a challenge to navigate around.
Nice. So the other situation I want to talk on is if you do have a spouse who passes and you are entitled to a widow’s benefit. Earlier on we gave that high-level overview and I said, hey, you can start benefits as early as 62. Well, I was talking about the benefit that you worked for. If something were to happen to your spouse, you actually would get access to their widow’s benefit or survivor’s benefit earlier than 62. You can actually get it as early as age 60.
And there are some other considerations there when you think about, all right, hey, if you start the widow’s benefit at age 60, you are going to take a little bit of a haircut. But there are situations where your own benefit might continue to grow and you might be able to switch over to it down the road. So I think it adds another layer of complexity there. But if you lose a spouse, that is a very big situation in your life to where you need to start looking at Social Security and saying, hey, is one of these benefits do I need to potentially kick it in early.
And then the other would be if you happen to find yourself in a unique situation to where you are eligible for Social Security and you have children that are under the age of 17. Because there is a benefit the Social Security would pay to your children under the age of 17 where you can actually start your benefit and then they would get paid a payment from Social Security. So I had a family where it was a unique situation. For over the last two years, they’ve actually been getting benefits off of their children.
And that was one of the reasons why we decided to actually have them start their Social Security benefits early is because, well, they get two other streams of income on their children as well, which of course, adds up over the years if you happen to find yourself in that situation.
Very good. Those are some key differences and little nuances to be aware of, those special circumstances. Any others we should have on our mind before we reach the conclusion of our early Social Security episode?
Those were the big ones that popped up in my mind to be mindful of. I mean, I think the big caveat here is that every family situation is different and you just really got to understand and going into that claiming strategy with open eyes and really just evaluating the situation that’s best for you and your family. Just because you have a few coworkers that say, “Oh, I’m kicking my Social Security in early and I want to get the payment because it’s not going to be there,” that’s not always the right approach for every family.
So just make sure you arm yourself with as much data as possible. Or if you don’t like the data, have a good financial advisor that’s going to go through the data for you, understand your situation, and present a few options that are the most viable, and then help you narrow down those options and get to a decision that’s going to be right for you and your family.
Lot of these conversations about retirement planning begin with a Social Security question like the one we’ve covered on today’s episode. If that’s the case for you, you’ve got some questions about your financial situation, maybe it’s Social Security, maybe it’s something else, but that would be a great reason to start a conversation with Tyler Emrick, Kevin Kroskey, and the great team at True Wealth Design. You can set up a 15-minute call with an experienced advisor on the team by going to truewealthdesign.com and clicking the Are We Right For You button.
Schedule your time to meet, see if you’re a good fit, and have a great conversation about some of those top questions on your mind before launching into the deeper planning process. Again, truewealthdesign.com, your place to go. And you can also call 855-TWD-PLAN, and that’ll get you in touch with the team as well. All that contact information is in the description of today’s show, so find it there. Tyler, thanks for the help. Great episode today. Appreciate it, and I’m looking forward to what 2024 will bring us on the future episodes here.
You have a great, happy end of the new year, Walt, and we’ll catch up and see everybody in early 2024.
That sounds great. For Tyler Emrick, I’m Walter Storholt. We’ll see you the new year. Thanks so much for listening.
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