"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age." - President Roosevelt.
The Social Security program has come a long way since its passing in 1935. While it was designed as a protection against poverty, it has come to become a prominent source of income for many retirees. Recent reports estimate that up to 40% of Americans rely solely on Social Security as their source of income with poverty rates of adults over 65 estimated to be around 10%. However, the perception of the program has changed over the years. Life expectancy, national debt, Medicare, and tax loopholes have also added a few areas that have changed the program. It is no surprise that despite being considered a successful program for most retirees that Social Security still has a mystical aura when it comes to applying for their benefits.
In general, to qualify for benefits workers must be at least 62 and have participated for 10 years. There is a fairly long list of exceptions, but most Americans fall under this general threshold to receive benefits. If you qualify you can apply for benefits between age 62 and 70 with early retirement receiving lower monthly benefits and later retirement receiving more. Every year you wait is about an 8% increase in benefits. Cost of living adjustments (COLA) are computed separately to these benefits on an annual basis. Working before your Full Retirement Age (Age) while taking benefits can result in a reduced Social Security benefit. Basically, if you turn on benefits, and earn a certain amount, your benefits can be reduced. If you wait until age 70, you will have it the maximum age for your benefit calculation.
The complexity of the Social Security program has caused confusion. We often hear new claiming strategies and misleading articles that cause misunderstandings. Unfortunately, this often seems to cause frustration and confusion in deciding what is the best time to start benefits. In reality, strategies can be all over the board, from people wanting to start early to those who want the maximum benefit at age 70.
There seems to be an illusion that every participant can figure out when to start their benefits to achieve the most money over their lifetime. Such a strategy does not really exist. The only true way to know how to maximize someone’s benefit is to know their date of death. The average life expectancy in the US is 77 years old, so if you waited until 70 to begin benefits then you are left hoping you outlive the average and reach your break-even. Our advice: determine a break-even but be prepared to adjust based on your goals rather than a theoretical math problem telling you when to start benefits. If you wait until age 70 to start benefits, there is a chance you waited too long. If you started benefits at 62, there is a chance you are giving up future benefits. Both can be true and because we don’t know when the benefits will end, a majority of Americans will choose the wrong start to their benefits – and that’s okay, knowing the perfect answer really was not attainable.
Social Security has some unique qualities that everyone should know. In our current tax code, a maximum of 85% of the benefit will be taxable by the IRS. So, the benefit has a tax-efficient quality in providing cash-flow in retirement. Furthermore, many states do not tax Social Security benefits (California included) which provides additional tax-efficient benefits for retirees. Family health, longevity, and goals also play a big role in determining when to start benefits. There are also plenty of long-term care costs to plan for. For example, comparing the enjoyment of the benefits now compared future dollar amounts. Also, in most cases, once someone passes away there is no residual benefit that becomes an inheritance. The benefits just end which should be a consideration for those with beneficiaries.