Delivered on: Friday, May 26, 2023
Deciding When to Take Social Security Benefits
Distilling down the core components of the Social Security program to understand when, how, and why to start drawing benefits
- FORMULA: How the Social Security Administration calculates benefits at various ages (and how you can influence yours to be higher)
- EARNINGS TEST: Why your decision to take benefits may be affected if you are still working (and how other income is treated)
- SPECIAL GROUPS: Who may have special rules to follow (and how their benefits may be lowered)
- CONSIDERATIONS: What other factors must be considered when making the decision to start taking benefits (and what happens if you change your mind!)
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Prefer to read instead? A transcript from the video is below.
Hello and welcome everybody to the FedImpact webinar on Deciding When to Take Social Security Benefits. Now, I know that this is not all that exciting of a topic, but it’s one that we get tons of questions about because let’s face it, Social Security is part of the three-legged stool that OPM has created for FERS employees, right? You have your pension, you have Social Security and the Thrift Savings Plan. So it stands to reason that lots of feds have questions about how this program works, and although on the surface it appears to be a pretty straightforward program, there’s lots of complexity baked in.
So while everyone’s getting in and getting settled, I want to run through just a couple of housekeeping items. Of course, we have a pretty diverse audience like we always do. Y’all are coming to us from all sorts of walks of life. You have different experiences in the Social Security program. You can expect different things, and so of course we’re going to do our best to give a little bit to everybody based on the situations that you’re in.
We do have our support team standing by in the Q and A area to answer any questions, so please pose them there. Like I always do, I’m going to stay focused on delivering today’s material, but our support team will be standing by to answer those questions one-on-one in the Q and A section.
Now for handouts, we do have all of today’s slides available for handout right in the handout section of the webinar portal. If you don’t quite see that, you can look to the bottom of your screen. You should see a link to download today’s handouts as well.
As usual, this session is being recorded. We will send out the link to the replay to all of the registered participants here in the next couple of days.
And stay until the end. Today we have 10 frequently asked questions about Social Security. So I’m going to run through the program itself and then I’m going to cover those 10 FAQs that are very, very common amongst federal workers and frankly everybody else, too. So standby for that. Don’t leave early because there’s a lot that I have to share with you today.
Now, of course you guys know me. I’m Chris Kowalik, the founder here at ProFeds. I am joined by our support team who’s going to be standing by for questions. So again, I’m going to stay nice and focused on delivering today’s material. They’ll answer your questions right there in the chat.
All that I ask is that the questions that you submit over to them, that they have to do with today’s topic because again, we try to get to all the questions and when we have a lot of ancillary questions that don’t have anything to do with today’s topic, it becomes difficult to get through the whole list.
Deciding When to Take Social Security Benefits
So let’s dive into deciding when to take Social Security benefits. Now, if there’s ever a loaded topic, this one’s it because there’s so much that goes in to making this decision on when to turn benefits on. We’re going to cover a lot of that today, but we’re going to focus on distilling down some of those core components of the Social Security program so that you have a better understanding of when and how and why to start drawing benefits.
Quick on our agenda, we’re going to cover the formula, so how the Social Security program calculates benefits at various ages and how to influence yours to be higher. That’s always the big takeaway feds want to know, how can I get mine to be bigger?
Next is the earnings test, why your decision to take benefits may be affected if you’re still working. And so we’ll see how the test is applied and what penalties might be assessed to you if you’re continuing to have income even after you begin drawing Social Security benefits.
Next up are special groups. I’m not going to spend a whole lot of time on this, but there are some special groups of federal employees that have some special rules to follow with respect to Social Security, and we want to know how their benefits might be lowered based on the fact that they’re in that special group.
And last up, which is kind of interwoven throughout all of today’s material, is what other factors must be considered when making the decision to start taking benefits and what happens if you change your mind?
Now, this is one of my favorite slides in our webinars, and that is what this webinar will not cover. We will not be able to cover all of the intricate nuances of the Social Security program. I’ve intentionally kept this at a little bit higher of a level so that we could all have an appreciation for what’s happening and the big decisions that are coming into the Social Security program when you’re deciding whether it’s time to draw or not.
It’s worth it to dig into those details and see more of what’s under the hood with Social Security, but that’s not what today’s session is going to cover. I will bore you all to tears. I can teach it, but I don’t know that y’all want to learn it as far as how the sausage is made, so to speak, with respect to the Social Security program.
Let’s start with the intent. The intent of the Social Security program was designed to provide a retirement benefit, and it was intended to be funded through your entire working life. So 6.2% of all of your wages throughout your lifetime have gone to fund the Social Security program.
And it’s intended to be payable at your full retirement age. This used to be called your normal retirement age. They changed it several years back, but want to make sure that we all know those mean the same things. But let’s look at what full retirement age looks like according to the Social Security Administration.
On the far right-hand side of the screen, if you find the year in which you were born, you go to the right-hand side, and this is your full retirement age, again, according to the Social Security Administration. So if you were born in 1950, your full retirement age would be 66 years old. Have your date in mind or your age in mind with respect to your full retirement age, so as we’re going through today’s material, you can be thinking of it through that filter of what your actual age is.
Now, it stands to reason, but I’m going to say it anyway, that the full retirement age that you have with the Social Security Administration is likely very different than the age in which you are going to be eligible to retire from federal service. So don’t confuse the two. This is just the mark in time that the Social Security Administration has put in the ground to identify how they’re calculating the benefits.
Let’s get into the decision itself. We’ll get into some calculations here in a moment, but I want to talk just briefly about the decision that you have. You get to decide when to start drawing Social Security benefits, any time between the age of 62 and 70. So these are your normal Social Security benefits. I’m not talking about disability or anything like that. This is your own work record and you getting to age 62 and being able to decide, do I want to take them now or do I want to take them later?
There is no benefit to waiting beyond the age of 70 to start your benefits. There’s some distinct advantages to waiting until 70, but there’s nothing magical that happens after that point. But we get this question a lot from employees like, “What if I start Social Security and then I realize that I didn’t really want to start it at that point? Can I change my mind?” The answer is yes, kind of.
Within the first 12 months of you starting benefits, you can change your mind, but there’s a catch – and the catch is that if you change your mind, you have to pay back all that you’ve already received. So this is your only way to get a do-over in Social Security, put all the money back as if you had never taken anything, and after that, you can later decide when to begin those benefits again.
But you only have 12 months from the time that you start those benefits, so it’s nothing to mess around with. You want to make sure that if you’ve made an error in starting benefits, maybe now you realize the benefit of waiting until later, and if you’d have known then what now you would’ve made a different choice, as long as you come to that revelation in the first year after taking benefits, then you can go in and change your mind. But again, you have to be prepared to pay all that money back that you’ve already received.
Now, let’s talk about the actual calculation. The benefit that the Social Security Administration is calculating for you to receive at your full retirement age, somewhere between 65 and 67 depending on the year that you were born, that benefit is called your primary insurance amount or your PIA.
This PIA calculation is going to have a whole process that I’m not going to bore you with, but a whole process to determine the monthly average of your earnings over your whole life. They’re going to take a look at all of the earnings that you’ve had that were subject to Social Security tax when you earned them, and they’re going to adjust them to today’s dollars.
Again, I could show you how the sausage is made here. I could show you how the calculation works, but in the end, I think most of you want to know generally how this works instead of all of the finer details here.
Again, they’re going to look at all of the earnings that you’ve had throughout your whole lifetime that were subject to Social Security tax when you earned them, and they’re going to make all of those dollars equal. And what I mean by that is they’re going to inflate those dollars from long ago to make them look like today’s dollars. So all the inflation that’s happened over all of these years, cost of living adjustments, all of that, that’s all going to be done behind the scenes for all of your earnings.
Then the Social Security Administration takes your highest 35 years of those earnings to determine what we call your average indexed monthly earnings or your AIME. If you have more than 35 years, we’re just going to take your highest 35. But it is important to know if you have fewer than 35 years of earnings, then those years are going to count as zeros. So it’s going to be dragging down the benefit that you are set to receive from Social Security.
All right, so let’s talk about the timing. The intent that the Social Security Administration has is for you to draw benefits at your full retirement age. We’ve established that now a couple of times in today’s material. If you choose to take it earlier, you’ll receive a lower amount than what was calculated for you. If you choose to take it later, you’ll receive a higher amount.
I want to show you an example. We actually use this example in our workshops, and I want to try to use some numbers to prove a point here. This example is showing the effect of delaying receipt of a Social Security benefit. It assumes this person has a full retirement age of 67. And if you look at the box that we’ve got, the black box around at age 67, you’ll see that the benefit is $1,714 per month. That is the PIA. That is the amount that they’re supposed to get in Social Security if they draw their benefit at that age, if they start drawing it at that age.
But we all think of Social Security as 62 because that’s when you’re first eligible to choose to start drawing it earlier. So if this person at 62 years old says, “You know what? I know I’m supposed to get $1,714, if I turn this benefit on at 67, but I think I’d prefer to turn it on now at 62,” they can do so, but they’re going to suffer a 30% penalty to that benefit and they will only draw $1,200 per month.
If they were to wait just one year to start drawing benefits, so now they’re 63, you would see that incremental change of $1,286 per month. If they were to wait until 64 to begin drawing, it would be $1,371 per month and so on. So that is essentially the penalty for drawing, “early.” So normal Social Security is supposed to be at your full retirement age. Anything prior to that is considered early for you and your benefit will suffer a permanent penalty for the remainder of your lifetime.
If you draw at 62 and it’s $1,200 a month, at 67, it doesn’t bump up to 1,714. You would simply have received cost of living adjustments from age 62 that will not equal $1,714 per month. It will be significantly lower than that, and it stands to reason because you took it far before it was intended for you to take it.
Now, something interesting also happens if you delay Social Security. So again, I won’t get into the gory details, but essentially they give you these things called delayed retirement credits. If you choose to wait to draw benefits until after your full retirement age, then you get an increase to the benefit that you’re going to receive.
If you wait all the way until 70 to draw your benefit, which again is the highest calculation that you’re going to get, it would be $2,125 per month. That’s a pretty significant difference by waiting eight years. Instead of $1,200 a month, you get $2,125 a month.
Now that crossover point, where it makes sense to draw, we’re going to talk about that a little bit later, but really, really important that we understand that these figures that I’m showing on the screen are if you begin to draw benefits at these various ages.
From there, once you begin drawing, your benefit will simply be subject to the cost of living adjustment for the years along the way as you age in retirement. So there’s a benefit to waiting until 70. There’s a benefit to waiting until 67. It’s just a matter of what you’re trying to choose to do and what’s right for you.
Now, I’d be crazy if I didn’t talk about taxes when it comes to Social Security benefits because we do have to be mindful of taxes, not just for this benefit of course, but for all of the benefits that you receive and all the income that you’re going to be receiving in retirement. At the federal level, generally up to 85% of your Social Security benefits are taxable at that federal level. So we need to be prepared to pay tax.
Now, I’ll be honest, years and years and years ago when I first learned that Social Security benefits were taxable, I thought that’s crazy because this was a tax that was applied to you while you were working and now you’re going to be taxed on it again. That didn’t seem right to me, but they didn’t ask me and they didn’t ask you. So here we are left with this rule that we have to be prepared to pay tax on about 85% of the benefit that you are receiving from Social Security.
Now, at the state level, this is where things can differ a little bit. The states get to decide whether they’re going to tax Social Security benefits at the state level or not. We have 13 states on the right-hand side, these are states that tax some portion of your Social Security benefit. It might not be all of it, but something is taxed from Social Security benefits that you are receiving in these 13 states.
I’m not suggesting that you should not live in these states in retirement while you’re drawing Social Security benefits, but it is one of the factors that you need to think about as you’re choosing where you plan to live in retirement.
The Earnings Test
All right, next up, let’s talk about the earnings test. So we’re asked all the time, if I’m still working for the federal government or if I retire and I go get another job, does that affect my Social Security benefit? And the answer is, it might. Here’s how it works.
The “earnings test” is just a fancy term for penalty and here’s the breakdown of it. Your Social Security benefit will be penalized if ALL of these statements are true: 1)If you are drawing Social Security benefits and 2) you are under your full retirement age, again, 65 to 67 depending on when you were born, and 3) you have wages from a job that exceed the limit of $21,240 per year.
Now this number changes each year. So that’s the figure that we have for right now in 2023, but I always have to explain what wages mean with respect to Social Security. Wages are income from a current job. They do not include income from your pension, money you take from the TSP, other investments. That’s not income. This is you actually having a job and drawing a wage. So if you’re not out there continuing to work, then you don’t have to worry about the earnings test. But if you are, it is something that you need to think about, but I want to show you how it’s calculated.
The earnings test calculation goes like this. The Social Security benefit that you’re receiving will be reduced by $1 for every $2 of earnings that you have that year over the allowable limit. So we already talked about that allowable limit being $21,240 per year, at least for 2023. So you can make $21,240 free and clear. It will not affect your Social Security at all.
Again, if you’re over your full retirement age, this won’t matter, but if you’re under your full retirement age, that’s when this is being applied. The earnings test only kicks in when you exceed the allowable wages, which is the $21,240.
Let’s take a look at an example, kind of an extreme example, but I want you to really appreciate what’s happening here. Let’s say a person has $1,200 a month in Social Security benefits at age 62. Based on the current earnings test, the earnings limit, the $21,240, this calculation for this example means that once that person makes more than about $50,000 in that year, they would’ve lost all of the Social Security benefit for the following year. It’s always penalized the next year (so you’re not writing a check to give the money back, but you are losing it in the next year).
Now, this 50,000 will be different for everybody because your benefit in this case, $1,200 a month for this person, if yours is $1,500 a month or $2,400 per month, your allowable limit of the $21,240 doesn’t change, but the amount that you would have to make to have lost all of your Social Security benefits will be different. So I’m using this as an example so that we can see for someone who has a normal Social Security benefit of $1,200 a month at 62, they’re not making all that much money to have lost all of the benefit.
Very, very important that you think about these things before you flip the switch to turn the benefits on because if you’re 62 and you’re still working, whether it’s for the federal government or otherwise, if you’re still making this kind of money and you’re going to be penalized for earning that money, you might as well wait to begin drawing benefits so that you can receive those higher amounts later.
That’s the talking point here that we want to make sure that we’re getting across, that there’s pros and cons to taking benefits early and taking them late, but we never want to see you penalized for starting Social Security benefits.
Up to this point has just been the explanation of the benefits, but in reality, the things that you guys want to know about typically come in the form of questions, not just how it works, but in what scenarios does this make sense?
Frequently Asked Questions
I want to talk briefly about some frequently asked questions that we receive about Social Security.
FAQ#1: How much does working longer really affect by SS benefit amount?
The first is, how much does working longer really affect my Social Security benefit amount? Well, if we think back to how this benefit was calculated, we know that we needed 35 years of your highest earnings in this calculation. So if you already have 35 years of earnings that you see on your Social Security statement, chances are that you working longer won’t increase your benefit by all that much. It’s not to say it won’t increase it because it’s just math, so of course it will go up, but it’s not going to go up by a significant amount.
However, if you don’t have 35 years of earnings on your Social Security statement, you have zeros in this calculation. So when we average out years where you have zero income in those 35 years, then you working every year replaces one of those zeros, and so of course your benefit will be getting more significantly better the more you replace those zeros.
Now, some of you are probably scratching your head like, “Well, of course I’ve had more than 35 years of earnings. I started working when I was in high school, and here I am 60, 62 years old, and I’m thinking of taking Social Security.” So it all makes sense, of course you’re going to have that amount, but many people don’t.
If in fact you don’t have 35 years that you can count on your Social Security statement, you working longer will have a much more substantial effect on the benefit that you will receive. And you’d have to really go into the Social Security calculators and plug all of those in to see how it’s going to change for you, but that tool is available on the Social Security website, and if you’re really curious, you can pop in there and check that out.
FAQ #2: If I choose to live overseas, do I still get my Social Security benefit?
Next question. I get this actually quite a bit. If I choose to live overseas, do I still get my Social Security benefit? The answer is likely, as long as you aren’t living in Cuba or North Korea. There are bans on where US money can be sent to, even if it’s not physically being sent there, even if it’s a bank in the United States. If you live in one of these countries, you are not permitted to draw your benefits.
So you need to make sure to update your physical address with the Social Security Administration prior to you leaving the country. And there’s even a little wizard, so to speak, on the Social Security site. In the search, if you just type in “overseas,” you’ll see that it takes you through a series of questions of what country you plan to live in, what kind of benefits are you talking about receiving, like are they normal Social Security benefits, are they disability benefits, are they widow’s benefits, those types of things, and you can see how all this shakes out when you go overseas.
FAQ #3: My spouse and I will both be eligible to draw SS benefits. Is there a strategy to maximize what we get?
All right, next up, this is really, really common. My spouse and I will both be eligible to draw Social Security benefits. Is there a strategy to maximize what we get? Boy, this again, loaded question here. The answer is yes, but it depends on a lot of factors. I’ve listed a couple of them here, the big ones.
What is the age difference between the two of you? What is the difference between each of your earned Social Security benefits? So, these are your own work record for each one of you. What is the difference between those? Have you earned roughly the same amount throughout your career and so your benefits are pretty equal, or is there a big difference between the benefits that you have earned in your own right?
And then lastly, your respective health conditions. You might be the breadwinner, so to speak, the higher earner of the two of you, but if you’re much younger or much older than your spouse, it will affect when you should begin drawing benefits each of you respectively.
So, there’s a lot that goes into this. It’s not just as simple as everybody just flips the switch whenever they feel like it. There’s strategy here, but we have to help you to be able to get to that point. So, for those of you who work with a financial professional, they’ve got tons of tools to be able to show you how those Social Security factors all play into this and be able to, I’ll say stress test your Social Security benefit on a couple of different factors.
If one of you were to pass early, what’s that look like for each one of you? If one of you takes benefits right away and the other delays and vice versa. There’s lots of strategy there, but a little more complicated than we could do in this particular webinar.
FAQ #4: I’m married. Can my current spouse collect off of my benefits? Does it affect how much I get?
Next up. I’m married. Can my current spouse collect off of my benefits? Does it affect how much I get? There’s a lot of confusion about this very question amongst a lot of Social Security participants. So, let’s clear it up.
Once you decide to file for Social Security benefits, your spouse becomes eligible for half of the amount that you are entitled to at your full retirement age. Typically, your spouse must be at least age 62, but if they take it at that point, they’re going to be penalized because they have not reached their own full retirement age.
So the answer to the first part of your question is, yes, your current spouse could collect off of your benefits, presumably their benefit compared to half of yours (so a hundred percent of their own benefit versus half of your benefit, whichever is better, they’re able to draw), but if they are under their full retirement age, they’re going to be penalized. Just like you were penalized if you took your own Social Security benefits prior to your full retirement age, the same would be true of them, but it’s based on their age.
The second part of your question I think is really important because I think it gets people a little bit sideways, and that is, does it affect how much I get? If my spouse takes half of mine, do I just get the other half? The answer is no. You get whatever you are entitled to that you’ve chosen to draw, and the spouse, this is just like a bonus that you are getting off of your benefit.
So essentially the two of you are going to receive 150% of your benefit if you choose to do it this way. It does not reduce the amount that you receive. It just gives a bonus to it if your spouse is not drawing their own benefit first.
FAQ #5: I’m widowed. Can I collect off of my deceased spouse’s benefit?
All right, next up. I’m widowed. Can I collect off of my deceased spouse’s benefit? The answer is yes, but you need to understand that you get one or the other, but not both. You either get your own earned benefit off of your own work record or your deceased spouse’s benefit, but not both.
The Social Security survivors benefit, or the widow’s benefit that you will receive will be largely based on your age. So, it won’t be the age of your spouse when they passed. It will be your age that will determine what percentage of the benefit that they were drawing you’re going to receive.
The Social Security website is actually quite good. They’ve gotten tons better on explaining things in a little bit more layman’s terms, and so you’ll be able to see this right on the site. You can go in and plug in different numbers. I think it’s something worthwhile, especially if things are complicated, but I would not negate the importance of looking at these decisions in light of the rest of your financial situation, of course.
FAQ #6: If I’m very ill, does it always make sense for me to take benefits as soon as I’m eligible at age 62?
All right, next up. If I’m very ill, does it always make sense for me to take benefits as soon as I’m eligible at age 62? This is always a sad question that people ask because they’re trying to do the right thing. They maybe don’t have a long-life expectancy based on an illness or something that’s happened, and they’re trying to do the right thing.
Here’s the deal. If it’s only you that you’re worried about, you don’t have a surviving spouse or anything like that, then you going ahead and taking benefits at 62 makes sense. If you don’t have a life expectancy long enough to wait until 70 and even beyond to make that decision make sense to get the higher benefit for a longer period of time, then taking it early at 62 makes a ton of sense.
But if you have a spouse who presumably will survive you, their widow’s benefit or their survivors benefit in Social Security will be determined based on when you begin claiming your own benefits. So if you’re really ill and you say, “Well, I might as well take benefits while I can,” and you start them at 62 and you pass, then your spouse’s benefit off of your record will be based on you drawing your benefit at 62 with that big 30% penalty to your benefit.
Whereas if you wait to draw, even if you never actually draw benefits during your lifetime, your surviving spouse, their benefit will naturally be higher from the survivor benefit standpoint. And I’m not talking about the survivor benefit on the pension. I want to be very clear, and I wish these things weren’t named so similarly, but the widow’s benefit in Social Security.
It’s a balance here that you’re trying to strike, so definitely a lot to think about here, but if it’s just you you’re worried about, then sure, go ahead and take it. But if you have a surviving spouse or a spouse that you expect to survive you, then we have to look at how valuable your Social Security benefit is for them after you pass, and that will largely be determined based on when you started to draw your own benefit.
FAQ #7: I’m divorced. Can my former spouse collect off of my benefits? Does it change how much I get?
Next question. I’m divorced. Can my former spouse collect off of my benefits? Does it change how much I get? Boy, this would be a burr in your saddle, wouldn’t it, to know that a former spouse is going to lower the amount that you’re receiving? I have good news for you though. That’s not how it works.
If your marriage lasted 10 years or longer and your ex-spouse is still unmarried, they can draw benefits off of your work record, but it does not affect the benefit that you will receive. It doesn’t lower anything that you’re getting from the Social Security Administration. The administration is simply looking at the earnings that you had and the benefit that you have accrued in Social Security.
It’s very possible that instead of your ex-spouse receiving their own earned benefit, that it is more advantageous for them to take half of your earned benefit. They’re not taking it away from you, they’re just taking an amount equal to half of your benefit.
FAQ #8: I am a CSRS employee. Will I get all of the Social Security benefit that’s listed on my statement?
All right, next up. I am a CSRS employee. Will I get all of the Social Security benefit that’s listed on my statement? So, there are very few CSRS employees left. About 3% of the federal workforce are CSRS, and so I felt compelled to put this in here because all of them are eligible to retire.
The answer here is that it depends, and it depends on how many years of substantial Social Security earnings that you have. This is not just did you have earnings that year? It has to be above a certain dollar amount each year. But if you can count 30 of those years that meet that minimum earnings limit, then you’ll get the benefit that’s on your statement because you would have met the threshold to have 30 years of substantial earnings, which means you avoid the Windfall Elimination Provision.
But if you don’t have 30 years of substantial earnings on your Social Security statement, you will be affected by this Windfall Elimination Provision or WEP, as we lovingly call it. Unfortunately, what that calculation does is it takes away part of your Social Security benefit. The good news is it can never take all of it. The bad news is it can either take up to $558 a month of your Social Security benefit or “half” of your Social Security benefit, whichever is less.
So, if you have a really high Social Security benefit, let’s say it’s $2,000 a month, the most they can take away from you is $558. If you have a very low Social Security benefit (which is more likely for a CSRS employee because they had fewer years that they were really contributing), let’s say it’s $400 a month that you’re expecting from Social Security, the most they can take away is $200. So, the WEP never completely eliminates the Social Security that you’re receiving, but it does reduce it unless you have at least 30 years of substantial earnings.
Now, there’s some gray area. If you have between 21 and 29 years, we’re mitigating this penalty. It won’t be quite as bad. But in the grand scheme of things, just to try to keep things simple here today, if you have at least 30 years of substantial earnings in Social Security, you’ll eliminate the Windfall Elimination Provision, which means you get all of the Social Security benefit that’s on your statement. If you don’t meet that 30, chances are something’s going to be reduced from your Social Security benefit because of this provision.
FAQ #9: Am I better off taking my Social Security at age 62 and preserving my investments? Or is it better to do the reverse?
All right, next up. Am I better off taking my Social Security at age 62 and preserving my investments? Or is it better to do the reverse? Boy, I like where your head’s at with this question, but it’s really hard to say without knowing what you’re doing with your investments. Are they in the G Fund not making a whole lot of money? Are they in the C and the S fund and they’re all over the place? What’s happening there? That’s largely going to determine whether it’s beneficial for you to do one or the other.
But I do want to put just a little thing in your mind to be thinking about, and that is the investments that you have can all be left to another person, but your Social Security benefit cannot. The only person who can benefit off of your Social Security record as far as your earnings is your spouse. Your children in a different way, but your spouse is the only person who can benefit. But remember, as a widow, they only get either their own earned benefit or your earned benefit, not both.
So, if your spouse is drawing their Social Security and so are you when you die, it’s not like they get all of yours too. They’re going to get one or the other. But if you think about investments, whether it’s the TSP or maybe you have an IRA or a non-qualified account, like just a regular mutual fund, those investments, if you haven’t used them yet, you haven’t taken them out and used them as income, they’re sitting there and upon your death can be paid to somebody.
So, in that respect, does it make sense to take Social Security earlier and leave your investments alone? I would argue that there’s an argument there, right? There’s at least something to consider when we’re thinking about what’s the right thing to do and the right time to do it.
I’m not suggesting that this is always the right thing, but I think it is something that needs to be in the thought process of whether it does make sense to take the haircut on the Social Security benefit, take that 30% penalty on what you’re receiving with the guarantee that that money is coming in, meanwhile, being able to leave investments alone for another 2, 3, 4, 5, 8 years.
Does that make sense for you? Depends what the investments are, how they’re performing, and how you’re managing the bigger financial picture of what you’re doing. But again, I do believe that there needs to be a thought given to the idea that you can leave behind investments much more easily than you can a Social Security benefit.
FAQ #10: I’m torn between taking Social Security at age 62 versus waiting until age 70. Is there a breakeven point?
All right, last frequently asked question. I’m torn between taking Social Security at age 62 versus waiting until age 70. Is there a breakeven point? So the breakeven point in this scenario is talking about, well, at what point in time, at what age would I have to get to that the benefit that I would’ve started at 62, which is a lower dollar amount, but for a longer period of time would equal the benefit that I start at 70, and obviously drawing it for a shorter period of time? Larger benefit, shorter period of time. So that’s where those two lines cross is that breakeven point.
Here’s the thing, the longer that someone lives, the more it makes sense to have waited to start Social Security benefits. Of course, we don’t know when that point in time is of when you’re going to die. If we knew that it would make all the financial planning decisions super, super easy for you.
But because you don’t know, it causes us to wonder, do I roll the dice and say, “You know what? I think I’m going to live a long full life. I’m going to wait until 70 to draw benefits because I think they’re going to be much better.” Or are you more of the mindset, “I’m going to get it while the getting is good, and even if I have to take a penalty, at least I have it, and the bird in hand is worth more than three in the bush.” You know the old saying.
There are plenty of studies out there on looking at those breakeven points. So here’s the deal. If you delay receiving benefits until age 70, higher benefit, shorter period of time. If you delay receiving those benefits until you reach age 70, it takes about 10 years to break even with the benefits had you started receiving them at age 62.
So about age 80 is when it doesn’t matter which route you took, you’ve received the same amount of money. But from 80 beyond, it would be more beneficial had you waited until 70 to draw, because from that point forward, you’re going to draw a higher dollar amount.
We get this question all the time, and I think it’s a valid question to ask, but it’s a really hard one to answer because again, we don’t know when you’re going to die. If it’s a matter of, let’s assume I’m going to live a long full life, what makes sense now? Do we expect that your long full life is beyond the age of 80? And if so, waiting until 70 makes sense.
The challenge is there’s so many other factors that go into this, like the spousal benefit and all of that. So it’s really looking at the whole picture that I think makes sense with respect to Social Security and is worth you looking at before you flip the switch for Social Security and turn it on.
How does this fit into the bigger picture?
So speaking of fitting into the bigger picture, you guys know we do retirement training. I took a quick peek, many of you have already attended our workshops, and you’re just coming to these webinars to keep refreshed on things, see how things change year to year and really get your head on straight on all these different options that you’re having. But if you haven’t been to one of these workshops or you need a little bit of a refresher, I encourage you to attend.
So these are in-person sessions. We do not charge for you to be able to attend. These are sponsored sessions, and so the cost has been taken care of, so there’s nothing coming out of your pocket to be able to do that. We’re going to cover all the federal benefits topics and the decisions to be made.
And here’s the deal. Even in those sessions that are full day, we can’t answer all the individual questions that employees have. It would be inappropriate to do it there. So we offer simply some one-on-one help after the session so that you can get more clear on the things that are important to you and what you need to take action on.
You can see all of the details, the locations, the dates, all that at FedImpact.com/attend. Now, we of course don’t have a workshop in every city, but we hope we have one close by you so that you can participate.
All right, real quick, handouts and replay for the session that we wrapped up today. If you’re still on here and you’re able to do the downloads, you’re able to get the handouts right here. Otherwise, they will be emailed to you along with a link to the replay here in the next couple of days. And you’re welcome to listen to this as many times as you need to or certainly pass us along to friends who can benefit.
All right, our next webinar, we want to have a little fun with this one. It’s What to Expect When You’re Expecting (Your First Retirement Check). We see all sorts of nonsense happening with respect to how long it’s taking applications to be processed at OPM. On one hand you’ll hear stories like, “Wow, mine was processed in two months.” And others, like two that we’re dealing with from a legal standpoint now next week, it’s been over a year since they’ve retired and they don’t have a normal pension check.
So we have to know what to expect for that first retirement check, what happens between the time you leave service and the time OPM finalizes everything, how do all your benefits work. That’s exactly what we’re going to talk about in next month’s webinar. This will be on June 23rd, one 1pm Central.
So What to Expect When You’re Expecting that First Retirement Check. We’re going to talk about managing the financial transition from being an employee to being a retiree when you finally take that leap. So you can sign up for that webinar at the same place you signed up for this one. You can go to FedImpact.com/webinar.
All right, so guys, that’s it for today. Thanks so much for joining us. Obviously, we’re moving into a holiday weekend, and so I know that Social Security might not have been quite top of mind, but hopefully many of you are able to catch us on the replay and get this into your head at just the right time.
Remember to find a workshop near you. You can go to FedImpact.com/attend. To register for the next webinar on What to Expect When You’re Expecting Your First Retirement Check, go to FedImpact.com/webinar. Thank you all so much. Please enjoy your Memorial Day weekend and we’ll catch you next month.