James Knoll (0:00)

When should you really start Social Security? As a financial advisor, I've seen firsthand how this decision could very well be one of the most important retirement decisions you make. But with so many different variables to consider, how do you know which option is right for you? Well, in today's video, I'm going to walk you through the pros and the cons, as well as other considerations of collecting at age 62 versus 67 versus 70, to help you understand what might be best for you. So before jumping right into the pros and cons, we have to lay the groundwork by understanding some of the Social Security basics, some of the foundations, because this information, information is what will be most relevant in determining the pros and the cons of each. So, number one, the way that Social Security is actually calculated is the Social Security Administration looks at your 35 highest years of inflation adjusted earnings. So there's an actual formula that dictates exactly what's called your primary insurance amount, which is the amount of Social Security benefit or Social Security income you are eligible for at your full retirement age. This formula is based upon your 35 highest years of inflation adjusted earnings. So that's number one. Number two, your full retirement age. So that age by which you get your primary insurance amount is anywhere from age 66 to 67, depending upon the year in which you were born. Used to be even earlier. But as they push the Social Security ages back, for those of you that aren't already collecting, your benefit age will be somewhere between 66 and 67, and that will be your full retirement age, and that's the age at which you receive your full benefit. Now, we'll touch on this more later, but don't confuse full benefit with max benefit. Full benefit essentially means you're eligible for 100% of your primary insurance amount. There's actually ways to increase that even more, and we'll talk about those in just a bit. Now, the third thing that you need to understand before we jump into pros and cons is that you don't have to collect Social Security at your full retirement age. Every year that you wait beyond your full retirement age, you get what are called delayed retirement credits. So those are increases above and beyond your primary insurance amount. Every year or even every month you collect your Social Security income before your full retirement age, you are taking a reduction in benefits. Now, here's the thing. Most people think that the decision to collect 62 versus full retirement age or 70 just comes down to the amount, but that's only one part of the Overall consideration, what you can see right here is you can see the impact of collecting Social Security early. And you can see for the 36 months leading up to your full retirement age or the three years leading up to your full retirement age, every year you collect early, you are taking a 6.67% reduction in the benefit that you will now receive for the rest of your life. Now that's actually factored into a monthly calculation, meaning it's not like you get big step ups or big jumps by waiting from 65 to 66 and then 66 to 67. Every month that you delay or every month that you collect early, that reduction is taken into an account on a pro rated basis. But a 6.67% reduction for each year and, and the first three years that you potentially collect early before your full retirement age. This graphic is showing full retirement age at age 67. That full retirement age could be a little bit sooner. Now again in this example, looking back at this graphic, if you're collecting years earlier, even before that. So if you collect at 63 or even 62, you're accepting or you're taking only 5% reduction compared to where your benefit would have been prior to that. So a bigger reduction for every year you collect early before age 67, up to those first three years of collecting early, and then the final two years. So if you were to collect four years early or five years early, an additional 5% reduction such that if you collect at age 62 and your full retirement age is age 67, your benefit at 62 is 70% of what your primary insurance amount would have been. So that's the impact of collecting early. Now over here, what you can see is this is the impact of delaying your benefit. Every year that you delay your benefit beyond your full retirement age, you get what's called a delayed retirement credit. The delayed retirement credit is an extra 8% increase in your monthly Social Security payment. Now one thing that's important to consider is this is not a compound 8%. It's a simple 8% adjustment. So if you delay one year, you get 108% of your primary insurance amount. If you delay two years, 116% and if you delay three years, 124%. So keep that information in mind. Let's now take a look at collecting at 62 versus 67 verse 70. To understand the pros and cons of each, let's start with age 62. The obvious downside is what we just talked about. You are locking in a lower monthly amount, but that's not the only thing that we have to consider. Another thing that I would have you consider is by the time that you're 62, let's assume that you're working at 62 and you retire and collect your benefit, then there's a very good chance that you are in some of your peak earning years at age 62. Let's go back to what I talked about at the very beginning. Your Social Security benefit is Based upon your 35 highest years of earnings. And those earnings are inflation adjusted. So let's assume that in your 20s and maybe even early 30s, you had jobs, but they were random jobs here and there. You didn't actually earn that much even on an inflation adjusted basis. So when you look at those 35 years, a whole bunch of them, you had earnings, but they weren't really that much. You weren't really contributing that much to the formula that impacts how your Social Security benefit is calculated. So by collecting Social Security at 62, I'm somewhat making the assumption that you're also stopping your work, stopping work at a higher peak earning years. And what that could mean is, is not just the reduction by collecting age 62 versus 67, but you may be saying no to higher years of earnings that would have actually increased what that benefit would have been at 67. This isn't always the case, but certainly something to keep in mind is by 62, do you have 35 strong earnings years. And if not, every year that you would have kept working, you're actually increasing the amount that your full retirement age benefit, your primary insurance amount would have been. Now, another downside of collecting at age 62 is there's an earnings limit. So maybe you're collecting at 62, but you still want to work. Even you just want to work part time or to some extent, $23,400 is the limit of what you can earn before Social Security starts withholding some of your payments. For every $2 that you earn in excess of that limit, Social Security will withhold $1 of benefits. Now the good news is this is just looking at you. So if you're married, your spouse can earn whatever they want to earn, they could earn a million dollars a year. That's not going to impact your earnings limit. Your earnings limit is only looking at the income that you are bringing in. But this is really important to know if, if you are collecting early is limiting how much you can then earn in other types of income. This does not include portfolio withdrawals, pensions, investment withdrawals. It's just earned income that this is looking at. The final downside is the way in which collecting early impacts spousal or survivor benefits. Now, spousal benefits, it actually doesn't impact too much. Even if you collect early and you have a spouse that's planning to collect a spousal benefit based on your earnings record, they could still wait until their full retirement age and get their full spousal benefit. That's based on 50% of your primary insurance amount. So you collecting early, the good news is it does not impact your spouse's ability to get a full spousal benefit. What it does impact is a survivor benefit. If you are the spouse that has a higher earnings record and you collect early, that's not just a decision that you are making for you. That's also a decision that's going to impact your spouse if you pass away before they do. So, for example, maybe you had a spouse that stayed at home and you were the primary breadwinner and you turn 62 and you say, you know what, my health isn't the greatest. I'm going to collect this income while I can because I might not live all that much longer. As an example, now you collect that early and you're exactly right. Maybe within five years or 10 years you do pass away, but your spouse is in great health. Well, that benefit, that income that helped you and if you were single, that was probably the right decision to make. But are you taking into account the impact on your surviving spouse? If your surviving spouse is in great health and they live for another 30 years after you pass, they are now living on a survivor benefit that is 100% of what your benefit was. But your benefit is as small as it could be because you collected at age 62. So there's some instances where that should be taken into account, some instances where that's actually not going to be a deal breaker. And you still should collect early. But that is something that's very important to know is don't just look at your benefit. If you are married, understand the impact on a survivor benefit. Now let's look at the positives, the pros, the benefits of collecting early. The most obvious one is access to the funds. Now, sometimes you just need funds. You just need the money. You don't have the luxury of being able to wait or be able to pull from other resources. Well, Social Security could do that for you. As soon as you turn age 62, you are eligible for that Social Security benefit, by the way. And as an aside for survivor benefits, you are actually eligible to collect Those as soon as age 60. It means a reduction in benefits, but something that's very important to know if someone's looking to collect a survivor benefit on their deceased spouse. So if you're 62 and you collect benefits, it's immediate cash flow that is obviously a benefit. The second benefit, and people don't often think about this or don't think about it nearly enough, is every dollar that you pull on Social Security is one fewer dollar that you have to pull from your investment portfolio. So people are looking at break evens. They're saying, how long am I going to live? And that's going to help me determine when should I collect Social Security. There's a break even sometime between your mid-70s to early 80s, depending on what ages you're comparing. But that break even is just looking at Social Security in a vacuum. That break even analysis looks completely different if when collecting early, it means you're leaving more money in your portfolio to grow for you. That is a real opportunity cost and that's actually a real benefit in some cases. If you're collecting Social Security early, less pressure in your portfolio ensure you're locking in a lower income amount, a lower Social Security income for the rest of your life. But are you also increasing your portfolio and the income it can generate for you by doing so? Not the case always, but absolutely something that you should look at and that is a potential positive or benefit of collecting Social Security early. Now let's explore the pros and the cons of collecting at age 67. And before we do so, make sure that you subscribed every single week. We're releasing multiple episodes talking about how you can create a more secure retirement. So subscribe, make sure you don't ever miss one of those episodes. So, age 67, what's the first benefit? Well, the first benefit is you are now eligible for 100% of your primary insurance amount. Going back to that calculation, that 35 years of highest earnings, all that goes into defining your primary insurance amount. By the time you reach full retirement age, which will be 67 for a lot of you watching, you are eligible for 100% of that. You are no longer taking a reduction or reducing your benefit by collecting early. So that's the first benefit is you're eligible for 100% of that. The second benefit is actually a tax benefit, and it's not a tax benefit that's any different than collecting at age 62. But the way Social Security is taxed is much more tax efficient than the way, say, a traditional IRA withdrawal is taxed for one, most states do not tax Social Security. Number two. At a maximum, 85% of your Social Security income amount is included in your taxable income when you file taxes or when you Pay taxes. Meaning $1 of Social Security is going to be worth more after taxes than $1 of IRA income or of pension income. So by waiting until 67 as compared to 62, it's not just a higher amount, but it's a higher tax adjusted amount. Now, same Social Security tax benefits at 62 versus 67. But of course at age 67, because you have more dollars, because you have more income from Social Security, you also have more tax benefits. Now, the final benefit of collecting age 67 is it's a nice balance. You're not waiting all the way until 70, deferring cash flow all the way until then. But you're also not minimizing your benefit by collecting at age 62. So it's a good balanced approach that somewhat gives you the best of both worlds. Now, the downsides of collecting age 67, you can also look at what I just said as a downside. It's not giving you the best of both worlds. It's neither giving you immediate cash flow like collecting age 62 would, nor is it fully maximizing your benefit. So depending on how you look at this, this could be either a pro or a con, because you're neither getting the best of both worlds, but nor are you getting the worst of either. So it can be a good balance. But the downside is you're not maximizing cash flow coming in or or maximize your benefit by delaying. So the next downside that I would consider of collecting age 67 is if you are someone that does not have a long life expectancy, you are in poor health. By delaying, you might actually be minimizing the amount of lifetime Social Security benefits that you're going to collect. If you knew for certain you were not going to live past age 70, well, why wait until age 67 to collect? Why not collect earlier? It's a lower amount, but you're getting more months of income from your Social Security payment. So that's where the break even analysis comes into play. But if you don't have a long life expectancy, and like I said previously, if you are married, you also need to take into account your spouse's life expectancy. But if either you're single or both you and your spouse are in very poor health, delaying your benefit until age 67 might actually end up costing you. So those are the pros and cons of collecting at age 67. And now, finally, let's talk about the pros and cons of collecting at age 70. Let's start with the pro. The biggest obvious pro is you have maximized what your Social Security benefit can be. You have paid into this system your whole life. You have now maximized what that system will now pay to you. And if you're collecting at 70 versus age 67, your monthly benefit will be 24% higher every single month. And that benefit is locked in for as long as you live. So that is by far the most valuable benefit of waiting until age 70. The second benefit is that by waiting until age 70, for a lot of people, this is unlocking potential tax strategies that you can take advantage of if you in your early to mid-60s. Roth Conversions is a big one. For Roth conversions to be as effective as possible, you want to keep your taxable income as low as possible for a number of years. Because as you keep your taxable income as low as possible, you can simultaneously start to convert parts of your traditional accounts, your traditional IRAs, into your Roth IRAs. So pushing Social Security out is keeping your taxable income clear. It's keeping it low for some of those middle years. So it opens up some really strong potential tax strategy. The third benefit is by maxing your benefit at age 70, is you're minimizing the severity of failure in your plan. I'll talk about this a lot with Monte Carlo simulations. People look at it. I have a 60% probability of success or 90% probability of success, or whatever that number actually is. And that's only half the equation. The other half is what's the severity of failure? If you max your Social Security benefit at age 70, let's assume that that income amount is now $4,000 per month. And you only want to spend, let's say, $4,200 per month. Well, if you run out of money in your portfolio and you want to spend 42, but you're actually just stuck with $4,000 per month from your Social Security benefit, that severity of failure is not that horrible. You're taking a cut. Of course, Instead of spending $4,200 per month, you're only spending $4,000 per month. But it's not a dramatic cut, not like it would have been if your Social Security benefit was only $2,000 per month. So by maximizing your benefit, what you're doing is you're buying yourself more flexibility where if you do happen to run out of other savings or other Portfolio assets or things go south, you have this higher stable income floor that can continue meeting your needs even if things didn't go as well for you in other aspects of your plan. The next benefit is around something called longevity risk. Believe it or not, living a long time is actually a risk to your financial plan. Your portfolio assets, your resources, they were not designed in all cases to support you for a 30, 40, 50 year retirement. Now, I know that's starting to seem pretty extreme depending on the age at which you retire. But if you live to 110 and you blow through all your assets, well, maximizing your Social Security benefit, that's going to last as long as you live. So it's giving you a larger income floor that you can carry with you for the rest of your life, of course. And then finally, the final benefit is not only is this income amount locked in for you, it's locked in for a spouse if you're married. So you're not just maximizing your income, you're also protecting a surviving spouse in the instance in which maybe their benefit is not as high as yours would have been. So those are the benefits. Now let's touch upon the cons, the downsides. The first one, of course, is this requires some serious delayed gratification. Now, maybe you're working until 70, so you don't need the benefit, and this doesn't really feel like delayed gratification, but maybe you retired at 62, and by not collecting Social Security, there's a lot of delayed gratification, and not just delayed gratification, but you're having to spin down your portfolio assets. So sure you're maximizing your Social Security income, but are you simultaneously reducing the amount of income your portfolio can create for you for the rest of your life? That is a potential downside. The second downside is what if you don't get to enjoy that money? What if you don't have the life expectancy you think you're going to have? Go back to my example earlier. If you knew for a fact you were going to die at 70, you would not wait until 70 to collect Social Security. Now, the thing about our date of death is we don't ever know exactly when that's going to be. So of course, if we knew for certain we were going to live a long time, the more it makes sense to delay our benefit, if we knew, on the other hand, that we were going to pass away early, the more it probably makes sense to consider collecting early now, because we don't know what we do is we try to minimize risk, and so by pushing the age out until 70, we've minimized that longevity risk. Just keep in mind that presents another risk. And that risk is if you pass away before you start collecting your benefit, you don't get anything really from the system. Social Security is designed to be a social insurance net. A social insurance system, which is what that means, is if you pay in and you pass away before you collect, those benefits essentially disappear. Now, of course, if you're married, your spouse can still collect a survivor benefit based upon that, but it's not something like a retirement portfolio or a home or another asset that will pass to your children if you don't end up using all of it. And then the final downside is the opportunity cost of not using the money sooner. We already somewhat covered that as by delaying until 70, you're spending down your portfolio assets, which means there's less of a portfolio base to create more income for you in the future. That being said, there are tremendous benefits and potential downsides to collecting at 62, 67 and 70. None of them is a one size fits all solution. But understanding both how Social Security works in general, as well as the pros and the cons of each of these potential collection dates will allow you to make a more informed decision for yourself. Now, all of these, all these benefits could be improved if you know what you need to do to maximize your Social Security benefit. That's why I made this video right here. In this video, I walk through four simple things you can do to maximize your Social Security benefit. Whether you're collecting at 62, 67, 70, or anywhere in between. Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown, have been invited, have been shared with each individual's permission, and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Once again, I'm James Knoll, founder of Root Financial, and if you're interested in seeing how we help our clients at Root Financial get the most out of life with their money, be sure to Visit us at www.rootfinancialpartners.com.