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Optimizing Social Security

By Advisor Matthew McDaniel

Social Security is a surprisingly challenging topic for many nearing retirement. The key question on most people’s minds is when to elect Social Security. You may be aware of the general principle: elect sooner for a lower benefit and delay for a higher benefit.

That still leaves the question of when should you elect Social Security.

Every plan has different variables, and if this is a question you’re wondering about, the best answer is to talk through it with your advisor. To help frame the discussion though, here are some of the key ways we think through the decision.

Variable #1. How much do you need?
Social Security can close a critical gap for retirees who need the cash flow now. The first question we ask is, “How much Social Security income do you need to make your plan work?” If you need the benefit now, that’s ok but less optimal. However, if you can delay the filing to maximize the benefit, that will work best. See the next point on how longevity plays a part in this analysis.

Variable #2: What does longevity look like in your family?
At its best, Social Security works like an insurance product, protecting you from the financial risks of longevity. For example, what happens if you live longer than expected or a new medical breakthrough occurs 10 years from now? We view Social Security as a hedge against the “risk” of living a long time.

Practically speaking, we often see 82 years old as the “breakeven” point for the decision to file for benefits at full retirement age or delay until age 70. Said another way. If you anticipate having a lifespan of less than 82, file at Full Retirement Age. If you anticipate living greater than 82, delay the filing until age 70.

While it’s impossible for us to know when our last day will be, a conversation about family health history is informative to help you get the most value from your Social Security.

Variable #3: What distribution strategy lowers your tax liability?
The final critical facet we discuss is how your Social Security fits in with how you receive your various income and portfolio withdrawals while retired. With a tax-minded approach, there are often ways to lower your tax bill by delaying the filing and allowing more time for timely financial planning strategies such as Roth conversions. The decisions you make regarding the filing of your Social Security will impact how that income stream is taxed.

If you need to make this decision in the next 10 years, we encourage you to reach out to your advisor. These conversations are best had before you begin taking Social Security, and we are here to help.