Why Taking Social Security Early Makes More Sense Than Ever

Full transcript with subheadings:

Many of you have been hearing about the Social Security Trust Fund running out of money. Potentially, if something doesn’t happen before it runs out of money to get everything fixed, because that is something that we have to worry about today and because it hasn’t been addressed yet by our politicians.

Today, I wanted to talk to you about why I think taking Social Security early makes more sense than ever during my career.

My name is Ty Bernicke. I’ve been doing this for 29 years and my opinion has definitely changed over time because of fears that I have with the solvency of Social Security in the future.

The Trust Fund Depletion Timeline

So the Old Age Survivors and Disability Insurance Trust Fund is projected to be depleted by the year 2035. Once that trust fund is depleted, we’ll still have tax revenues coming in from those people who are still working.

And that’s projected that we’ll be able to pay 81% of the promised Social Security benefits at that time, which obviously means that there’s going to be about a 19% reduction if something doesn’t get fixed between now and then.

And this has, in my opinion, pretty significant implications to when a person takes Social Security. If you’re worried about this, like I am, because of something called the break even age.

Understanding Break Even Age

So the break even age is the age a recipient would have to live in order to benefit from delaying their Social Security income beyond the early start age of 62. So what does this mean?

To describe what this means, I prefer to use research done by a guy named Doug Lemons. He wrote an article for the Journal of Financial Planning, and it’s several years old now, but I still think its principles of what he wrote about are practical to this conversation, because the study he did was far more thorough than other studies that I’ve read about on this over the years. And Doug Lemons was a former Social Security executive.

And basically what he said is that based on tax implications, inflation rates, the rate of return on investments, the break even age ranges from 81 to 87.1 years old.

The Break Even Age Calculation

So what that means is if you’re 62 years old and you knew for sure that you’re going to be dying before his earliest break even age based on changing around these variables. So depending on the variables, that’s why we have kind of a range here between 81 and 87.1, because he provided a study that studied a lot of different potential options.

And he said based on how you maneuver those different tax implications and inflation rate, the rate of return on investments, somewhere between 81 and 87.1 is where the average break even age would be. So if we knew for sure you were going to retire at 62 and start taking Social Security at age 62, and you knew you were going to pass away at 78 years old, well, since that’s earlier than the earliest end of the break even age, it would make sense to take your Social Security earlier.

But if you knew for sure that you’re going to live to 100 years old, it wouldn’t make as much sense to take it at 62. It makes sense to take it at one of the later ages, possibly even as late as age 70 in that example, because we knew that you would get that higher amount that you get by delaying your Social Security for many, many years into the future, which is why it would make sense to delay it.

So again, if we knew you’re going to live to a really, really long age and we knew Social Security was going to be intact and pay out at the amounts promised today, it means that it would make sense to delay taking Social Security at a later age if we knew you were going to live past this break even age range.

How Future Reductions Change Everything

The problem with this today, again, is if Social Security gets reduced in the future because the trust fund runs out and we don’t have enough to pay 100% of what is promised, that’s going to slide these break even ages to lower ages. And depending on how much they potentially reduce it in the future, maybe the early end of this break even age could be as early as 78 or 77 or 75.

We just don’t know because there has been no guidance from the government on this. But if that’s something that you’re worried about, I think it’s worth noting when you’re deciding when to take your Social Security.

Your Individual Situation Matters

And I think it’s important to understand the context of your individual situation. Doug Lemons focused on things like inflation and taxes and the rate of return you would make on your investments that you don’t need to take out earlier if you take your Social Security at an earlier age.

But there’s a whole bunch of different variables out there. And I almost think of this like a pendulum. Depending on your unique circumstances, it can make the pendulum swing in one way in favor of taking it early, and in other situations, it can make sense to take your Social Security later and delay it.

But I’ve listed a variety of different variables that could move the pendulum one way or the other based on your unique circumstances.

And I’m not going to go over all of those today. I have written an article about this in Forbes. So if you Google Ty Bernicke Forbes Social Security, you’ll be able to find that article which goes over all these other variables in detail. But again, the reason we’re going over this in the video today is because of concerns with future potential Social Security reductions.

Key Factors That Favor Taking Social Security Early

So some variables that I do want to illustrate that can promote taking Social Security earlier include if you’re in poor health and you are single, it generally slides that pendulum in favor, all things being equal, in favor of taking your Social Security early.

And if you’re single and longevity doesn’t run in your family, that slides the pendulum to taking your Social Security early.

The Hybrid Method for Married Couples

If you are married and you have a lower projected Social Security amount than your spouse, that’s another reason to take it earlier and do what’s called the hybrid method, where the lower income earning spouse takes the Social Security income earlier and the higher income spouse takes it later, because that higher amount will continue on for that spouse’s life.

But if they die at a young age, you get to keep their higher amount. And so, you know, if you live to a really long age, you can keep that higher amount, even if you live well beyond that break even age we talked about earlier.

Dependent Children Considerations

If you have dependent children, that’s another really good reason to take it earlier, because you receive extra money up till the age of majority. And if you don’t take it early, you don’t get that amount at all.

Sequence of Returns Risk

Sequence of returns. So what this means is if you were to delay taking your Social Security and you walked right into really bad market conditions, and you were forced to take money out of your portfolio and sell investments when the market is already down, it’s going to be much more difficult for that portfolio to get back up to where it was if you hit that sequence of bad returns early in retirement versus later in retirement.

So one of the ways to reduce that risk is by taking Social Security earlier, which then reduces the amount of money you have to take out of your portfolio so that if it drops, it’s not as hard for it to get back to where it was, because you’re not taking the money out because you have Social Security coming in, which requires you to take out less from your portfolio.

Flexibility with Investment Withdrawals

The other reason to take out your Social Security early is so you have flexibility with your investment buckets later on if one-off expenses come up.

The Bottom Line on Future Reductions

Finally, and the purpose of this whole video today is if you believe Social Security will be reduced in the future, that’s going to, all things being equal, slide that break even age to younger than what Doug Lemons talked about in his research years ago.

Consider the Total Picture

So I don’t think that when you’re deciding on when to take your Social Security, that you can view any of these variables in a vacuum. You have to consider the totality of your situation to make an informed decision.

There are still circumstances where I think it makes sense to take Social Security later on, but it depends on a variety of variables, some of which we talked about today.

Next Steps

If you want to have a more detailed discussion on when it makes the most sense to take Social Security based on your unique circumstances, I’d encourage you to set up a 15 minute call with one of our certified financial planners, who can go over this with you. We do this stuff all day, every day and help people with their retirement.

And you can find out more about this by going to bernicke.com to set up the 15 minute virtual meeting. Or if you click on the link that we’ve provided, that’s another way you can get signed up to have a no obligation call. And I hope you found this information valuable today and look forward to talking with you guys if you decide to make that next step.

Thank you very much.