When Should You Take Social Security? 5 Key Factors to Weigh Before Deciding

Should you take social security early or should you listen to the experts and always defer until age 70?

Well, like most things in life, there’s a gray area and the answer isn’t always black and white. A lot of times academics use what I would consider to be the wrong math and what I want you to do and what the core basis of our retirement success plan is, is understanding and feeling empowered that you can make the right decision about social security and other aspects of your retirement based on how you feel, what makes the most sense and how the utility of that decision positively impacts your overall retirement.

Why the math isn’t the whole story

It’s not just about the math. So when you finish this video, you should feel empowered to make good decisions about your retirement without worrying if it’s not the mathematically exact correct thing to do, that you’ll still be okay and you’ll understand why. So we’ve been talking about this concept for years, but I recently read an article on the Michael Kitces blog and the author was Derek Tharp, PhD, CFP, CLU, RICP. So I want to give credit to him because he was able to succinctly put into words the concepts that we’ve been telling clients and been telling you on this channel for many, many, years.

Most of you have probably heard that deferring Social Security until age 70 is in your best interest. But for years, for a lot of years, working with thousands of clients, we’ve learned through those experiences that even mathematically, if it makes sense to defer social security, a lot of times you aren’t comfortable. It’s not the best decision for you because what the academics tend to overlook is the utility of that decision.

And what I mean by utility is:

How does it make you feel?
How satisfied are you from that decision?

Because success in retirement is not derived from achieving the best mathematical outcome on a spreadsheet. It’s derived from making a combination of decisions that when put together give you the most security, help you have the most income, reduce risk, and allow you to do the things with the people that you love and care about and pursue your interests and hobbies to the greatest extent possible while you’re younger and active and able to. That’s utility.

So when we look at retirement through that lens, this is why we call it the Retirement Success Plan because this is how we’ve done retirement planning, financial planning, for 15 years now here at Oak Harvest Financial Group.

So when you look at it through that lens, you’ll start to understand that even though it may make sense for you to take Social Security later from a math standpoint, there’s a lot of benefits you should consider that come with taking Social Security early.

But I also need to point out that there are real benefits, even from a utility standpoint, of deferring Social Security until you’re 70 years old. You could even take a multi-election social security strategy, meaning one spouse takes it here, one spouse takes it there.

The big point I want you to take home is that it should be personalized to your situation, your circumstances, your assets, your health, your longevity, what you’re trying to accomplish. And then when you do that, I believe you’ll achieve retirement success.

Key risks of waiting until 70

We’re going to start with some of the risks of deferring social security until age 70.

Mortality Risk

Now, the first one is obviously mortality risk. the fact that you or your spouse may pass away before you turn Social Security on at age 70 or shortly thereafter, thereby negating the benefits of deferring Social Security. That’s the first and most obvious one.

Sequence of Returns Risk

The second one is sequence of returns risk. If you’re committed to deferring Social Security, you and your spouse or just yourself until age 70, you run the risk of the market going down while also taking portfolio withdrawals to support your lifestyle in retirement. while you’re deferring Social Security. So that combination of taking money out of the portfolio and seeing the portfolio decline due to an external market event in consecutive years is what’s known as sequence of returns risk. It’s one of the biggest dangers posed to your retirement. And by deferring Social Security till 70, you enhance that danger. You increase the probability, if that happens, of running out of assets before you pass away.

Policy Risk

The third one is policy risk. So the Social Security code, as it pertains to to your full retirement age, delayed retirement credits, even the taxation of your Social Security benefits, all of that is more written in sand than carved in stone. You never know when the tide’s gonna come in and potentially wash that all away, and then we have some type of new rules that apply to your Social Security. So that policy risk that things may change in the future, that’s a big one to consider, and if you’re planning on deferring Social Security until age 70, that’s a risk you bring into the picture.

We already know that the trust fund, if you look at it on a graph, it is literally about to go down, or literally it does go down in exhaust in about eight or nine years. What does that mean for you?

Well, certain things like means testing could be applied in the future. So if you have high assets or high income, you could be someone who does not receive your full benefit because of the adjustments and changes Congress may make to the tax code. So that’s just one proposal that’s on the table, the means testing. There are several others. Most importantly, it’s a risk that you choose to carry if you defer Social Security until age 70, and you have to decide if that’s right for you or not.

Opportunity Cost

The fourth one is the opportunity cost. So by choosing to defer Social Security until age 70, you have to pull money out of your portfolio. That does a few things. So there’s opportunity costs on the mental side, there’s opportunity costs on the financial side. The first and most obvious one is if you left that money in your portfolio and took Social Security, what type of rate of return could you achieve on those funds? Some of that is external. You can’t control what the market does, stocks, bonds, et cetera. Some of that is your risk tolerance. So your risk tolerance and your willingness to invest more heavily in stocks, or if you’re more conservative, that plays into this overall decision of when it may make sense for you to take Social Security. But the opportunity cost can be emotional as well.

So again, for years, One of the reasons we’ve encouraged people to take Social Security early is as we get to know them and as we get to understand who they are, we can see that it may create anxiety to pull money out of the portfolio. They may be spending less than they otherwise could because they’re afraid, this is all I have. This is all I’ll ever have. I’d rather not spend it than actually enjoy my retirement.

So in that particular case, when we turn on Social Security at maybe 64, 65, or 63, or 67, instead of 70, It creates a stream of reliable income that can offset the portfolio withdrawals. And what we found over the years is it helps people spend a little bit more comfortably in retirement.

So think about this opportunity costs, not just on what return or not just through the lens of what return can you make on your assets if they stayed in your portfolio, but how does it impact you emotionally? How does it make you feel? There’s a cost associated to that. And it’s probably more significant than the financial cost because again, for years of doing this in retirement, the thing that I feel bogs people down the most is fear and anxiety over what may happen or whatever they develop in their minds. And that, a lot of times, prohibits people from truly enjoying their retirement like they could.

And just to touch on that a bit further, because this is important to understand the root of why a lot of academics have always said you’re better off deferring until age 70. And it’s because In the financial world, there’s something called a discount rate. And the discount rate is what we use to determine the value of a dollar today versus a dollar in the future. So for most academics, they assume Social Security to be a risk-free, guaranteed lifetime income stream. When you have zero risk, you use a zero discount rate because there’s no risk premium to be associated when you’re calculating the value of those dollars in present value terms.

All that simply means is that A dollar in the future, if you use a 0 % discount rate, is just as valuable as a dollar today. But there’s many other theories, and most of these come from people who actually work with people in retirement, that want to assign a higher discount rate, which just simply means that a dollar today is more valuable than a dollar in the future, because as real practitioners in the real world working with real people, we see these things like opportunity cost and clients that pass away and clients that get sick.

These are costs that we believe, I should say I believe, I can’t speak for everyone, need to be considered when making this decision about when to take social security.

Behavioral Risk

The fifth one that we’re gonna talk about here is behavioral risk. And I touched on this a bit earlier, but one of the greatest feelings I have as a retirement planner is when someone comes to us and the first year or so, even though we put together their own customized retirement success plan, we have the income plan, the risk is set appropriately for their willingness. the tax plan, the healthcare, the estate.

Once all that’s buttoned down, they come in for their six month review and they’re still not spending as much as they otherwise could or as much as we planned for. And it’s because there’s some emotional, there’s something underlying going on from an emotional standpoint. Usually after year one, year one and a half, year two, people start to feel a bit more comfortable and they see the plan working as it originally was intended and then they get more comfortable spending.

Whole point being here is from my experience, there are several different behaviors in retirement that could be impacted or behaviors that you take as a result of fear and anxiety that can be alleviated by simply taking social security soon.

So the behavioral risk, I just want to touch on that a bit more because it is a category in and of itself here and it’s something that you need to take into consideration when making this decision.

Benefits of deferring Social Security

Now there are benefits to deferring your social security until age 70. But as always, we wanna make this decision with visibility into how it’s impacting today and in the future.

Much larger retirement income

The first big benefit, of course, is you have a much larger retirement income, assuming everything plays out the way the current social security system is laid out. So once you hit full retirement age, which is 67, your benefit will increase 8% a year. And in between 62 and 67, it increases slightly under 8%. It’s a different percentage leading up to your full retirement age, pretty significant difference.

And if you have longevity, if you have maybe not as many retirement account assets, that big guaranteed lifetime income stream that is inflation protected, you get a cost of living adjustment on that higher social security amount, that can be a huge benefit to your peace of mind and security, and it can help later in life. So there absolutely is a benefit from deferring. It’s going to depend on your personal circumstances.

Tax flexibility

The second benefit to deferring Social Security until age 70 is the tax flexibility. So if you don’t take Social Security now, you defer it later, then you can choose, where do you take income from? If you take it from your non-retirement accounts, that leaves you basically in a 0 % income tax bracket, or very, very close to it.

That allows you to do strategic Roth conversions with your retirement accounts. and move that money to a tax-free environment. And you can target the 12%, 22%, whatever makes sense when you analyze the situation, or preferably have someone who’s done this before analyze it, and create an incremental Roth conversion plan until you turn Social Security on.

And that has massive benefits potentially for your retirement, because depending how much of your IRA you convert to tax-free, your income for the rest of your life could potentially be extremely tax-free, meaning all those Roth distributions will be tax-free, and if the tax hold holds up the way it is now or similar to it, all of your Social Security benefits would likely be tax-free as well.

So I highly recommend that you get a Social Security tax analysis and understand how that Roth conversion strategy could impact you, not just today in the taxes that you pay, but in the future in regards to your tax implications.

Roth Conversions

The third benefit to deferring your Social Security kind of piggybacks off that last one, but I want you to understand that if you follow the Roth conversion strategy and you create large Roth accounts, small IRAs, and you have Social Security benefits deferred until age 70, you could have very, very large sums of income later in life and not pay taxes on any of it.

How that could benefit you on the policy side is if they end up implementing a means testing for Social Security benefits in order to preserve the trust fund, you would virtually be in the 0 % tax bracket, maybe 10 % or so, and you wouldn’t be impacted. So just as there’s a potential negative policy risk to deferring Social Security until age 70, there’s also potentially a positive policy risk that could impact you at age 70, or at least you wouldn’t be impacted by.

So understand that by doing the deferred social security strategy along with the tax strategy in your earlier years could put you into a situation to where you’re not impacted by any changes to social security and potentially being very, very, very low tax rate later on in life.

That’s typically gonna be best for someone who has accumulated a significant amount of money in retirement account assets. So 700,000, a million, two million, three million. Somewhere in that range, it just depends on how much you spend, the other factors that impact your retirement. And of course you need to look at it and do the analysis.

A couple other benefits real quick of deferring Social Security until age 70 is that one, if you do withdraw from the IRA earlier to fill that gap, you’re likely to have smaller required minimum distributions later in life as opposed to if you had turned Social Security on early and deferred those retirement accounts. So again, that can have domino effects throughout the rest of your retirement.

Legacy planning considerations

And then of course, it’s always nice to have those Roth assets if you’re going to do the Roth conversion strategy by deferring and defer Social Security later as backup assets and also to pass them on to your kids or grandkids if that’s important to you. Because those assets, once they get passed on, they can grow for another 10 years tax free and then your kids do have to distribute them. But it’s typically gonna be better than passing on a tax-infested retirement account and then your kids, when they have to take it out, they take it out and they have to pay taxes at whatever rate those are in the future and potentially see 40, 50, 60 % of the IRA just go directly to the government.

So again, there are benefits to deferring Social Security until 70. The larger guaranteed income, which is inflation protected, the tax flexibility of being able to do Roth conversions now, more space in the tax brackets, and of course the legacy benefits, the smaller RMDs later in life. So there are benefits.

Who benefits most from delaying

Typically deferring until 70 is going to be more advantageous for two groups of people. Those that have very, very large retirement accounts that need to do tax planning. more so than are worried about running out of money. And then those on the opposite end of the spectrum that have longevity and are expected to live long time, but don’t have as many retirement assets. So that secure guaranteed lifetime income that’s inflation protected from social security by deferring until age 70 can create a very comfortable retirement.

So everything that we’ve went through here, I know it’s a lot, but like I said, hopefully you feel empowered to make better decisions about your social security with respect to how does it help you define what your retirement success is or how does it get you closer to more utility out of your retirement as opposed to just the mathematical decision. And that’s what we do here at Oak Harvest Financial Group.

That is what the Retirement Success Plan is. So if you’d like to sit down, go through this with us, feel free to reach out to us. If you have questions, put them in the comments. I’ll probably do a follow-up video on this to maybe look at the taxes and address some of your comments because I know this is a very important topic for many of you.

But if you’d like some help going through this and creating visibility, to how these different decisions not just impact you mathematically, but incorporating how some of these decisions make you feel and then modeling those out. Give us a call. We’re here to help.”

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