When Should You Take Social Security
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Zach – Hey everyone, Zach Holcomb here, back with this week’s blog. We have Michael Reese with me, Certified Financial Planner. Mike, this week, we’re gonna be talking about when to take social security. Now, it’s a very complicated decision, and it is a must that you talk with an advisor, who specializes in retirement planning, because there’s a lot of factors that play into making this decision.
Michael – Oh, there certainly are. I mean, whenever you think about taking social security, and as you said Zach, it is probably the number one question we get when it comes to income planning. Sometimes we hear people saying, “Oh, I’ve pretty much decided I should wait till 70,” but is that always the right decision? And then other times I hear people say, “Now I’m just gonna take it as soon as I can get it.” But again, is that the right decision? And yeah, there’s certainly a number of factors.
Zach – Yeah 100%, and you have that huge social security book, I’ve seen you lug around the office. It’s like 500 pages. There’s so much to understand when you have to make this decision.
Michael – I think you’re exaggerating Zach. It is closer to 800 pages. So yeah, it’s incredible. Maybe we could talk a little bit about some of those key factors, right. And I’ve got a little cheat sheet here. I made myself a little list, ’cause I don’t want to miss any, but in reality, it’s impossible to get them all, right, but here’s some of the more common factors that you need to think of, or at least need to consider, whenever you’re trying to decide when to take social security. So let’s see, life expectancy. That’s gonna be number one. What’s your overall health? how long are you gonna live? Now, how about this Zach, here’s a good question for you. Do you think most people, do you think that they, when they think about their life expectancy, do you think that they target higher than they probably should? Like, they think they’re gonna live longer than they likely will? Or do you think they’re gonna live shorter than they likely will? Which way do you think they generally tend to guess?
Zach – Well, they generally tend to guess lower, based on the conversations that I’ve done.
Michael – Yeah, that’s the thing. They’re all like, “Ah, I’ll be lucky to make it to 80,” or something like that. And you know, all I can tell you is this, my dad came from a family where every male, like his dad, his uncles, all of them, they all, his grandfather, they all died at age 67 from heart attacks, all of them. And so of course, what did my dad think was gonna happen to him?
Zach – He thought he was next in line for that.
Michael – Yeah, when he hits 67, he’s gonna die from a heart attack. And sure enough, he had a minor heart attack at 67, which the doctors were convinced he pretty much talked himself into, right, because it happened to everybody else. But here’s the thing, I remember a few years ago, I called him on his 80th birthday, and I said, “Hey dad, happy birthday.” First words out of his mouth, “Man, I never thought I’d live that long.” Today he’s what, 84, and still cruising right along. So it’s very common. We tend to live longer than we think. Your earnings record is a factor. Were you a high earner? Not a high earner? What about your spouse? Was your spouse working? Was your spouse more at home? Like maybe the husband worked, and the wife stayed at home, or these days, the other way around. Maybe you both worked, so that’s a factor that could come into play. And heck, you might not even be married at all. So that might not be an issue. What about other assets that you own? I mean, think about it Zach. I mean, how many people do we talk to, they have 401ks, and IRAs, and Roth IRAs, and investment accounts or rental real estate.
Zach – That’s a big one.
Michael – Yeah, do you ever talk to anyone that has other assets?
Zach – Every day.
Michael – I mean, all the time, right. So what do those look like? When are those other assets going to generate income for you, or when are they expected to generate income? How long would that income last? What’s the tax situation on that income? All of that comes into play. What about your income needs, right? What do you even need for income? A lot of people, when you think about retirement, retirement has three stages of income. The first stage, we call them the go-go years, because I mean, think about it. You’re young, you’re healthy, you’re traveling, you’re doing stuff, but all that stuff costs money. And then what happens? You go for that way for a while, and then maybe about your mid-70s, you start hitting what we call the slow-go years, right. Where you’re saying, “Ah, kind of been there, done that. I’m still doing some things, maybe not as much.” So we go from go-go years, to slow-go years, and then you get into your 80s, and what do we hit then, Zach? What’s the last stage?
Zach – Well, is no-go the appropriate word for this?
Michael – Yeah, go-go, slow-go, no-go. Yeah, but that doesn’t sound really good. That feels a little bad, so I’m gonna call it go-go, slow-go, won’t-go. How about that?
Zach – That’s much more appropriate, yeah.
Michael – Yeah, there we go, won’t-go, but anyway, that’s when basically your life revolves around being at home and going to the doctor, right. I mean, that’s the stage you’re at, at that point. Each of these stages, your real spending goes down over time, so when you think about taking social security, should you take it earlier, get that extra income earlier, when you’re in those go-go years, recognizing that you won’t need as much later on. Or, based on your other income streams, maybe you’ve got other income streams coming in now, and postponing social security is more important. So lots of factors to think through, and it’s never the same for any two families, is it?
Zach – No, definitely not. So why don’t we talk about some specific hypothetical examples, on when to take social security?
Michael – All right, I’ve written some of these down, haven’t I? I’ve got, holy cow, I’ve got three different examples to cover today, don’t I?
Zach – We do, now keep in mind before we talk about these, these are hypothetical examples, and everybody’s situation is different. So just because some of these things apply to you, it may not be the best fit for your case. You need to talk to somebody before you make these decisions.
Michael – Yeah, it’s very true. Thank you for putting that disclaimer out there, and Zach, I’m starting to wonder if maybe you are moonlighting as a compliance expert, when you do that.
Zach – Spending too much time with Becky.
Michael – There you go. Our first example, I’ve named them Dick and Jane, and here’s a classic example where Dick is working, Jane stays at home. And this is something, or maybe Jane worked a little bit, but let’s be honest, she can collect half of Dick’s benefits, and that number will be higher than anything that she would get on her own. Here’s some rules behind spouses getting half of their, of the benefit, if you will. So, I hear this all the time. “Mike, I’ve been the one working.” Usually it’s a guy I’m talking to, and I don’t want to be sexist here, ’cause maybe it’s the other way around, but usually it’s the guy. “Yeah, I’ve worked my whole life. My wife has stayed at home with the kids, and I know she’s gonna get up to half of my benefit. So we were thinking,” and then they start telling me what they were thinking about how that’s gonna all work out. So let me share some rules with you on social security with the spouse getting half of the benefit. So we’ll call Dick. Let’s say Dick gets $3,000 a month. How much is Jane gonna get? What’s half of that, Zach?
Zach – 1,500.
Michael – There you go. Well, here’s a couple of rules for you. Number one, she cannot get her benefit until Dick starts collecting on his benefit. So that’s number one. Number two, this half of spouse benefit is always calculated using something called full retirement age, right, full retirement age. So Zach, as far as the Social Security Administration is concerned, we all have one age at which we hit full retirement age. So it might be, like for me, I was born in 1964. If you look up on the table, my full retirement age is 67. That means if you’re born from 1960 or later, it’s 67. And that means as far as the IRS is concerned, I’m sorry, not the IRS, The Social Security Administration is concerned, that’s my retirement age. I don’t have any other retirement age. Now I can take social security earlier, but of course I’m going to get less. I can wait until I’m 70, I could get more. So let’s say, let’s imagine I’m Dick, and when I’m 67, at my full retirement age, I would get 3,000 a month. So if my wife’s Becky, but let’s say I’m Dick. Then you’ve got Jane. Jane can get up to half of that number, which we said was 1,500, but she’s got to wait until she reaches her full retirement age. That’s rule number two. She’s got to wait till she’s at her full retirement age to start taking that, and rule number one, I have to already be taking my benefit. So what if we were born in the same year? What if we were both the same age, but I decided I’m gonna wait until I’m age 70, ’cause I want a bigger benefit. She hits age 67, I’m not taking my benefit yet. Can she start collecting half of my benefit?
Zach – No, because he has to start taking his.
Michael – That’s right, Dick’s got to start taking, right? So no, Jane would have to wait until Dick starts taking his benefit at age 70. Now, hey, because he waited till age 70, let’s say he gets 3,800 a month or something like that. Does she now get half of that higher amount?
Zach – No, its just the full.
Michael – Full retirement age.
Zach – Full retirement age, yeah.
Michael – Everything’s based on full retirement age. No, she gets half of what Dick would have received, when he starts taking at age 67, in this example. So remember this, whenever you think about spousal benefits, everything revolves around full retirement age, and by the way, pretty much everything the Social Security Department does, is based on that full retirement age consideration. So there you go, that’s example one, and so you have to kind of play with that. Should Dick wait until age 70? If he took it at 67, they both could collect right away. By waiting, they’ve both got to wait, if they’re the same age. So these are factors you need to consider. So there you go, that’s enough with that example. What have we got coming up for example number two.
Zach – All right, so in scenario two, we’re gonna talk about somebody that’s single, how much they can take in retirement. How does their situation differ from somebody who’s married? What changes?
Michael – What happens then? Here’s the deal, when you are single, now we don’t have to worry about a spouse, do we? It’s just you. General rule of thumb when you’re single, wait as long as you can. If you can wait till age 70, that’s great. Now why? Because number one, I’m assuming that you’re gonna live past age 80, because for most people, if you live into your 80s, you’re better off to wait. That gets you more social security, but the reason I say that is this. You don’t have another spouse to depend on. You are all you got. Most single people, their savings are not as large as married couples, because there’s one person saving, versus two, one income versus potentially two. So oftentimes, the resources aren’t as great. So you need to make social security work as hard for you as possible. So general rule of thumb, wait till 70, but guess what, is that always the case Zach?
Zach – It’s not, because what if you need that money earlier?
Michael – Yeah, what if you need it earlier, right. Then you take earlier, that’s just how it goes. Wait as long as possible. That’s the general rule. Now, a lot of times people are single, because they’re either widowed or divorced. So there are benefits in the social security system, for those who are either widowed or divorced. Let’s talk about divorce for a moment, ’cause that comes up pretty frequently. If you are divorced, then you are eligible for up to half of your ex-spouse’s benefit, provided that you were married for 10 years. Now, this is one of those weird things where the ex-spouse does not have to be taking their benefit yet, right. So this is, if you’re married, in our last example, Dick and Jane, Dick had to be taking his benefit for Jane to get half, but if you are single, not the case.
Zach – So let me make sure I’m clear on this. So, if you’re divorced, and as long as you were married for 10 years, you can draw on half of your ex-spouse’s social security, even if they’re not drawing it already. Correct?
Michael – That’s correct. And this brings to mind my famous story of a couple. This was several years ago, probably 15 years ago at this point, where his second marriage, and the husband was like a big time earner. The wife, she never really worked, and anyway, she came to me and said, “Hey Mike, don’t say anything, but I’m thinking about leaving my husband and getting divorced.” And I said, “Well, how long have you guys been married? Remind me.” She goes, ‘Yeah, nine and 1/2 years.” So I told her, I said, “Well, you know, if you can hold out another six months, you’ll be married 10 years and one day, then you can collect half of his social security benefits later on.” And she’s like, “Really?” I’m like, “Yeah.” And so she’s like, “Okay, well I’ll just hang on.” And then of course, during that next six month period, they had ended up repairing their marriage. All the things that were causing problems kind of went away, and they’re still married today. And she still, she even says in front of her husband all the time, she’ll like say, “You know Mike, that that’s social security, you saved our marriage, telling me about how social security works.” It’s like the big joke these days. But there you go, a good story about how this 10-year rule saved a marriage. So there you go. So that’s how single people work. It’s a little simpler with single people, because you don’t have to factor in spousal benefits. So, there you go.
Zach – Gotcha, all right, so we have one more example here. We have John and Nancy. Now this one’s a little bit different, because they are married as well. They both worked, correct?
Michael – Yes, yeah, and in this example, we’re talking about a couple where they did both work, but here’s the key factor on this one. John has health issues. He already has had heart issues, he got diabetes. This is a legitimate example, where he is likely not going to live until 80. He’s not gonna have a long life expectancy.
Zach – Right, so Nancy is more than likely going to live longer in this scenario.
Michael – And not just a little bit longer, because Nancy is super healthy. She exercises all the time, eats right. She is the picture of, she’s gonna live to her 90s. She has grandmothers and aunts that have lived to mid- to late-90s. She even had a grandmother lived to 100. So, almost certainly gonna live long, long time.
Zach – She’s got the health ducks in a row.
Michael – Yeah, like opposite, like the opposite. And in this example, John, while they both worked, John made a lot more money. Like he’s maxing out social security. Whereas Jane, she worked not, I’m sorry, Nancy, rather. Nancy was working, but a mid-level earner, maybe, right. And when I met them, John was thinking, he just was assuming, “Look, I’m not gonna live a long time. Therefore, I should take social security early, ’cause that’s how I’m gonna get the best payoff.” And I said to him, I said, “John, wait a minute. Let’s let’s think about this a little bit. You’re the higher earner, and we know that in this example, Nancy’s likely gonna live longer than you. When you die, she gets to keep the bigger check. Do you think, shouldn’t we do what we can to maximize that check for her?” He’s like, “Well yeah, that makes sense. Well, how do you do that?” “Well, in this case, John, I want you to wait till age 70. I want you to wait all the way to age 70, and here’s the deal. This is not the best decision for you. I guarantee this is not how you are going to maximize your social security benefits, but it is definitely the way we maximize social security for you and Nancy as a couple, because Nancy’s gonna collect that much higher amount, for what we would expect to be many, many years, many years.” And know, if you thought about it, John was at the max, top end of the category, by waiting until 70, he’s getting like 3,900 a month, almost four grand a month. That’s almost 48,000 a year, and after he’s gone, if they’d done it the way he was thinking that they should have done it, she would have only gotten about 2,500 a year.
Zach – Wow, almost slashed in half.
Michael – That’s $18,000 a year difference, and over, you do the math. She’s expected to live like 20 years past him, right. 18,000 a year for 20 years, that’s like $360,000 more money in her pocket by doing it this way. So yes, it cost them in the short run, huge benefit long-term. So when you have a situation where one spouse, especially if it’s the higher earner spouse, is likely to pass on much sooner than the lower earner spouse, delaying benefits can often make a lot of sense.
Zach – Right.
Michael – Right. So there you go.
Zach – So it seems pretty clear from the examples that we’ve talked about today, Mike, that a lot of factors come into play making these decisions.
Michael – Oh yeah, no question. Everybody’s, every, everybody’s different. There is no two families that are exactly the same. I’ve been doing this for 25 years. I don’t think I found one in the, I visited, as you can imagine, thousands of families, and I’ve yet to come across any two that are identical. What do they say, every snowflake is unique? Every family’s unique. This is why I always tell people, Zach, what do I say every time? You’re all different. It’s always a good idea, if you’re just having questions on this, hey, let’s pick up the phone. Let’s have a conversation. It’s free to talk. We’re always happy to see if we can help you think through these issues, so that you can make that smart decision for your financial future.
Zach – Absolutely, and keep in mind as well. These decisions don’t just revolve around social security. I mean, these decisions factor on your previous income, your tax situation. There’s more factors that play into just taking social security. There’s a lot that plays into that.
Michael – Yeah, everybody’s different. So if you’re a client, you know we already talk about this with you, but for those of you who are watching or listening in, who are not working with us, hey, just give us a shout. Our phone number is 512-265-5000, we’d just love to have a chance to visit with you. And guess what, it’s free to talk to us. There’s no obligation, and you know, I’m not sitting here. If you talk to me about your social security, that doesn’t mean that, oh my goodness, this is somebody that has to work with us, because you’re talking to us. Look, let’s just get you good information, and you know what I’ve learned? For every 10 families I talk to, some of them, I’m giving them great information, and we part as friends. We never talk again. Some of them, hey, we end up working with them long-term, and it works out. So, you know what? No harm, let’s have a conversation. Let’s find out what would make sense for you, and again, the number’s just 512-265-5000, easy number to remember. Just give us a shout. Let’s have a conversation.
Zach – Yep, we’d love to talk with you. Mike, any last thoughts before we sign off?
Michael – Just the same thing I say every week, Zach, I’m a big believer that your retirement should be the best time of your life. I believe you deserve to enjoy the retirement of your dreams. Now our goal is to help you make those smart financial planning decisions, so that that your finances, so that your money can support that dream retirement. So that’s it. I hope y’all enjoy the rest of your weekend. That’s all for me, Zach. Anything else from you?
Zach – Nope, I agree with you, Mike. We’ll see everyone next week.
Michael – Take care.
Zach – Bye-bye.