Timing Is Key When it Comes to Social Security

The uptick in longevity and the resulting possibility of a longer retirement will create added financial pressures for many workers, according to Northwestern Mutual. 

For many Americans, Social Security is a key component of retirement funding. Knowing how to navigate its intricacies, especially changes under the Bipartisan Budget Act of 2015 taking effect on May 1, 2016, is essential to maximizing the benefit and building a sound financial strategy for retirement.

This is why Northwestern Mutual has issued a white paper, “Social Security Simplified: Select the right options to help maximize your income.” The points it lays out can be helpful for advisers who wish to work with investors on Social Security strategies.

In its 2015 Planning and Progress Study, Northwestern Mutual learned that the majority of Americans plan to begin taking Social Security between the ages of 65 and 67, “but that may not necessarily be the best path depending on other financial and life circumstances,” says Rebekah Barsch, vice president of planning at Northwestern Mutual. “It should be a priority to ensure that your retirement plan provides sufficient income for as long as necessary, particularly considering rising costs and ongoing economic uncertainty.”

As a first step, Barsch recommends that people become familiar with various Social Security benefits types, distribution schedules and benefit calculators. One example is determining one’s cross-over age—the age at which the total amount of benefits a worker would receive having started distributions after full retirement age (FRA) exceeds the total benefits he or she would receive if they started taking benefits before FRA.

NEXT: Five key factors

According to Barsch, there are five key factors that an individual should consider with regards to when to start taking Social Security.

Savings and investments—If you have enough money saved, it may make sense to use those savings before collecting Social Security at or after FRA. Conversely, if an individual has meager savings, taking Social Security early in order not to incur debt may be a better path.

Health and longevity—For those in good health, it may make sense to continue working and delay taking Social Security to maximize the benefits later. However, if you’re in poor health or think you’ll have a shorter life expectancy, delaying benefits may not make sense.

Taxable income—Social Security benefits are taxed in accordance with a couple’s combined income. However, even at the highest taxable percentage, they compare favorably with distributions from individual retirement accounts (IRAs), 401(k)s or other retirement sources. By delaying receipt of Social Security benefits to FRA or even age 70, one may get a higher level of benefits.

Current and future earnings—The earnings rule sets guidelines around how much income you can earn before your FRA without risking a benefits reduction.

Family status—Social Security has a number of specific rules that apply to current, surviving and divorced spouses. A knowledgeable adviser can guide you on this.

As Northwestern Mutual says in its white paper, “Timing your Social Security benefits may be the most important retirement decision you can make.”

The report notes that individuals who begin taking benefits at FRA receive 100% of their Social Security benefits. Those who delay until after FRA earn 8% in delayed retirement credits for each year they choose to delay, up until age 70. Thus, some retirees can increase their benefits by as much as 32%. Conversely, if an individual retires at age 62, the earliest possible year, their benefits are reduced by 25%.

The “Social Security Simplified” report can be downloaded here.