By R. Todd Holden, Wealth Advisor   

Numerous articles on Social Security appear monthly. They seem to have either a “perfect age to claim benefits” strategy or some sort of political ideology. I will try to provide some basic framework for you to consider and/or share with your family and friends.

There is No Perfect Age to Claim Benefits

In seminars, I joke about this often saying, “If you know exactly when you’re going to die, I’ll tell you exactly when to claim Social Security.” None of us know when we’re going to die, so there is not a perfect age to claim benefits.

Generally, if you expect to live a longer life, you’re better off claiming benefits at a later age. If you expect to live a shorter life, drawing earlier may make sense.

We Misunderstand Life Expectancy

We hear life expectancy numbers and latch onto them, often incorrectly. If we ask ChatGPT, “What is the life expectancy for both females and males in the United States?,” we may get this type an answer: Females have a higher life expectancy of 81.4 years, while males have an average life expectancy of 76.5 years.

If we change the ChatGPT question to “What is the life expectancy of a 65-year-old male or female in the United States?,” we may get a different answer: 85.8 years for women and 83.4 years for men. Why the difference? Because the 65-year-olds have already outlived people who died younger. The 55-year-old man who had a heart attack and the 42-year-old woman who died of cancer are built into the lower number. Just by living longer, we are expected to live longer.

Don’t latch on to the lower numbers. They are not accurate.

Social Security Income Has Tax Benefits

Not all income is created equal, and Social Security is more tax friendly than other sources of income. Some people, including both my grandmothers, never paid tax on their Social Security. The only income they had was Social Security, and it was tax free to them. Most people reading this article will pay tax on their Social Security, but currently, the worst case scenario is that 85% of Social Security is subject to tax and 15% of it is tax free.

For a couple who wants $150,000/year in retirement income, having $100,000 from Social Security and $50,000 from other sources results in less income tax than having $75,000 from Social Security and $75,000 from other sources. By other sources, I mean TSP, 401(k), IRA, etc.

Plus, there are some states that do not tax Social Security, but tax other retirement income.

There is a Long Way Between 100% and Zero

We often hear “Social Security is going bankrupt.” Not true. Social Security is running out of reserves, but those working will still be paying Social Security tax (FICA). When the reserves run out, Social Security is expected to pay 77% of the promised benefit.*

This is frustrating, but it is not zero.

Consider Social Security as Part of a Large Retirement Income Plan & Prepare for Cuts

Social Security does not live in a vacuum. It is part of an overall retirement income plan. Financially successful retirees look at it that way. They have a well-constructed retirement plan that combines pensions/federal annuities, retirement accounts and Social Security to generate the income they need in a low-stress manner.

When someone can have both the income they need to enjoy life and sleep well at night with little stress, they will have a successful retirement life.

*Social Security Status of the Social Security and Medicare Programs: https://www.ssa.gov/oact/trsum/

The information in this article is for informational purposes only and is not intended to address one’s specific individualized situation. For personalized advice, we recommend consulting with a qualified financial and/or tax advisor.

Northwest Financial Advisors, LLC and LPL Financial are not affiliated with or endorsed by the U.S. Social Security Administration or any government agency and do not specialize in Social Security issues. The Social Security Administration provides free Social Security forms, publications and assistance. For questions about your Social Security benefits, please contact your local Social Security Office.