When You’re Ready, Come and Get It
We tend to get a lot of questions regarding Social Security. Some older clients are interested in claiming strategies to maximize their benefits, while younger clients ask whether Social Security will even be around when they reach full retirement age. What follows is a quick review of Social Security’s history, as well as some perspective on this very important benefit.
In 1935, Franklin D. Roosevelt signed into law the Social Security Act, following results from a study on economic security that suggested a more industrialized and growing nation required a government response to support communities in need. The idea was to help the elderly, unemployed, and disadvantaged Americans by having all workers pay into a financial safety net while they were employed. My, how Americans have changed their view on this “entitlement.”
While Social Security is still a safety net for many workers, in our practice, the benefits received are generally a fraction of what clients earn over time. And people tend to think that their long-term contribution to Social Security is larger than it actually is, and somehow entitles them to an outsized benefit over time. Consider this: If you had contributed the maximum amount to Social Security for the past 35 years, your total contribution would be just over $200,000. That’s not an insignificant amount of money. However, if you were to take your benefit at full retirement age, again assuming you had the highest qualifying salary, your annual benefit would be just over $43,000. That’s about a five year break-even on your contributions.
So, how should you consider Social Security as part of your longer term retirement plan? My favorite suggestion to clients is that they evaluate whether they need the cash flow that social security benefits might provide. If taking the benefits at normal (full) retirement age allows you to defer taking money out of retirement accounts until you have to, then that seems like a “win” to me.
You could argue that deferring Social Security until age 70 allows for an eight percent annual increase each year past your full retirement age, and that is an attractive guaranteed rate of return. But, remember, it is eight percent of a relatively small number. The highest potential social security benefit in 2023 is $54,660 and requires you to:
- Have a full 35-year work history before claiming.
- Pay the maximum amount in payroll taxes during those 35 work years.
- Take benefits at age 70.
While the accumulation of benefits over time may be relatively significant, keep in mind that it is an accumulation over a period of 20-30 years, not some big, immediate windfall.
When you consider Social Security claiming strategies, the most logical approach is the one that meets your needs best. If you need some help determining what that solution is for you, don’t hesitate to reach out and have us run some numbers for you.
Meet Kristan L. Anderson, CEBS®, CFP®»
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