You have probably seen the word “FICA” on your paychecks — and like many people, you may disregard it. FICA, or the Federal Insurance Contributions Act, actually refers to a tax you pay toward Medicare and Social Security. While it’s important to understand the impact both programs will have on your future, let’s focus on the latter: Social Security.
One of the most common questions I hear from clients is, “When should I start my Social Security benefits?” It’s important to build a framework for your retirement and understand where Social Security fits into your overall financial picture.
Here are a few aspects to consider as you start to navigate the process.
Evaluate Your Cash Flow
Many of my clients have cited cash flow as a big influence in deciding when to start Social Security benefits. For those who enjoyed working and had income well into their late 60s, it was an easy decision to delay benefits until age 70; however, it’s not the optimal solution for everyone.
As you start to assess which option is best for your situation, the first thing you should do is create a living expense worksheet — your current expenses versus the expenses you will have in retirement. Some expenses may decrease, like clothes for work and car expenses, while other expenses might increase, such as travel expenses and medical costs. Keeping a living expense worksheet is one of the most important exercises you can do to understand the backbone of your financial picture. This tool can also help you set appropriate expectations and avoid big surprises. With this exercise, you might discover that your expenses are higher at the beginning of your retirement and lower in the later stages of retirement; this might compel you to start Social Security early.
Naturally, the second step is to track your sources of income in retirement. This may include rental income, a pension benefit, an annuity benefit or income from your investment accounts. If you find that your expenses are greater than your income sources, you will have another question to consider: should you start Social Security early to supplement your living expenses or withdraw from your savings and/or investment accounts instead?
To answer this question, you should take time to review your family’s history: do you have longevity in your family? What is your family’s health record? If your parents, aunts and uncles lived well into their 90s, and you have sufficient income sources in retirement, you may consider delaying your benefits as long as possible.
Conduct a Breakeven Analysis
In some cases, these cash flow indicators can be unclear — maybe your income in retirement is insufficient, or one of your parents passed away early, while the other lived well into their 90s. A “breakeven analysis” is an important exercise that can help you understand the age at which your cumulative benefit will be greater if you choose to delay Social Security.
For example, if the analysis shows that your breakeven age is 85, and you expect to live past that, it is better to delay your benefits until later in retirement. Additionally, if you are in a low tax bracket in retirement, you should consider supplementing your living expenses with your taxable or non-taxable investments, which can potentially result in your benefits increasing up to eight percent annually from your full retirement age (FRA) to age 70.1
Everyone’s situation is different. Many of the clients that I spoke with — those who started their benefits at their FRA, and those who delayed until age 70 — were happy with their decisions, because they went through the exercises above and understood the trade-offs. If you still have concerns, your financial advisor can help you weigh the factors that are most influential to the decision-making process: your cash flow, your family’s lifespan and your breakeven analysis.
Double-Check Your Information
Many people depend on their circle of friends for Social Security information. You may hear about one experience from one friend and a completely different experience from another friend, prompting you to wonder which information is reliable.
Here are a few ways to double-check the information you receive:
1. Review the Social Security Administration (SSA)’s website. The SSA provides a variety of resources that can help answer important questions you may have about Social Security, including:
2. Schedule an appointment with your local Social Security office. A representative can pull all of your benefit information when you visit the office in person. Check with the representative to find out which items you should bring to the appointment; here is a general list:
— Social Security card
— A check for auto-deposit
— Photo identification
— Original marriage license, if applicable
3. Work with a financial advisor to review your Social Security strategy, breakeven analysis, cash flow and other financial planning items (such as your health insurance coverage and tax strategy) as you head toward retirement.
Navigating the confusing maze of Social Security rules and regulations is far from easy — and you don’t have to travel it alone. By enlisting the help of an experienced financial advisor and completing the exercises listed above, you can identify the strategy that works best for you and plan for the retirement you’ve always wanted.
Do you want to learn more about how you can boost your Social Security benefits?