Many investors rely on Social Security benefits to supplement their retirement income. You have been paying into the Social Security fund your entire working life. These benefits are owed to you based on the number of years you’ve worked and how much you earned. Your primary benefit is the amount you would receive at your full retirement age, which ranges from 66 to 67, depending on your birth year. You can take benefits as early as age 62, but this permanently reduces your benefit by up to 30%. You can also delay benefits until age 70, which permanently increases your benefit by by 8% for every year you delay beyond full retirement age.
On the surface, it’s easy to think, “I’ll wait and boost my benefit so I can get the absolute most from the government.” If you knew when you were going to die, you could easily decide if you wanted to receive less for more years or more for fewer years. Many investors try to estimate their breakeven point, factoring in their health and life expectancy.
At Henssler Financial, we recommend considering when you need the money. If you are following our Ten Year Rule, you should have set aside 10 years of spending needs in fixed-income investments to protect principal. Investments like U.S. Treasury bonds and FDIC-insured CDs are high-quality investments chosen for their safety rather than their return. We recommend investing money not needed in the next 10 years in growth investments that are more likely to provide a higher return than bonds over a long enough time horizon.
When you’re working, your 10-year needs are likely for life events, like paying for your children’s college or a wedding. As you approach retirement, you likely shift more into fixed income to maintain your lifestyle once you’re no longer earning income.
However, if you are not supplementing your retirement account withdrawals with your Social Security benefits, then to cover your spending needs, a larger portion of your portfolio must be in conservative investments, which can mean missing out on the growth traditionally found in equities. If you choose to defer Social Security solely because you want to receive a higher benefit, you could end up drawing down your retirement portfolio faster than if you used a reduced Social Security benefit to supplement your need for income in those years. This drawdown is further compounded if the portfolio withdrawals are coming from tax-deferred assets like your 401(k) or traditional IRA since the distributions will be taxable income. For every dollar you need to withdraw for spending, you will need to take an additional amount to cover the taxes due on the distribution.
The longer you can keep your assets in growth investments, the better off you’re likely to be because the long-term average return on stocks is around 10% a year. Depending on the size of your investment portfolio, there is a high likelihood that you could make up the difference between a reduced Social Security benefit and a higher delayed benefit with portfolio growth by not drawing down your assets as quickly.
Of course, other factors like sources of retirement income, the size and allocation of your retirement portfolio, the tax location of your portfolio, your current and future expected tax situation, life expectancy, marital status, and coordination with spousal benefits can also influence your decision on when to begin taking your Social Security benefits.
If you have questions on how to incorporate Social Security benefits into your financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the April 6, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
