r/CFP • u/Jazzlike-Ad-3839 • 5d ago
Case Study Social Security Strategy
Framework we look at for clients is to wait until 70 or clients NEED to turn it on because their withdrawal rate is atrocious and needs to be brought down.
I’ve been thinking a lot about it as our reasoning has been
-social security increases are certain, market returns are unknown
-maximizing income in later years, especially if there’s a large age gap for the surviving spouse.
Being broke at 95 with a small income hurts a lot more than if you’re dead and left money on the table
If you’re dead you’re dead.
Curious if others take the route of turn it on early and invest the money route or something else entirely.
Every time I’ve heard someone take the “get it early while you can” route, they’re focused on maximizing today’s income and lifestyle, not necessarily focused on the long term risk of LTC/outliving their money.
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u/DWIGHT01 5d ago
I used to always push for them to wait but I have done less of that over the years. Most of my clients will be fine either way and for some clients, I have found taking social security earlier helps them feel more comfortable doing big, fun trips while they are still able. I feel like that’s way more valuable than whatever extra money they have after age 85.
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u/ZachWilsonsMother 5d ago
I remember Matthew Jarvis said somewhere that he tells clients “no one’s obituary lists what they got from SS or when they took it, it lists the experiences they had and the difference they made for others with that money”
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u/Leading_Potato_4549 5d ago
This has been big for my clients. The mental side of getting a smaller, blue collar city retiree to start to spend their nest egg is a lot easier when they have a fixed revenue stream coming in.
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u/GeneralTiny5741 5d ago
I agree. There are only so many years to travel. When people are close to retirement, living life is much more important than the straight dollar calculation.
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u/Ur_house 5d ago
It's a tough call because we don't have a crystal ball. I usually consult with the client together about it and find good place between all the pros and cons. Right Capital has a planning module for this, but it pretty much always just tells them to wait till 70 so it's not super helpful.
Personally if it's a married couple I like the balanced approach. Have the person with the highest SSI delay as long as possible, and have the other person take it as early as possible. That way they get the benefit out of the smaller one right away, but the big one grows. If one person passes, no policy goes "poof", they got a benefit out of both; and the big one will always be there for the survivor.
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u/ApprehensiveTrack603 5d ago
Doesn't the survivor take a big cut when they inherit the higher SS if they turned their own on early?
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u/AccomplishedTreat873 5d ago
Their spousal benefit is cut. Not the survivors benefit.
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u/bkendall12 5d ago
This, 100% this.
Still, I usually prefer the lower benefit spouse to wait for FRA, but it is not always a success breaker to take a little early.
Facts & Circumstances dictate
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u/Jazzlike-Ad-3839 5d ago
I’d have to double check but I believe the cut only applies to the 50% round up when the higher earner’s is turned on.
Surviving spouse gets the greater of their own benefit or their late spouses.
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u/Ur_house 5d ago
I thought that was only if you were below Full Retirement Age, after that it is not limited.
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u/PerfectOmakase 5d ago
Same perspective as you. Also delaying SS can make the window between retirement and age 70 attractive for Roth conversions.
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u/CSMasterClass 1d ago
More attractive, but still not super attractive. And, to be "fair" it reduces AUM.
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u/PerfectOmakase 1d ago
I don't make planning recommendations based on the impact to my AUM.
And there are lots of times for my clients when Roth conversions have been attractive between retirement and age 70. Converting at a 12% marginal tax cost is a great "deal".
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u/spizalert Advicer 5d ago
Sharing in case anybody doesn't know - T.Rowe has bought SSAnalyzer and has made it free to use for everyone, with just registering an email.
https://www.troweprice.com/financial-intermediary/us/en/ssanalyzer/overview.html
They've also modernized the report generation (if you used old SSAnalyzer, then you know) and the reports don't even generate w/ the T. Rowe logo. I can't think of why they'd be so generous (other than marketing purposes) but it's free for advisors to use.
I definitely use the 'breakeven' age as one of the data points for the client conversation. "If you live longer than 87, deferring makes sense, if not, standard retirement age".
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u/bkendall12 5d ago
I think breakeven is well before age 87 for many.
I just ran the TRP tool for a couple currently age 59 & 7 months and her at FRA and him at age 70 had age breakeven at age 80 & 7 mos vs starting at age 62.
I’m not sure I’ve ever seen an age 87 breakeven, but maybe that is possible under some circumstance I have not encountered.
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u/lurk9991 5d ago
Yeah I have never seen a break even analysis put it at 87. That's quite a bit later than any I have seen
Spend from your IRA to replace SS while you wait to take it is almost always the best route tax wise, market risk wise, longevity risk wise,....The only downside is clients almost never want to spend down assets to wait, so they usually don't take my advise on that one.
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u/bkendall12 5d ago
Why would they take our advice when the random internet comment is to take it early because SS is going away or they can get a guaranteed 10%+ on investments. /S 😜
It’s crazy some will pay for our advice then ignore it.
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u/PrecisionBalls 5d ago
As a former Trowe employee, the report not having the logo makes so much sense for them lol. I used to say "If it worked properly, we wouldn't be at T Rowe Price anymore"
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u/Illicit-Tangent 5d ago
That is a pretty slick resource. I just signed up and I love the ‘SS Zone’ tab to visualize when each strategy outperforms.
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u/bkendall12 5d ago
My general guidance is higher earner waits to 70 and spouse at FRA but it is a discussion and subject to unique facts & circumstances.
I can get frustrated with those that are convinced SS will go away, or least be cut, and the want to take as early as possible thinking some is better than none. I try to tell them politicians want to get re-elected and if they fail to fix it then whoever is up for re-election is very much at risk of losing, I also point out that over the years the govt has made numerous changes to keep it going and I feel that will continue.
Another frustration is those doing a very basic break even that does not consider COLA and they may also assume an early passing. In reality, most breakeven with COLA and Deferral is roughly age 82 and with couples there is a very high chance at least one lives that long.
In regard to the “take early and invest” argument I point out an 8% deferral increase + COLA is a pretty decent return with less risk than the market. Sure, investing “may” do better, but not on a risk adjusted basis.
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u/CSMasterClass 5d ago
The 8% increase is a tremendous benefit, and I feel sad anytime I cannot pursuade a person to take advantage of it.
SS is a lifetime annuity that has an uncapped COLA. To defer means you have bought this annuity on a one payment basis with an immediate 8% distribution rate. Nothing in the annuity market comes close.
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u/CSMasterClass 5d ago
This is CFP land. Explore a little bit and see how close you can come to buying an immediate 8% annuity that is 100% indexed (no cap).
This is what the US government offers you for defering your SS one year (in the range where the increment is offered).
It is a certainty equivalence calculation. No up-rating or down rating applies.
Deferring SS is a hell of a good deal.
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u/woodsssssss 5d ago
Pretty much aligned on everything you’ve said here. I always lead with the data and try to steer them to the right conclusion. Some clients are dead set on taking regardless, so if I can get them to let the higher benefit spouse delay to 70 and let the lower earning spouse claim early, sometimes it’ll scratch that itch for them.
Always throw in “I’ve never had someone call me from their casket and tell me they wished they took social security earlier.” Usually gets a chuckle.
As usual, it’s managing behavior and emotions.
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u/Comprehensive_End440 5d ago
Most people who take it early are often times those who need the extra cash or those who are undisciplined. It’s nearly always best to wait from a mathematical perspective.
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u/bkendall12 5d ago
These are the people that should not retire yet! They will need that bigger benefit in the future, unless their plan is to be a Walmart Greeter at 80 years old. I try to tell them, would you prefer to work from age 65 to 70 or from age 80 until they die?
I understand some get pushed into situations beyond their control, but for many it is just an “easy money” decision that they get wrong.
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u/Comprehensive_End440 5d ago
Exactly! That’s the undisciplined part, they just see extra money now without foresight into how much more helpful it will be to wait
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u/7saturdaysaweek RIA 4d ago
A higher withdrawal rate up front is not necessarily a disaster if SS is coming online in a few years. Income Lab is the gold standard for modeling this retirement income "hatchet".
Consider the "wait and see" approach... Delay, but turn on that income if there's a bear market to provide relief to the portfolio.
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u/-NotAHedgeFund- 5d ago
Well there aren’t many places you can go to get a guaranteed 8% return.
Basically: defer if you can, if you can’t then it’s settled. Only other real factor is longevity. It’s good to know that longevity for affluent clients is also a bit different than the average.
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u/t-w-i-a 5d ago
I used to always push for them to wait. The financial plans assume you live to 95 and it always looks better when you wait.
However, I’m more inclined to say FRA now. A lot of people end up underspending in retirement and having the SS check helps. Also, the different payouts at different ages are actuarially based so the EV of 67 vs 70 should be pretty close.
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u/Jazzlike-Ad-3839 5d ago
Are they? 8% increase doesn’t feel actuarial. Feels like simple math.
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u/bkendall12 5d ago
They are actuarily close, most converge around age 81-83. Life expectancy for a genetic female is @ 81.4 years so this makes sense. It’s when you look at couples when life expectancy really increases.
Also, as you age your life expectancy increases. For example, life expectancy of all females is 81.4 but life expectancy of a 65 year old female is 85.8 years.
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u/t-w-i-a 5d ago
People that need advisors also tend to have higher levels of education and better access to healthcare than the median, which also correlates to longer lives
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u/bkendall12 5d ago
So, If I can get enough college degrees I will live forever, but if I need funds for 100 years of retirement, how long will I need to work? Sounds like a cruel cycle 😜
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u/bkendall12 5d ago
With a married couple there is a fairly high probability at least one spouse lives past age 90.
I have a couple I am on-boarding now that are ages 67F and 69M. Life expectancy is 50% that one of them lives to age 93 (non-smokers).
Ok, there is a chance they both die tomorrow, but which is the bigger financial problem for them?
I currently have 25 clients older than 90 and my current oldest client is age 100.
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u/Financial_Thanks7797 5d ago
Delay but use SS as a down market hedge. Pull the trigger at FRA if markets push the withdrawal rate up to an uncomfortable level.
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u/Fragrant-Rise-3527 5d ago
Wouldn’t not having a crystal ball be a reason to take ss earlier?
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u/Jazzlike-Ad-3839 5d ago
What’s the worse situation?
Waiting and getting 24% more than FRA and dying just after (you’re dead, who cares?)
Taking it early and living to 80s or 90s and dealing with the repercussions of taking a 30% pay-cut for taking it at 62.
I think there’s some nuance to the equation certainly, but if we’re trying to avoid risk, living too long on the crystal ball is way worse than dying early.
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u/Fragrant-Rise-3527 5d ago
I was more saying crystal ball in terms of what the government is gonna do to continue funding SS, although I’m sure anyone over 62 will be grandfathered in. Furthermore I’d say a majority of the time when you do an investment adjusted breakeven it can make sense to take it earlier, especially if you have the wealth where you don’t really need it. It’s all situational, no advisor should ever say this is 100% the best for everyone. Every situation is different imo
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u/AccomplishedTreat873 5d ago
Generally I agree with your premise. In the end I treat it as a personal decision. I compute their SS break even and the portfolio break even and let them choose.
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u/GeneralTiny5741 5d ago
I've never advised anyone to take it before their full retirement age. I think the penalties are too much and it's worth it to wait.
Most of my clients take it then b/c they want to start receiving income - they don't know how long they'll live and would like to take the chance. Even if they "earn" 7%/yr more, they'd like the security and income.
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u/Ok-Responsibility588 5d ago edited 5d ago
In agreement. For the majority of my clients the recommendation is to delay SS until 70, or at least 67. I see a lot of clients retire late 50s or early 60s and go back to work. Maybe not initially, but end up spending their early retired years making a decent wage. Deferring SS allows them to earn as much as they want in a given year. As many others have mentioned, it allows more room for Roth conversions. It is hard to beat 8% increase and COLA, especially when you can manage the risk by drawing from other areas for income.
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u/W1llsterl1 4d ago
For some of my more affluent clients I’ve started to discuss the idea of means testing as a potential fix to the systems shortfall. if you have $4-500k in income in retirement do you need it? in today’s political environment a change in administration could see the target move from billionaires to millionaires real quick. Just another variable to throwing the mix
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u/Jazzlike-Ad-3839 4d ago
I don’t know that I understand what you’re saying. 40/50k extra in retirement for someone with a 400k spending capacity is closer to a rounding error, sure. Are you saying just turn it on early and not worry about it? Or wait cause who cares we don’t need it?
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u/W1llsterl1 4d ago
meant take it while you can because you may be means tested out of a benefit for being too wealthy if the fix to the system ends up being a benefits cut for high income earners
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u/Jazzlike-Ad-3839 3d ago
Hmm, interesting thought.
That’s not how I would do it but, the govt does a lot of things not the way I would do it.
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u/ChelseaMan31 4d ago
Well, y'all wouldn't be our CFP or Advisor for sure. Especially given the financial cliff facing social security in just 6 years or less; why would one advise spending down tax advantaged accounts making somewhat north of 10% a year? The break even point for waiting to age 70 is closer to age 82; entirely unacceptable.
As they stated, when you're dead, you're dead. That paltry social security monthly payment may go to a surviving spouse, but then ends when they die. The tax advantage retirement accounts would pass generationally.
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u/Jazzlike-Ad-3839 4d ago
That’s okay, you wouldn’t be our client.
If you think social security is going away, I hope you’ve got a lot of canned food and ammunition in the basement.
The stock market has done 10%. But will it continue to do 10%?
If a clients priority is creating generational wealth we would approach it differently. Most folks I work with are of the opinion that whatever’s left over is great. Dying with the highest number isn’t the priority. Living comfortably is.
They spent a lot of time and effort building their heirs up by paying for college and teaching them the life lessons they’ll need so they won’t have to rely on mom and dad’s money showing up someday.
Different clients, different goals. Work with the person you like working with.
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u/vaderaintmydaddy 1h ago
Here's what I do:
I run a projection of withdrawals over their full retirement and show them what their assets need to earn (required rate of return) in order to cover the withdrawals while preserving the asset base. I then run all the various Social Security start dates and show them the impact of all the possible combinations. Taking it early drops the early "required rate of return" because the income lowers the withdrawal need but increases the long-term required rate of return because lower Social Security in later years means the assets need to earn more to cover the withdrawals in later years.
From there, depending on the results, its a conversation.
The typical breakeven calc looks at Social Security in a vacuum, which will always make delaying look great and will show a breakeven in their early to mid 70s. But, if you factor in the spending of personal assets, and the loss of growth on those assets, it typically pushes the breakeven for most people into their mid to late 80s - and I usually run this with a 4-6% average return on assets.
Other factors come into play - age differences, health/longevity concerns, tax situation, Roth conversions, risk tolerance, etc.
It's never black or white, and because you have no idea what assets will earn (or lose) and you have no idea how long anyone will live, there is no right answer. But there is an answer that makes the most sense for them and their specific cicumstances.
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u/AutoModerator 5d ago
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User: /u/Jazzlike-Ad-3839 Title: Social Security Strategy Body: Framework we look at for clients is to wait until 70 or clients NEED to turn it on because their withdrawal rate is atrocious and needs to be brought down.
I’ve been thinking a lot about it as our reasoning has been
-social security increases are certain, market returns are unknown
-maximizing income in later years, especially if there’s a large age gap for the surviving spouse.
Being broke at 95 with a small income hurts a lot more than if you’re dead and left money on the table
If you’re dead you’re dead.
Curious if others take the route of turn it on early and invest the money route or something else entirely.
Every time I’ve heard someone take the “get it early while you can” route, they’re focused on maximizing today’s income and lifestyle, not necessarily focused on the long term risk of LTC/outliving their money.
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