People often rely on rules of thumb as they decide when to take Social Security, and that's understandable because it's complicated. But the question is: Is that the right thing for you? For instance, with a married couple, you might hear somebody say without knowing anything about you that the lower earner should claim as soon as possible, that's age 62, while the higher earner should wait until age 70 or as long as possible, and there is a rationale behind that, but it's not always the right thing to do. For example, if you want to protect against certain risks like longevity, it may be worth making some adjustments to that strategy, so that's what we'll cover in the next couple of minutes here, we'll review the reasoning behind that typical rule of thumb, we'll also go over when it's not the perfect choice for everybody, and then we will go through some examples, and to do that, we're going to use Open Social Security, which is a free online tool that you can use, you don't have to sign up or anything, and you can put your own numbers into it, so check the description below for a link to that, starting with the reasons for claiming early, one is that you just get money coming into the household sooner than later when one person claims early, and that helps with a number of things. It can bring in cash flow to help you retire, it can also help you reduce the amount that you need to pull out of your retirement savings, and that can preserve your assets, whether you use those later or you pass those assets on to somebody else, it can sometimes work out well that way, a dollar today is worth more than a dollar later... That's the time value of money. Now, keep in mind, with Social Security, you do get more dollars later if you delay, but having that money coming in now, some cash flow can really be helpful, so I don't want to pass judgment on anybody who claims early or anybody who delays, this is just the rationale behind why you might use this strategy, another thing that happens with the strategies, you can maximize the survivor benefits, so when one person dies, the surviving spouse would typically take on the payment that's the bigger of the two. So if that's their own payment, they continue on with their own payment, presumably they delayed until age 70, so it's as big as possible, but if the higher earning spouse dies first, then the lower earning spouse can typically step into the bigger benefit that the higher earning spouse was either getting or entitled to receive, so again, by delaying benefits, that higher earning spouse keeps getting an increase of about 8% per year after their full retirement age, that helps to maximize what that eventual payment will be for whoever lives the longest. So under this strategy, one of the spouses claims early and gets that reduced benefit, it's less than they could get at their full retirement age, while the other person maximizes their benefit by delaying and whoever lives the longest will end up with that bigger payment. That's important because as one spouse dies, that surviving spouse can fall into what's called a widow's tax trap, so that person typically has the same amount of assets for retirement, they might be spending the same amount and getting roughly the same amount of income. What does go away is one of those Social Security payments, but this person is now in a single tax filing bracket, so with less income, they're going to be bumped up into higher tax brackets, so every little bit of extra income they have at that point in life is really helpful. And another reason for looking at this strategy is it can potentially help to maximize the spousal benefit. Now, the term spousal benefit can really get confusing, so you want to be careful, and a spousal benefit can be made up of two components, so if the lower earning spouse worked during their time and contributed to Social Security, they may have their own Social Security income, that's typically the smaller benefit in this strategy, but even a spouse who didn't work can potentially get a spousal benefit off of the working spouse's record, when you have a lower earning spouse who did work and can get their own benefit, they would have a benefit that comes in two pieces: One is their own benefit, and then there may be what we'll call a spousal top off that goes on top of their own benefit, so the spousal top off is something they get based again on the higher earning spouse's record. Now, that spousal top off can be adjusted and reduced depending on when you claim, that's similar to your own benefit that gets reduced if you claim early, although they do get reduced at different rates. To maximize the spousal benefit, you want to become eligible for that benefit at full retirement age or later, so the lower earning spouse or the non working spouse, whichever the case may be, can get their biggest benefit if they wait until full retirement age or later to take that benefit, going back to this strategy of one spouse cleaning early and the lower earning spouse at 62 and then the other at 70, We can assume that in many cases, and certainly not all of them, spouses might be similar ages, so if the lower earning spouse started at 62 by the time the other is at age 70, we might assume, and that might be right or wrong, that the lower earning spouse is at least at their full retirement age, so that they can get at least as much of that spouseal top off as possible. It's important to know though, that you won't always get 50%, this is a common misconception that a spousal benefit is always going to be 50% of the working spouse's or of the higher earning spouse's benefit. And it's a lot more complicated than that. What you might want to know just as a shortcut, is that if the lower earning spouse or the non working spouse takes their benefit early before their full retirement age, they will eventually end up with a total benefit that is less than 50% of the working spouse or the higher earning spouse's full retirement age benefit, that's not exactly the point of this video, but I did want to mention it at least so that you know what's going on. By the way, I am Justin Pritchard, I help people plan for retirement and invest for the future, and in the description below, like I said, you'll get a link to the calculator we're going to be using, free online tool, as well as some general retirement planning information. I think if you're thinking about these things like Social Security, when to take it, you will have other questions as well, and those resources should be very helpful for you, and by the way, a quick reminder, it's just a short video, we're not covering everything here, it's really important that you check with an expert and with Social Security before you make any decisions. So when might it make sense to wait a little bit longer instead of taking the first person's benefit as soon as possible, when might it make sense for one or both to wait a little bit longer? Again, I've got no judgment on this, if somebody wants to claim early, there may be very good reasons for doing so, and so that's the right thing for you, but you might want to be aware of several of these situations. One of them is longevity, now, you might have some ideas about how long you'll live, but it's really hard to predict that unless you have some known health issues that actually affect you, so you can look at if you're age 65 today, what's the probability of living to a certain age... Well, let's say it's age 85 or so for women, a little more likely at 55%, men 44%, and one person out of a couple making it there, it's about 75%, age 90 might seem high to a lot of people, but one in three women are likely to make it that far. One in four men almost are likely to make it that far. So you do want to consider the possibility that you might live a longer life, and of course, this depends on a lot of things, your health, your genetics, your luck, and even things like your socio economic status and your habits can play into this, it gets awfully complicated but these are things you want to think about when you look at the statistics. Where do you fall and how likely is it that you might live a little bit longer than the norm? You might also want to consider tax strategies as you make this decision, so it could make sense to use a bridge strategy, a Social Security bridge, where you delay taking your benefits and in the meantime, you spend down assets from pre tax accounts or maybe do Roth conversions, converting pre tax money over to what will ideally be tax free money later in retirement. Some reasons you might do that are to potentially reduce the required minimum distributions or the RMDs that you have to take later in life, those can be surprisingly large and bump up your income quite a bit, that could affect how much you pay in taxes in terms of the tax rate you're in, it can also affect how much you pay for healthcare, so your Medicare premiums could depend on your income, and if you go above certain income levels, you may have to pay extra each month, but if you can get some of that pre tax money out of those accounts earlier in life, and meanwhile, you're letting those Social Security benefits grow and give yourself more income later that can potentially work well for you, and another reason is just to get some of that potential tax free money, or at least not taxable money available to you. So if you have things come up in life during retirement, maybe you want to buy a vehicle, repair a roof or something like that, then you have easy access to funds that are going to create a big tax liability for you, there may be other reasons as well for example, if you're going to take benefits at 62 and continue working, you may not get as much cash flow out of the deal as you expected due to the earnings test, so there are just a lot of big picture things you want to look at as you evaluate this decision, ultimately, Social Security can provide a lot of certainty in a pretty unique way, so it is guaranteed by the government, it's not going to run out of money, which your investments potentially could... If things don't go well, it's also inflation adjusted, that's unique, a lot of pensions are not... Annuities are not, but those Social Security payments are inflation adjusted and it's guaranteed to last for the rest of your life, which is really nice, so if you run out of other assets, you still have that Social Security income coming in. Social Security can also be a tax favored source of income, so you might pay taxes on your Social Security, but at most it would be on 85% of your benefits, so the other 15% is essentially tax free income. You might get more than 15% out tax free, so by saying You want to favor Social Security versus maybe getting that income coming in sooner, that bird in the hand. I know it's a tough trade off, but these are reasons to consider favoring Social Security, so now let's dive into the calculator, this is again, Open Social Security, there will be a link in the description below. This is from Mike Piper, it's totally free to use online, so check out his work, buy his books or something, if you want, what you do is you just enter your information, this can work for single people as well, if you're still watching this video, you enter some basic information about yourself, by the way, you can swap around the gender any way you want, it's not going to really affect the numbers that much, so women tend to live a little bit longer, but ultimately the concepts are going to be basically the same here, so we've got somebody a couple of years who are just about to turn age 62, and so they're facing that decision: Do we have somebody claim now, or both of us, or what do we do? So you got this person who has a PIA, that's the full retirement age benefit of 900 here, they have not filed yet, the spouse has a 2600 benefit, so you can... In your mind starts saying, Well, half of that is 1300, which is higher than 900. So that's going to be interesting, and we click Submit to have it tell us what it thinks is the ideal strategy, and this is based on some assumptions, so you'd want to look at those and evaluate those and see if you want to tweak anything, but it is going to suggest that the lower earning person claims at age 62 while the other claims at age 70, and so it gives you a present value based on some calculations, and this might come in handy in a couple of minutes here, but that's the default suggestion from this. But a couple of things to think about. First of all, it is looking at some pretty standard life expectancy, we'll get to that in a second, but it's going to show you a little chart, so what is your benefit, this happens to be the lower earning spouse and how much total is coming into the household here, so eventually, the spousal benefit or that top off is going to come into play, and the other person, the higher earning spouse starts getting their benefits, so they've taken their own benefit, which unlocks the spousal benefit for the total household income here, and they talk about some survivorship as well, the nice thing about this calculator is it does show you a little bit more information and lets you pick, so you can actually click on this graph here and decide on other timelines, so when do you begin your retirement benefit again, it has it right down here very soon, in 2024. And when does your spouse begin their retirement benefit, and that's going to be at their age 70, but you can kinda look at this and see that the green is still a big portion of the present value, so if we come all the way over here... Again, it said, the idea is if you claim in 2024, but if you go over to 2029, for example, you would still get 99% of that present value, so you're not necessarily giving up a whole lot, this is again, the lower earning spouse is going to take their benefit in 2029 instead of 2024, again, we've moved all the way from 2024 over here to 2029, and then we click on that, and it's going to calculate that for us, so it's filled in below here that you take yours in 2029, lower earning spouse. The higher earning spouse still goes with age 70, and we get some calculations here, and it's going to tell us that compared to that first result it spit out, you're giving up about 6582 in present value. That's less than a percent. So you might say, Is that worth it or not? Just in case I live a long time? I'm not sure, that's going to be up up to you to decide, but again, it will spit out all these numbers, so you can look at things year by year, so let's make a quick adjustment to this so it does tell us about a lot of the inputs here on the About page, and you can see the Social Security Administration's table here, where we have the life expectancy of male versus female and your current age, and so you'll notice here... This can be confusing. A lot of people will say, Well, I'm only going to live to 74. That's my life expectancy, but that's your life expectancy at birth. Once you make it to age 62, for example, when you need to make this decision, you have survived your infancy, you've survived your teenage years, a lot of things can happen in life, so once you make it to age 62, we're going to come on down here and say currently, you're 62 and it thinks you have 19 more years to go, so that might be 81, 82 as you may know, that's higher than the 74 expected at birth. So again, by living to a later age, you typically have a higher life expectancy, and of course, who knows, you could have an accident, you could get sick, nobody knows. And for a woman, 62 year old woman, you've got 22 years left of life expectancy, so that might be 84, 85, for example. So that's the life expectancy they're talking about... Here we said age 84 85 and maybe 81, 82 for men. But what if you happen to be healthier? So we'll go back over to the calculator here and you can use different life expectancies, if you use this super preferred or preferred, these are essentially going to be people who are in good health, just to make it easy. We'll enter an age at death, what if you want to say that you'll make it till age 90, and she is going to make it until age 92, so there is some longevity in the family here, and we're going to click Submit, it's already doing that for me. Is it going to give us the same answer of having the lower earning spouse claim as soon as possible at age 62? The answer is no, it's going to say, let's do age 67 because you have some potential longevity going on here, so the lower earning spouse goes at age 67, the higher earning spouse goes at age 70, um a much bigger present value here because again, the assumption is that you're going to live until age 90, nothing's guaranteed you might die next week, we can't say, but if you wanted to plan for that type of thing, this is why you might want to start thinking about later claiming ages. Again, no judgement. Now, let's dive in just a little bit to that spousal top off amount, because you may be wondering how that works and what that's all about, so we're going to go back to the standard tables and we're going to have it tell us that somebody needs to claim at 62, so we go claiming at 62 and one month and we're going to go down to our table and you see, you've got your own benefit, this is... You've got that 900 month benefit, but it is reduced because you claimed early at age 62, so it's not going to be a full 900 a month, if you want to bring up a calculator here, we can say 7605 divided it by 12 months is 633 and 75 per month is your own benefit, and then we come down to the spousal benefit, so 4800... Why exactly is that 4800? The way this works is that the spousal top off, or the maximum spousal top off you can get is one half of the spouse's benefit at full retirement age, the higher earning spouse or the working spouse minus your own benefit at full retirement age. So we take 1300 minus 900, gives us a result of 400 is the biggest top off, you can get at full retirement age, but it might not end up being that big if you claim early, so if you claim early, whether it's a certain number of months or several years, there is a reduction and that reduction, of course, increases the earlier you claim, so if you claim four years early or five years early, let's say it's a 35% reduction, if you claim five years early, you would only get 65% of that maximum spousal top off. But here's where it gets complicated. So the amount of reduction has to do with when you become eligible to take the spousal top off, and so in our example, that person took their own benefit at age 62, which is indeed early, however, they did not become eligible for the spousal top off until they were age 67. So they actually end up getting the full top off that they could get on top of a reduced benefit of their own, we can adjust this example and say, Okay, they're going to become eligible, meaning the other spouse, the higher earning spouse unlocked the spousal benefit by taking their own benefit, we can adjust this by saying, Well, let's say that the higher earning spouse actually takes their benefit sooner than their age 70, and in fact even sooner than when the lower earning spouse hits their full retirement age... I know it's getting convoluted, and it is convoluted, but in this case, we're going to get a reduced spousal top to do that, we're going to move everything, so this person's going to take their benefit at January of 2024, and we're going to have the spouse claim early as well, so that's going to be several years earlier, in December of 2025, it's going to be ending up as a 300 a month or 3600 per year spousal top off. And the reason for that, if we go back to our handy calculator here... When do we get to 300 a month? It was three years early, so they only got 75% of the maximum spousal top off in that case because they became eligible, the lower earning spouse became eligible sooner than their own full retirement age. Possibly one of the best ways to start figuring this out if you want to run these numbers yourself is to look at Devin Carroll's information, and he's got a YouTube channel here, which is quite active, he also has a great website with all of this information, and he has this little chart that's a nice starter for you that goes over your own benefit or reduction at certain ages, do you get any increases... Yes, you do as you age versus the spousal benefit, this refers to the top off here, as your age changes, what happens, and you'll note that there is no increase after your full retirement age, but there are those reductions like that 75% that we just looked at, so again, it can get quite complicated, that's not the point of this video, we're talking about rules of thumb and do they make sense, and what more might you want to know as you evaluate applying those rules of thumb to your situation? And by the way, I've got another video on retirement rules of thumb popping up right now, I think you'll find that helpful. And I hope you enjoyed this video, if you did, please leave a quick thumbs up. Thank you, and take care.
