Social Security is an important source, and in many households, the largest source, of income for retirees. You can start collecting benefits at any time between age 62 and 70. Since Social Security is an income annuity, the longer you wait, the greater your monthly income will be for the rest of your life.
The Social Security start date decision is complicated by the fact that there are different types of retirement benefits for which you may be eligible. These include spousal, divorcee, and survivor options in addition to benefits based on your earnings. Furthermore, you may qualify for more than one type of benefit at a given time.
How do you learn about all the available strategies and choose the one that will provide you, and your spouse, if married, with the greatest amount of income during your lifetime? Recognizing the opportunity, a Social Security optimizer software industry has evolved with programs targeted for consumers and financial advisers.
Before using any Social Security optimizer, you need to be aware of three pitfalls.
The results of all Social Security optimizers are dependent upon assumed longevity, i.e., how long you’re going to live. This is the most important assumption that will affect your results. Since it’s also the most difficult to forecast, multiple scenarios should be run with different assumed ages of death.
2. Inconsistent Results
Social Security optimizers vary as to the type and detail of requested data, including, but not limited to, summarized vs. detailed historical earnings, projected earnings, government pensions, and economic assumptions. Consequently, results and recommendations can vary from program to program.
3. Optimized Result May Not Optimize Retirement Cash Flow
Let’s assume that you or your financial adviser use a high-quality Social Security optimizer that captures all of the data points and assumptions needed to recommend the best strategy for your situation. Should you implement the recommended solution? Not necessarily.
It’s important to keep in mind that the overriding goal of retirement income planning is to optimize lifetime cash flow. You want to make sure that you have the right types of assets and income when needed to provide you with sufficient after-tax income to cover your projected inflation-adjusted expenses for the duration of your retirement. The key is timing.
None of the standalone Social Security optimizer programs consider the myriad of financial information and assumptions that are required to determine how the recommended results will impact your projected retirement cash flow. For this reason, an optimized Social Security strategy may not be the best plan of action for ensuring that sufficient cash is available when needed.
I’ve had situations where the recommendation from one of the leading Social Security optimizers was projected to result in earlier depletion of my clients’ retirement assets than would have been the case using another strategy. As an example, deferring the Social Security start date to age 70 to maximize monthly income may not be the best recommendation for a single individual who retires at age 65 with limited investments or other sources of sustainable income.
The Social Security start date determination is one of the most, if not the most, important retirement income planning decisions most people will make. You shouldn’t rely solely on the recommendation of a Social Security optimizer when choosing your start date given the fact that the decision is generally irrevocable and will have long-term consequences for you and your family. Multiple strategies, not simply the “optimal” one, need to be analyzed using comprehensive retirement income planning software to determine the one that’s projected to optimize your retirement cash flow.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.