Social Security isn’t something you should only start thinking about when the time comes to file.
Why? Because you only get to make your Social Security decision once. After that, you’re pretty much stuck with your choices for the rest of your life.
Despite this, many people still spend more time making their decisions about how to buy a car than how (and when) they should file for Social Security.
But to make the best Social Security decisions for you and your spouse, we believe that you need a Social Security planning process to help you consider everything you need to when it comes to maximizing your benefits.
To help you make get started in making smart Social Security decisions, we’ve put together five steps to include in your Social Security planning process.
Read on to get started!
1. Plan With Your Entire Lifetime in Mind
When planning for your Social Security, don’t just plan for the next year. Plan with your entire lifetime in mind.
Why? Because Social Security is a lifetime decision.
If you’re only looking at the next year when making your decisions, it’s easy to believe that taking Social Security today will be the best thing for you. After all, you’ll likely have to take out less from your investments and your budget will also look a whole lot more attractive.
But how will your Social Security decisions impact you and your spouse for the rest of your lives — especially after one of you passes away? This is the big picture you should be planning for.
Your decisions around Social Security will likely end up being completely different if you think about your entire life rather than just one year. After all, that’s the whole point of Social Security, to provide you with an income for the rest of your life.
2. Maximize Your Total Benefit
When planning around Social Security, it can be easy to only focus on your own benefits.
But if you’re married, there’s a high chance that your Social Security is going to go into your joint checking account — and that it will be used to help out both of you, just like your salary did before. More importantly, your Social Security will be helping out whoever becomes the surviving spouse down the line, especially if you’re the higher earner.
If you’re married, there are two benefits to maximize. But to maximize them, don’t just look at each individually. Instead, ask yourself, “How do we get the most out of this together?”
And remember, it’s not about trying to get your money back as soon as possible. It’s about providing for and protecting you both, especially the one that will become the surviving spouse.
When one of you passes, the lower benefit will go away and the surviving spouse will only continue to receive the higher benefit. While this might not seem like a big deal, this could mean a 33 to 50% reduction in what that spouse is receiving after becoming a widow. That’s a big deal.
So, don’t only look at one benefit to maximize. Look at both together and key-in on which benefit is the highest one. If you’re the older person, this is especially important because you’re going to get to retirement age first. If you can maximize the highest benefit and get there quicker, that can be a big help for the two of you, both now and later.
3. Stop Focusing on the Breakeven
A lot of people look at their Social Security and ask, “When do I break even? If I wait one year to file, how long will it take before I break even and come out ahead?”
If you’re thinking like this, you’re likely looking at your Social Security like it’s an investment.
But Social Security is more like an insurance policy. The whole idea behind it is to ensure that you don’t totally run out of money both now and later on. That’s why, instead of looking at the odds, you should be considering what you need to do is get the best benefit for the least amount of cost.
Most of the time, maximizing your benefit will be more beneficial than any other strategy for bringing in retirement income.
Social Security vs. Annuities
For example, many people look towards things like income annuities for income, which can come with glitzy promises of around 5 to 7% in returns on your money. But did you know that Social Security has around 8% in returns on your money?
If you’re trying to figure out how you can get the best benefit for the least amount of cost, that will almost always be accomplished by delaying your Social Security. Doing this is almost like buying an income annuity, except it pays out a lot higher. Why? Because there are no commissions and the tax picture tends to be more beneficial.
Furthermore, Social Security has not been updated since the early 80s. This means that life expectancy and interest rates are now a lot different than when they first built these different payouts. On the other hand, income annuities, or any other type of annuity, are based on the current environment and interest rates (which are a lot lower than they were in the early 80s), which is why they can’t pay out as much as Social Security.
Social Security and Taxes
Your Social Security will often provide a more optimal tax picture compared to your other investments.
If you’re taking your Social Security earlier so that you can let your investments grow, it’s important to also consider the tax part of it. After all, you’re probably going to have to pay taxes on on your growing investments. With Social Security, you get more money later on, and at least part of it is going to be tax-free.
For us in Wisconsin, Social Security is income tax-free, while 0 to 85% of your benefits are eligible for federal taxes. This means that when you boost your Social Security and get a higher amount, at least 15% of it is going to be tax-free.
So if you’re really, truly doing a breakeven analysis, remember to include the fact that social security is a better tax situation than your 401(k), IRA, and almost any of the investments that you might think of using as an alternative.
4. Play the Odds in Your Favor
Do you ever wonder what the odds will be that you will live long enough to benefit from your Social Security payments?
When you’re making a big life decision like Social Security, we think you should understand what your likelihood of being around for a long time will be. Why? Because we believe that the more informed you are, the better decisions you’ll make.
That’s why we did the math and found that, if you’re a non-smoking couple who are both 62, there’s a 78% percent chance that the men will live another 15 years. For women, the odds are 85% that you’ll live another 15 years.
The odds that one of you in the couple makes it another 15 years is 97%. We think that’s all the motivation you need for you to maximize that higher benefit so that you can both come out ahead.
Even with these numbers, we still want you to get your own odds. Everybody has different ages, different health situations, and other factors that can impact your lifespan.
To get your estimate, we recommend that you visit longevityillustrator.org, which will ask you a few questions to give you an estimate on what your lifespan could look like.
Doing so will also help you plan for your entire lifetime, since you will have a better idea of how long that lifetime could last!
5. Think About Your Past Relationships
While your advisor isn’t your therapist, they should be doing some digging into your background, especially when it comes to your past relationships.
Everyone knows that your spouses impact your Social Security picture. Everyone knows that surviving spouses also have different Social Security situations. But did you know that you can get benefits from your ex-spouse if they’ve passed away?
If you’re widowed and you remarried before 60, that affects your widow benefits, and it can be a big deal. You could be missing out on tens of thousands of dollars in benefits and not realize it because you just didn’t know that that opportunity is there.
So, when planning for your Social Security, be sure to consider your past relationships to make sure you’re optimizing all the benefits available to you.
Social Security is a big deal. You make that decision once and then you’re stuck with the results for the rest of your life.
We want you to make the best Social Security decisions for you. To do this, we believe that you shouldn’t take Social Security at a specific age or time, but instead, you should run the numbers, know what you’re facing, and make the best decisions for you and your spouse.
If you walk through these five steps, you’re more likely to make a really good Social Security decision. For more help with your Social Security, check out our other financial resources or reach out to us via our contact us page.
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