Key Takeaways:
- Many unique situations could justify taking Social Security earlier.
- The psychological benefits of a new income stream can relieve anxiety around a new planning strategy.
- To take Social Security before age 70, the financial and non-financial benefits of claiming Social Security early should outweigh the benefits of deferral.
If you live a longer than average life, you will very likely receive more in Social Security if you wait until age 70 to claim. However, in numerous situations, we have advocated for earlier enrollment if the client’s situation justifies doing so. In most of these instances, the rationale is a combination of both math and reaching personal objectives that are important to the client. Below, I will highlight just a few of the strong cases involving claiming Social Security early and its alternative uses other than providing a living income.
Roth Conversion
At Ballast, we are big fans of Roth accounts. The more research we do in this area, the more we feel like Roth accounts have been improperly portrayed to investors. If you ask most people and most financial planners, they will insist that Roth accounts are for lower tax bracket earners and that higher income earners would be best served with the initial tax break. We believe this simplified advice masks the true benefits that Roth accounts can provide.
Even more counter to traditional planning advice, we have many times advocated those clients convert some or all their retirement savings into Roth accounts when approaching, or even during, retirement years. The biggest opposition to this strategy is usually the tax bill required to do so, as all funds converted are added to income, and ordinary income taxes are paid.
To avoid the “pain” of using one’s portfolio assets or cash savings for Roth conversion, we have advised clients to use their social security income to offset the tax bill. In doing so, the client is avoiding future required distributions on converted funds, effectively pre-paying their taxes on retirement income, and positioning themselves for a phenomenal tax setup if some of these funds are intended to be passed to the next generation.
Debt Payoff
We have never advised someone to pay off their mortgage and then subsequently heard any amount of regret from that client. In our experience, it is not uncommon for someone to reach retirement age with some amount of mortgage debt remaining. Much like the conversion example above, many investors find it psychologically difficult to remove a sizeable portion of their portfolio to reduce low-interest debt.
Ironically, any amount of debt one carries into retirement is likely to be the largest cause of anxiety. We understand this and have consistently advised debt elimination as soon as possible for those soon to retire or who have just retired. By turning on Social Security before age 70, one could utilize this income and dedicate it fully to debt reduction. The by-product of this planning strategy is magnified when the debt is gone, and the Social Security income stream continues for the remainder of your life.
Gifting (Charitable and Personal)
Not surprisingly, our most generous clients tend to be some of our happiest clients. Research reiterates this idea and expands the benefits to one’s health. According to Scott Bea, PsyD at the Cleveland Clinic, “health benefits associated with giving include lower blood pressure, increased self-esteem, less depression, lower stress levels, longer life, and greater happiness.”
We are fortunate to work with a generous client base, but we fully understand that one’s resources may not allow the generosity the client desires. A client, who previously had planned on waiting until age 70 to claim Social Security could, for example, claim a few years earlier to provide substantial financial assistance to grandchildren for help with college, or to provide funding to a charitable cause of great importance to the client. We see the non-financial benefits in clients when they are generous; we try to encourage generosity in clients during their lives so they can witness the benefits to the recipient and in many cases of family gifts, give at a time when the recipient is in the greatest need.
Income or Estate Protection
We occasionally come across married clients who have a lot of financial risks built into their unique situation. One example could be when one spouse receives a substantial pension that ends when that person dies. Another example could be a married couple with a substantial net worth, taxable at the estate tax level, that is largely comprised of illiquid assets like land or a private business. Social Security income could prove very valuable as a resource to pool over time and invest, or even fund, permanent life insurance.
In the case of the pension recipient, by dedicating some portion of their Social Security or pension income, they could potentially replace all of the risk associated with their premature passing.
Conclusion
The common theme across each of these concepts is the psychological flexibility associated with having an additional income. As Frank Yozwiak detailed in our earlier piece on the value of deferral, waiting until age 70, for those that can afford to do so, will likely yield the most dollars over your lifetime.
To consider taking at your Social Security Full Retirement age, the rationale to do so should outweigh the 8% annual benefit of deferral. As Financial Advocates, our job is to help our clients weigh both the financial and personal factors at play in each situation. If we see a planning scenario where the personal benefits to our client outweigh the financial costs, we are going to support and advocate for our client in that situation.
