How Should I Determine When to Collect Social Security If I’m Single?

Our topic on this episode of the Ready for Retirement podcast is about understanding when it’s best to collect Social Security for your specific situation. This week, we have a listener question:

My question regards the date for a single person to collect social security. My thinking is the main benefit to wait is to obtain larger monthly benefit and also survivor benefit. I have no one who will receive ss survivor benefit, but fear if I pass away prior to collecting, my estate would have less for beneficiaries. So, now I believe it best to just collect shortly after FRA and bank it or invest it. I do not believe I will need a larger monthly amount to protect longevity, but who really knows. Am I framing this correctly? Thank you.

Question to ask ourselves: How much income can be generated from Social Security and how does Social Security play into your overall financial plan?

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Social Security
  • What factors do we look at when determining when it is best to collect Social Security?
    • Income Needs – Today & Future
      • The first thing to consider is, do you need the income?
        • If you’re still working, it’s generally best to delay collecting Social Security.
        • If you’re working and not yet full retirement age, which generally is around 66-67 years old, there’s a Social Security earnings limit which says if you earn over $18,240, for every $2 you earn over that limit, Social Security is going to deduct $1 in benefits from you.
      • Example: If you earn an income of $28,240, which is $10,000 over the limit, $5,000 will be withheld from your social security benefit (~$460/month).
        • If you are not at full retirement age, there are few instances where it makes sense to collect Social Security.
        • The money that is withheld from your Social Security does get added back, but it’s a lower benefit than if you had waited to collect. 
    • Longevity Risk – The Risk of Outliving Your Income
      • How do I collect the most amount of money from Social Security?
        • If you’re deciding between collecting at full retirement age (assuming age 67) vs. collecting at age 70, the break-even point is generally around 80-81 years old. 
        • If you live until age 78, it’s likely better to collect Social Security at age 67. You had a lower benefit, but you had more years of collecting that benefit so the cumulative benefit would have been larger than had you waited to collect at age 70.
        • If you live until age 85, it’s likely better to collect at age 70. You may have fewer years of collecting, but it would be for a cumulatively larger amount over time. 
      • How do I know when it’s best to collect if I don’t know how long I am going to live?
        • If you live until age 90 or 95, you will be happy you waited until 70 to collect Social Security to protect against longevity risk.
        • If you don’t live until the break-even age and pass away at age 78, the risk is that you didn’t collect as much of a benefit as you could have if you had waited. 
        • The risk of outliving your money can be far greater than having less money to pass on to future generations. 
        • Everyone has their own decision based on their own values and decisions, which is always incorporated into the decision-making process of when to collect Social Security.
    • Benefits of Waiting to Collect Social Security
      • Guaranteed Return
        • Social Security will increase by 8% each year every year that you don’t collect after full retirement age: Delayed Retirement Credits.
        • Example: If your benefit is $2,000/month and you wait a year to collect, the benefit rises to $2,160/month, another $160/month the next year, etc.
      • Favorable Tax Treatment
        • Example: Assume you have the choice to take $2,500/month from your IRA or $2,500 from Social Security.
          • IRA: Any funds you withdraw from your IRA is fully taxable. $2500 minus Federal and State taxes.
          • Social Security: Not taxable at the state level in many states. California does not tax Social Security benefits. A maximum of 85% is included in your Federal Taxable Income.
      • Tax Strategies for Income Gaps
        • For most people, there is an income gap from the time you retire and the time you collect your RMDs (Required Minimum Distributions).
          • Assume you retire at age 65 and your RMDs start at age 72; your income may drop at age 65 and then spike again at age 72. 
            • There will be high taxes at age 65 and then high taxes again at age 72, with low taxable income in between.
        • How can you take advantage of years with low taxable income?
          • When there is a gap of low taxable income, it can be a great time to convert income from your IRA into a Roth IRA. 
    • Negatives of Waiting to Collect Social Security 
      • You will have to replace your income. If you’re not collecting Social Security, where will income come from?
        • For most people, this may be from retirement income such as a 401(k) or IRA. 
        • The longer you wait to collect, the more income that needs to be replaced. 
      • If you don’t need the funds from Social Security and you are extremely confident in your investing ability, the negative of waiting is you don’t have funds immediately accessible to invest to try and maximize your return. 

If you’re concerned about whether or not Social Security will even be around in the future, check out Episode 10 Will COVID-19 Cause Social Security to Run Out of Money? where I outline why I don’t think Social Security is going away any time soon.

Timestamps

2:30 – Income Needs

3:10 – Social Security Earnings Limit

5:30 – How Do I Know When I Should Collect Social Security?

7:10 – Longevity Risk

10:20 – Benefits of Waiting to Collect Social Security

12:54 – Tax Strategies to Implement Between Retirement and Collecting Social Security

15:20 – Negatives of Waiting to Collect Social Security

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