Conventional Retirement Wisdom is Wrong!

© 2019 Steve Feinstein. All rights reserved.

There’s an awful lot of retirement information and advice floating around out there. If you use a computer during your work day and have a look at any of the popular business websites (like MarketWatch, Forbes, Investor’s Business Daily, CNBC, etc.)  from your laptop, they all have articles on retirement strategies, reports of how many Americans are or aren’t saving enough for retirement, commentaries on the best places to retire, sponsored ads with “retirement savings” calculators showing you how much you need to put away to reach some arbitrary nest-egg savings goal, and so on. It’s dizzying.

For the average private-sector worker who is not independently wealthy, Social Security is a major component of their overall retirement income picture.  Estimates are that Social Security will constitute from 33-50% of the retirement income for most middle-class working Americans. For the purposes of this article, we’re going to make the assumption that Social Security remains solvent for the foreseeable future, for the scope of this discussion. That may be an erroneous assumption, but by all accounts, Social Security, as presently structured and funded, is 100% good through around 2030, so this article concerns retirees within that time horizon.

The issues regarding extending the solvent date of Social Security are a combination of inexorable demographics (the ratio of workers currently funding SS to workers claiming it is around 2 ½:1, compared to a ratio of more than 10:1 in the 1950’s) and political will. Social Security can be made solvent by either raising or removing the income cap to which the tax applies ($132,900 in 2019) or increasing the percentage of the tax itself, or some combination of the two. Politicians will have to come to grips with this soon, regardless of the “third-rail” aspect of the matter.

In the meantime, the facet of Social Security that seems to garner the most attention from financial retirement “experts” is when: when is the best time to take one’s Social Security payment? As most people know, a person may begin to take Social Security at age 62 (early retirement). At some point a few years after that (a sliding scale, depending on the person’s year of birth) there is their full-retirement age (FRA). For Baby Boomers retiring now, their FRA is 66. For every year that the retiree delays claiming SS past age 62, their payment will increase by about 8%/year and continue until age 70. That’s when a retiree’s SS payment will be maximized.

During “early retirement” (age 62-65), the amount of money that a person may earn as regular working wages is limited before those wages are counted against one’s SS payment. For example, from age 62-64, a person may earn $17,600 without any effect on their SS payment. Every two dollars earned above that amount reduces a person’s SS payment by $1.

So, let’s use a typical (but hypothetical) example to illustrate what happens. Let’s say a 62-year-old person—an accountant at a downtown firm—earns $70,000 a year. They’ve had a good career and they’re looking to collect at 62 but they want to keep working. Their Social Security income—based on their personal earning history–will likely be somewhere around $2200/month, or $26,400/year. If they were to continue working at $70,000/year while collecting SS, they would collect nothing. Nothing.

Here’s why:

$70,000 salary – $17,600 Social Security exclusion = $52,400. At the 2:1 reduction, that will eliminate $26,200 of that person’s Social Security payment—virtually all that they were scheduled to receive in the first place.

Therefore, the experts are quick to tell us, if you delay collecting until your FRA, then your payment will increase by nearly 8%/year and your lifetime total income lines will “cross” at around age 78. You’ll collect more over your lifetime if you delay the date at which you start taking Social Security. In addition, there is no earned wage “exclusion” limit at one’s FRA—no matter how much you earn, those earnings will not affect or reduce your Social Security payments.

This is why the conventional wisdom tells us, “Don’t take your Social Security until 66. Even better, don’t take it until 70. You’ll receive much more over your lifetime that way.”

That thinking is wrong. Back-loading one’s Social Security payments—especially starting them as late as age 70—is exactly the wrong approach for the average middle-class working person (the person earning between, say $50-60k/year and around $120k/year).

There is one thing that none of the so-called experts and financial websites ever take into account when recommending a Social Security timetable. Unfortunately, it is the critical thing, the only thing that really matters at all in the final analysis of retirement planning.

When recommending that retirees delay Social Security until 66 or 70 based strictly on the lifetime “numbers,” the experts fail to take into account this all-important consideration: Quality-of-life. It’s an indisputable and inescapable fact that as we age, our health deteriorates and our energy level diminishes. Our motivation to travel, our desire to learn and accomplish new things, our willingness and zest for socializing with others, all of that is far lower at age 75-80+ than it is from 65-70. It makes no sense—none—to optimize one’s retirement income for a time when it is of far less actual value to people. What good is having more money available to travel at 83 when your arthritis is so advanced that you can hardly travel into the kitchen without your walker?

Fortunately, there is an excellent solution. Remember the income exclusion amounts we spoke of earlier? From age 62-64, the income exclusion was only $17,600/year before it began to reduce a person’s SS payments.

But there is a little-known and inexplicably glossed over fact of the Social Security income exclusion and it is this: during the calendar year when a person goes from age 65 to 66 (their full retirement age), that income exclusion amount rises from $17,600 to $46,900! This has absolutely huge implications for SS planning.

Let’s say, hypothetically, that a person turns 66 (their FRA) in July and they earn a nice middle-manager salary of $85,000. Certainly, that’s a common situation that describes millions upon millions of workers. That person could begin taking their Social Security payments a full six months before their FRA while continuing to work and earning their full salary, without any reduction in their SS payments. In July of that year, they turn 66 and there is no income exclusion, so they can work earn and collect SS at the same time or they can retire.

But for the six months prior to their FRA, that person is collecting a very substantial portion of the full-retirement SS payment (age 65 payments are over 92% of the age 66 FRA payment) and they’re earning their full salary as well. That’s the key: by timing one’s SS collection to a $46,900 block of time before your FRA (in this example, six months), you come out well ahead by virtue of this “double-dipping.” Most importantly, it gives the person a truly meaningful, substantial retirement income when they can make the best use of it and need it most—in their mid-late 60’s.

This six months’ worth of “extra” Social Security collection for those six months prior to FRA more than makes up for delaying SS collection until FRA or later.

If this person’s SS payment at age 65 is, say, $2300/month, then for those six months they will have collected $13,800 in “extra” SS payments—while still collecting their full salary. They have that extra money in their pocket at age 65. An 8% increase at age 66 from $2300 to $2484/month is $2208 more per year. It will take that person over six years to make up that difference (13,800/2208 = 6.25 years) had they waited. Instead, they have the extra money when they are most able to make the best use of it and enjoy it: from age 66 to 72. If they continue working past their FRA, they will be even further ahead, since there is no income exclusion at one’s FRA.

Taking into account the Quality of Life consideration, it makes the most sense for a healthy individual to front-load the Social Security component of their retirement plan by taking SS for a $46,900 block of time prior to reaching their FRA in that calendar year. Such a strategy balances the conflicting but highly-desirable objectives of early retirement age vs. maximizing lifetime earnings in the most advantageous manner.

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