October 09, 2017

It seems like a simple question, one that every retiree likely does – and should – ask… but a heads up, there is probably a more complex answer than many anticipate. There have been plenty of papers and opinion pieces on the topic, so if you want an academic answer, replete with supporting data, this isn't the place. Blog posts are meant to be short and to the point.

So let's make this simple. Here are a few things that matter and not necessarily in order of importance... How long will you live? What income producing assets will you use outside of Social Security? When will you retire? What is the goal - is it to distribute a higher level of final wealth to heirs or have a higher level of income during your retirement?

Starting at the top, yes, I know you don't know how long you'll live, but that's part of financial planning. Few things are knowable with 100% certainty. In planning, we deal in probabilities because that's what we have. In the case of life expectancy, current health and family history are generally our best barometers, so we use them to make what we think are good guesses. If you're eating McDonald’s three times a day and your old man didn't see 65, assuming you'll live to be 100 seems...optimistic. Again, we're oversimplifying, so, as a general rule, the longer you'll live, the more it may make sense to delay taking Social Security.

How about income producing assets - in most instances we're talking IRAs, 401(k)s, etc., but everything counts - business income, real estate, or otherwise. The reason this factors into the decision is that, if you have a high level of assets and your need for income (as a percentage of those assets) is relatively low, the decision is less critical. If, on the other hand, your initial withdrawal percentage is relatively high, then the decision of when to take Social Security matters a lot. While delaying will eventually give you a higher base income, are you willing to accept the potential negative impact to your other assets? While claiming early may preserve other assets in the beginning, the lower level of Social Security income most likely means leaning more on your portfolio in later years. This is where deciding between higher income potential or more final wealth comes into play. It's a balancing act and worthy of thought and planning. Default decisions should be reserved for your breakfast order at McDonald’s, which, ironically, if you make it enough, has the potential to make retirement planning that much easier.

Finally, when will you retire? This part of the equation is pretty straightforward, but it's not about the absolute age of retirement as much as the gap between retirement and claiming Social Security. The smaller the gap, the less potential for long-term impacts on assets The larger the gap, the better it is to have your ducks in a row. If you plan on retiring at 55 and taking Social Security at 70, there's a lot of planning that needs to be done. If you want to retire at 69.5 and take Social Security at 70, still plenty of planning to be done, but as far as claiming strategies, not so much.

When it comes to Social Security planning, I think the best thing to do is to talk to someone who's qualified to walk you through the decision. While your brother-in-law is a nice guy, chances are he knows less about this than he realizes, God Bless him. Think about these things the next time you eat breakfast.

This information is provided for educational purposes only, is not intended to provide specific legal, tax or other professional advice and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or financial services professional. The concepts presented may not be suitable for every situation.