One of the most important decisions a federal retiree must make is when to draw Social Security. The internet is flooded with opinions on this topic and many new blogs and videos released claim to have figured out the perfect age; however, this one-size-fits-all approach to the Social Security question inherently ignores the uniqueness of each individual case. The age that makes the most sense for one individual may not be wise for another person based on a number of factors.
Although the Social Security question is not as easy to answer as some proclaim, there are certain factors around which the decision can be framed. Understanding Social Security in light of four key factors can go a long way in helping an individual decide what age to begin drawing Social Security for FERS (Federal Employees Retirement System) retirees.
The Cash-flow Decision
The cash-flow decision revolves around the question, “Do I have enough money to meet monthly needs?” If the answer to this question is no, then perhaps the decision of when to draw Social Security is already resolved. If an individual cannot pay for a mortgage or rent, or doesn’t have enough money left over to purchase food or other necessities, then waiting may not be an option.
FERS retirees often ponder, “Will I have enough money to meet monthly needs at age sixty-two?”
FERS retirees have the benefit of being able to retire at Minimum Retirement Age with 30 years of service or at age 60 with 20 years of service. In either of these situations, a FERS retiree would draw a FERS pension but also typically receive the Special Retirement Supplement (SRS).
As a bridge until Social Security, the Special Retirement Supplement ends at age 62, whether the retiree decides to draw Social Security at that age or not. So, how does this impact the decision of when to draw Social Security? Since the SRS ends at age 62, a federal retiree may see a potentially significant drop in monthly income. Although a federal retiree may have enough to meet monthly needs at age 59 with the SRS, will there be enough money each month once the SRS ends at the age of 62?
The Break-even Analysis
Social Security may begin as early as age 62, but can be delayed until age 70. For every year an individual delays drawing, the benefit increases by roughly 8% (until age seventy).
A break-even analysis simply finds the point at which the total amount drawn for different ages is equal. For instance, let’s assume Kathy begins drawing $1,200 monthly at age 62. If Kathy waits until her full retirement age of 67 to draw, her monthly benefit would be about $1,763. Her break-even point, which is the point at which the total amount drawn is the same, would be at age 76, regardless if she begins receiving benefits at age 62 or 67. After the break-even point, the total amount drawn from Social Security would be greater by waiting to draw at 67 rather than beginning at age 62.
So, what does all this mean?
Basically, the break-even analysis is useful when considering life expectancy. In the example above, if Kathy is planning on or thinks she will (based on health and family history) live well past her break-even age of 76, then waiting to draw until her full retirement age will allow her to draw more from Social Security over the course of her lifetime.
The cash-flow decision and break-even analysis are important but are not the whole story when it comes to Social Security. The next two factors examine how the age one draws Social Security can impact death benefits and total assets.
For retirees who know they will need some income to meet monthly needs, there are typically a couple of places additional cash can come from: Social Security or other assets. Other assets could be the Thrift Savings Plan (TSP), a 401(k) from previous employment, an IRA or any other investment that is not a part of a federal employee’s retirement package. Even though there is certainly a tax angle when it comes to drawing from Social Security or other assets, we will consider this decision framed around providing for a spouse or non-spousal beneficiaries.
Benefits for a Non-Spousal Beneficiary
A non-spouse beneficiary is someone a retiree is not married to. This could be a grown child, nephew, niece, or really anyone who a retiree would like to designate to receive funds at the time of the retiree’s death. Non-spouse beneficiaries are significant because they typically will not receive any sort of survivor benefit from the retiree’s Social Security.
Let’s assume that Bob has two main goals in retirement:
- Meet monthly income needs.
- Leave an inheritance to his two grown children.
Bob’s challenge is to implement a strategy that meets both of his goals. How would the age Bob draws Social Security impact these two goals?
If Bob lets his Social Security increase and draws down his outside assets, he meets his personal monthly income needs, but reduces the savings he planned on leaving to his grown children.
If Bob begins drawing Social Security instead and lets his other funds continue to grow, he could meet his monthly income needs, while at the same time leaving the inheritance for his children untouched.
The Spousal Decision
The example above specifically addressed the Social Security decision from the perspective of leaving benefits to a non-spouse beneficiary. What makes the most sense when it comes to your spouse?
If one spouse was the primary breadwinner for the family and is concerned about leaving the largest benefit for the spouse who was not the highest wage earner, here is an option to consider.
The spouse who was the main provider may want to increase his or her Social Security benefit by as much as possible to leave the largest survivor benefit to the surviving spouse at the time of death. Increasing a Social Security benefit is achieved by waiting to begin drawing as long as possible.
Remember that Social Security benefits increase by roughly 8% annually for each year a recipient delays drawing until age 70. So, in this specific example, it may make more sense for the breadwinning spouse to delay drawing and instead use additional assets to increase the spousal survivor benefit.
When it comes to Social Security, the factors listed above are not an exhaustive list. Certainly, a vast assortment of variables may impact an individual decision of when to take Social Security. Survival rates, life insurance, and tax considerations are just a few of the areas that come into play. For a detailed analysis of your individual situation, it may be wise to speak with a financial professional well versed in Social Security and federal benefits.
Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.