Thinking the right way about your Social Security claiming strategy

Social Security has been around since 1935, when Franklin D. Roosevelt signed the Social Security Act into existence.

Despite almost 100 years of history, there still isn’t an easy answer for people on when they should claim for maximum optimization. Everyone’s situation is different, and there is no one-size-fits-all approach. There is, however, one mindset you need to have when deciding to claim your Social Security that will better shape your decision than any other calculation. That means looking at your full picture, not just your Social Security benefit.

If you start calculating and analyzing when to take Social Security, you may try figuring out how long you’re going to live based on your family’s longevity, and multiplying your annual Social Security benefit for each year you might claim by the remaining years you’ll likely be living. However you might be starting at the wrong place.

When deciding when to claim, you also need to look at your investment assets, distributions and cash flow needs, earnings and so forth. In some situations, you may find it would be more beneficial to claim Social Security at age 62 instead of receiving your maximum benefit at 70, leading to lesser distribution demand from your retirement portfolio, and allowing for more growth and compounding.

Let’s explore this scenario a bit more. After you reach your full retirement age, at which your Social Security benefit is not subject to reductions, your potential annual benefit will increase at a rate of 8% until you reach age 70. Often, we see clients justify taking additional distributions from their retirement portfolio to meet their cash flow needs just to be able to lock in those 8% increases for a higher Social Security benefit later.

Sure, you might maximize the amount of money you get paid by the Social Security Administration over your lifetime, but if you’re taking distributions from your retirement portfolio while waiting for those annual increases, you are reducing your future retirement portfolio value, perhaps significantly. The difference can be hundreds of thousands of dollars, as seen in our experience. We need to be viewing your entire financial situation and how the order of taking distributions from your retirement portfolio and benefits from Social Security can impact your retirement plan’s success for better or worse. People may not consider just how much their retirement portfolio will compound for the rest of their life, and taking early distributions from it might cost them quite a bit in future value.

Personallly, I’d rather have a larger retirement portfolio for systematic and lump-sum distributions instead of a larger monthly stipend. In addition to the above, you can’t leave your higher Social Security income to your heirs when you pass, but you can leave them your larger retirement portfolio.

Now, we’re not recommending that you should always take from your Social Security benefit earlier instead of later. Rather, what we’re recommending is to consider all the moving parts, look at the situation holistically, and when called for, consult an expert on the subject matter to make sure you are making the best decision for yourself.

Find out more ways to maximize your Social Security with our free educational class at 5 p.m., Monday, Feb. 12, at Lewes Public Library. To register, go to demoneyschool.org.