Advised Podcast Ep 015: When to Take Social Security | More Than Just Math

Today's discussion covers the factors to consider before taking your social security.  Listen to how we help clients choose the right age to claim social security benefits.

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Rick Luchini (00:00):

I break even at 78 and if I took it later, I start receiving more money over my lifetime from social security from 78 and beyond. But those aren't necessarily the years that a lot of clients want to maximize when they're sitting in our office at 60 talking about retiring early.

Intro (00:21):

You are listening to Advised with Rick Luchini.

Hamilton Brandenburg (00:24):

So social security, let's dive into it's what do you want to talk about? Yeah, let's do social

Rick Luchini (00:27):

Security. Everything's social security. The age old question, when to take it. Should I take it early? Should I take it at my full retirement age? Should I delay even longer? That's really what we want to get into today is when does it make sense to take it early? When does it make sense? Almost definitely to delay. And for most people, what's that gray area in between where we really don't know what the outcome is, depending on circumstances and how long you live, but I can tell you how I treat it with clients and then in that kind of conversation that we have and how you do it, and they might be different. I don't know.

Hamilton Brandenburg (01:12):

And I think too, the question becomes really easy if you know when you're going to die, if you know exactly how long you're going to live, every question becomes easy to solve. But you bring up a good point of it's important when somebody wants to take social Security early to find out why. Tell me why is that your plan? And a non-combat way, because I'll hear a lot of different answers. Like you said, sometimes it's we're afraid social security is going to run out of money and we'll be left holding the bag because we delayed, we won't get anything. But then a lot of times, and I've seen this before where health is a big factor. I've had unfortunately a handful of clients who were forced to retire earlier than they planned on because they had maybe a really big health event like cancer or a heart attack and the doctors telling them, Hey, this really could affect your outlook on how long you're going to have in retirement.

I had a guy tell me, and he was like 60 years old, and he's like, Hamilton, I have already lived longer than my dad or all my other siblings did in my family, in our family, in the Smith family, not the real Smith family, but in the Smith family, we don't live past 58 years old. And so that's a big factor. If you think you don't have that much time on earth or that much time in your retirement, maybe taking it early is a smart thing to do versus if you're just afraid that hey, maybe the sky's falling whether or not well founded, maybe that's second reason for wanting to take it early, might need a little bit more examination. Right.

Rick Luchini (02:46):

Yeah. So let's get into the math a little bit because this is what I do with my clients and I don't know this, we haven't talked about it, but I have a sneaking suspicion that I might feel slightly different about it than you because I think I feel different about it than a lot of financial planners. And so what I do with my clients is I show them the math, I always show them the math, and then we have a discussion about the value versus that math. And you and I have fancy technology that does all this optimization, all the things, but it can really, somebody listening can do this on the back of a napkin themselves. I have a couple numbers written down just to give a simple example. This is the one I use with my clients, but define where that breakeven is, and this is something that we're going to bring up a lot as the breakeven point, so I'll just explain how we get there. It is the cross between when whether you took it at 62, 67 or 70, social security has sent you the same amount of money. So you took it early, you're getting less money, but you're getting it for a longer time,

Hamilton Brandenburg (04:03):

Meaning your total lifetime benefit for your whole life. So calculating how much you got altogether.

Rick Luchini (04:10):

Yep. I took it at 62, so I'm receiving less per month, but I'm receiving it for five years longer because I don't have to wait till 67 or I wait till 67. In this example, I got a bigger check, but I didn't get anything for the last five years. When do those two numbers meet in the future to where I have received the same amount of money, and for most people, the math ends up being somewhere between age 78 and 80. So what that means is if I'm 78 years old, whether I took it at 62 or 67, I will have received at that point about the same amount of money from social security from that point on. If I took it as 62, I start receiving relatively less. Then had I taken it later or if I received it at 67, I'm receiving a bigger number from that point on. So I think that's important first of all, and I'll give you a number example of how that works, but the reason why that's important is when you and I and people like us run these fancy optimizers, oftentimes the result is take it late. Always.

Hamilton Brandenburg (05:32):

Yeah. The math is always going to tell you take it late.

Rick Luchini (05:35):

The math is always going to tell you to take it late. I just did one for a couple. It tells 'em you're going to be so much better off if you both taking it 70. And they're looking at me like, you're freaking nuts, dude.

Rick Luchini (05:49):

I break even at 78 and if I took it later, I start receiving more money my lifetime from social security from 78 and beyond. But those aren't necessarily the years that a lot of clients want to maximize when they're sitting in our office at 60 talking about retiring early. Yep,

Hamilton Brandenburg (06:10):

You're absolutely right about that.

Rick Luchini (06:11):

So that's the value. That's where the value versus the break even comes in, which is yes, in a perfect scenario where you live till 90, 92, 95 filing later will have given you more money over your lifetime. However, you only start getting that additional money in your eighties and nineties. And so there's some other factors that we'll get into about what it does to the other side of the ledger, your portfolio and other things. But how do you feel about that? I to, I know that in our profession it often is weight because the math tells us you're going to get more. But I'm a big believer in what the value of those dollars are doing for us and when we're getting them, and I'm not always pushing people to wait.

Hamilton Brandenburg (07:10):

Yeah, no, I actually agree with you. I'm not always pushing people to wait, especially past full retirement age, which for most people who were born, if you're born in 1960 or later, that's 67 years old for now, mine will probably be much later, but I'm not a lot of times doing that. Now for me, what I'm looking at, like you said, the calculators are always going to say delay because delaying gives you the most money. But let's come back from the calculators to the real world for a second. The things that are, I would say, bigger priorities for me, I like to look at survivorship income. So if one spouse's retirement concludes a lot earlier than the other, then we've got to figure out how's our income situation and how's our cashflow then? So for people who don't just in common speak, if you're listening to this and you're not a huge social security nerd, then that means you're probably in good company.

But if a spouse passes away and you're a surviving spouse and the spouse who died, say your husband Joe had a $3,000 benefit and you had a $1,500 benefit, when he dies, you basically get his benefit. So you get the higher of the two. So one of the factors that I consider is okay, and especially because in Atlanta, some of my clients I work with have pensions, and pensions have survivorship. So the first spouse who dies who has the pension, only certain amount of that goes to his surviving spouse or her surviving spouse. So I'm looking at like, okay, if something bad happens, is my social security choice going to have a negative effect on my surviving spouse where I wish that one of us had delayed this longer so that way we had a guaranteed source of income that kicks in. That's one of the things that I'm considering first

Rick Luchini (08:55):

That comes up. I think Hamilton, when there's, it comes up all the time, but the time when I really start analyzing that deeper is when there's an age gap.

Hamilton Brandenburg (09:05):

Yeah. Oh yeah.

Rick Luchini (09:07):

It's huge because it's more likely that what picture you just painted is going to happen. Husband is 12 years older than wife or 15 years older than wife. It's easy to say. The statistics are going to say he's going to die first and then she's going to live even longer than what we're considering a 30 year retirement is because she's not even retirement age yet. So we want her to have that bigger check because she's going to get it for a longer period of time, and that's one of the big reasons where we start looking at that is you can consider it at all times, but I think it's more impactful when there's an age gap because the likelihood of what you explained happening is a lot higher, and now you can plan for it.

Hamilton Brandenburg (10:03):

And I'm going to throw one more curve ball at you too. You need to review your client's estate plan because, and I know you do, but people need to because especially where you have blended families, and I've seen this a lot. I've had a lot of clients who separated from their spouse and reconnected with somebody who was really important to 'em earlier in life after they've retired. So a lot of times you have a situation where you have a blended family and husband and wife each want to leave something to one another, but they also have their kids to leave stuff to. They have their own adult parents they're concerned with. You get into that situation really quickly where it's not just about, okay, well how long are you going to live? Take it at 70. Okay, calculator. But real world, if two spouses have blended families and the primary, the breadwinner or the one with the bigger social security check, he's leaving half of his portfolio to his kids and only half of it to his wife. Then you've got to really figure out what does income look like for her later on? And it's not something you can just trust a calculator to do. You've got to really plug in the human element and the estate plan and factor in a lot more than that.

Rick Luchini (11:19):

And I think we're talking about 62, 65, 67 under the assumption that you are no longer working.

Good point. Another obvious reason to delay is that you're working, and like you said, we geek out on this stuff all the time because we're nose deep in it. So sometimes we take that for granted, but it's something that I actually get asked a lot is should I take it at 62 and the person doesn't plan on retiring for another couple years? The answer absolutely not. Right? Absolutely not. So the age gap is one to consider delaying still working is a no doubter. You're going to get a reduction in those benefits and it just does not make any sense to do it.

Hamilton Brandenburg (12:14):

I learned about that early in my career, kind of the hard way with a client where this is really before I knew much about, I was not, I'll say the retirement planning expert and the niche focused person I am today, although I think I was still doing my very best work. But yeah, you get into a situation where sometimes people look at it like, Hey, let's take it at 62 and let's go do a part-time job. And the danger there is there's something called the earnings test or earnings reduction test, and if you're working and you're under your full retirement age and you're making too much money, and that changes, that amount changes every year, kind of like how the tax code creeps up or whatever.

Rick Luchini (12:55):

I have it written down here for 2024. It's $22,320,

Hamilton Brandenburg (12:59):

Unless it's your full retirement age year, and then the year that your full retirement ages, it goes up to 59 5, don't go

Rick Luchini (13:04):

There. Yeah, just stay under 22,000. If you're planning on working part-time or doing something, people don't think about, well, I'm going to retire and they're going to do some consulting work or something. They don't even consider that for some reason, but guess what? It's taxable income. It's earned income, and you're going to get a reduction of benefits. But go ahead, sorry.

Hamilton Brandenburg (13:27):

Yeah, no, yeah, you're right. You're going to reduce your benefit by a dollar for every $2 that you're earning in wages over the limit, and that can surprise a lot of people when January rolls around and they think they're going to get a check and they're not, maybe a month or two goes by where they don't get a check because the way Social Security adjusts it, they take it all off the front. They don't take your a thousand dollars benefit and reduce it by a hundred dollars a month for 12 months. They take it all off the front, so it might be June before you get a social security check. If you're planning on that for your cashflow, you're going to be in for a big surprise.

Rick Luchini (14:06):

What I'm seeing a little bit of is, and maybe it's because I'm promoting it, but it's a shift to phasing out rather than your traditional cold Turkey retirement. And so somebody that can go part-time or do some consulting because they're valuable where they're at, but they don't want to be, they can financially retire, but they don't want do nothing. They just want to have big chunks of time where they're not tied to this full-time six figure salary. It gets interesting when you start looking at some of the math too, because now it's like, well, how much are you going to work? Because if you're going to work just barely over that limit doesn't even make sense to work, right? Because we could just replace you by social security or how much more stress is it going to put on the portfolio because you want to play work and make 30 grand.

So we're not going to take Social Security, but you want to spend a hundred, right? So there's all these different scenarios that come into whether you have a earned income or not, but for just the traditional, I'm done. I don't have any earned income, I don't have a big age gap. Let's just go to the prototypical, the person that is on average looking at this decision. One of the big things that I look at is what the value is of having that money before 78 and two. What's something that I don't know the answer because there's assumptions built in market returns, and not only that, the timing of market returns, but something that I've been really spending a lot of time in a dark room by myself on is if I took it early and I am spending those dollars one way or the other because my cashflow needs it.

So if I don't take social security because the optimizer or CFP advisor told me that I'm going to get more from social security, if I wait, I'm still retiring, I'm still spending that money. So now I'm taking it out of my portfolio. And those dollars, we know whether you are taking money out or saving time is your biggest asset in an investment. So now if I'm taking more dollars out of my portfolio or my investments earlier, what's the impact long term? I can't fully tell you because of different market assumptions, but I can tell you that usually in a normal market scenario, it usually ends up that you die with about as much more as you would've gained from social security. It's like almost an even trade. So when I look at that, the thing that I consider and why I'm probably more pro take it early is if I'm going to net the same amount or close to it between portfolio and receive from Social security all combined together, I would rather have more in my portfolio than have received from Social Security because it gives me more flexibility, liquidity, and it passes on to my kids. If I drop dead tomorrow,

Hamilton Brandenburg (17:54):

Your social security is not going to continue until you're 95, even if you die at 95.

Rick Luchini (17:57):

Yeah, no. So if I drop dead and before, during, after 78, I took it early, there's definitely going to be more money in my portfolio. Yeah. And my kids, my charity, my wife, my whoever's going to get it behind me is going to get more. Then had I taken it later and put that more stress on my portfolio also for my own self, when I want to spend money later in life, when we look at cashflow statements, we look at them annualized. So it'll say $50,000, but the $50,000 from social security is different than the $50,000 out of your portfolio because $50,000 from Social Security between two people, I have to wait 12 months to collect it. And if I want to take the grandkids to Disney and spend 20 grand in March, I only got three checks.

Hamilton Brandenburg (19:01):

Yeah, absolutely.

Rick Luchini (19:02):

Right. I'm cash flowing a major purchase, whereas when that extra money's in the portfolio, I can just withdraw it. I have liquidity. So again, it's not perfect, but I didn't always feel this way, but I'm leaning more strongly towards taking it early, assuming you're retired, assuming that you have a plan in place around taxes and taxable income and all that other stuff. Maybe I don't want to take it early because I want to fill up my tax bucket for Roth Convert. There's all these other crazy things that we're not going to go into the weeds about, but just in a normal scenario, I want to see what's the value of that dollar and also what's the long-term impact of my investments, not just the vacuum of how much is the government going to what people care about? I want them to give. I paid in that my whole life. I want them to give me the most amount possible. Yeah, okay. But maybe that's not the most valuable thing to you in the way you want to live.

Hamilton Brandenburg (20:06):

Absolutely. And I think for us, a lot of times what I do with clients is if our plan is to take it at our full retirement age 67, or if we think it makes the most sense financially, what we'll do is, well, first of all, that's not a decision I get to make. That's the client's decision when to take it. My job is to present them unbiased and good information. And so I'll just lay it out and say, okay, hey, without going too deep in the weeds, here's your two options. Here's how much your total benefit is by taking one versus the other.

My recommendation might be wait till 67, but let's not have the plan that's set in stone. Let's review this every year because something you hit on that's really important is market returns and how much you're depending on your IRA to supplement your income or to be your income, to be your paycheck in your retirement. That's a big factor. And if you get on the train, if you get on the roller coaster at the beginning of your retirement and it's the first three years where it's been down three years in a row in a long time, that's going to have a big material impact on me on deciding whether or not we should take social security early based on how that's affecting your investment. So a lot of times I'll tell clients and clients, we'll decide together as a team, we're going to take this at 67, which means we are relying a little bit heavy on our investments early on, but we're going to evaluate the decision every single year, which it doesn't need to be onerous. It doesn't need to be taking the client back through the math all over again to where they're like, God, get me out of this meeting. It just needs to be a bullet point that really even behind the scenes, I'm just double checking how hard are we leaning into investments? Has that been okay? Are we on track still? Are we getting close to a situation where we might need to pare down our income and reassess that decision very frequently, even annually? 

Rick Luchini (22:00):

Yeah, that's a great point is you don't have to make that decision and sign it in blood.

Hamilton Brandenburg (22:07):

You don't even have to stick with your social security decision. You take it at 62, you can unwind that, pay back what you owe and delay it till later so you're never locked into

Rick Luchini (22:17):

Yeah, that's a great point that you brought up that I don't think a lot of people know that. So if you are listening to this and you didn't go through an analysis or you did retire and then not realize you were going to start selling your woodworking hobby or whatever this thing is, and now you're earning money, you wish you didn't take it at 62. Okay, yeah. You can unwind that. And just on the reverse of it, if you're planning on taking it at 67, and like you said, things change, let's go the market's down 30%. I don't want to, again take this big withdrawal. It would benefit us to supplement our income right now and let this portfolio come back up. Let's go file. It's okay if last year we said we were going to wait three more years, it's okay to change your mind as long as you're doing it for the right reasons.

Hamilton Brandenburg (23:20):

Yeah, a hundred percent. You can make a case with social security if you were born in June and you have $2 million in an IRAI can make a case for why you should delay it until January of the year after you turn 70. You can get as weird as you want to get with it, but a lot of times decisions are not permanent, they're not final. They can be undone, they can be changed. And again, you need to reassess the decision every year because it's outside factors like the stock market's performance, your IRA's performance, your other income sources, your estate plan, how much younger your spouse is, your health, all that stuff plays into it toward the calculators are a great starting point, but that's really all they are is just a good starting

Rick Luchini (24:01):

Point. And I think the other thing that has come up, it's just top of mind for me because it happened with two people in a row recently, is the person that's got a million or 2 million saved and is living well below those means and that threshold,

I think they have a little bit more flexibility in their decision and we're going to give 'em the same options. Here's the math, here's how you actually make more money If you live a long time, here's what might be the value differences. And maybe a more analytical person might want to delay and receive more money and maybe somebody that's valuing passing money onto their kids or something might want to go, they have a little bit more flexibility. They almost can't break it. Right. But somebody that's got less and is really going to be dependent later in life on that portfolio, they ought consider not stressing it out early and helping that portfolio in the early years with the social security because I can tell you, you beat it up early and it doesn't recover. And that's going to be there also to have additional money in that portfolio for things like healthcare, long-term care and everything else. I can tell you, you got something just itching to get out.

Hamilton Brandenburg (25:30):

I know, I do. I can't. I help. You said something and it made me think of, okay, you have to have heard this question before. I know I have, and something you said just reminded me of it when you're talking about an analytical person. I had a client pop in my head, a former client I used to work with, super great dude, love him to death. But one of his suggestions was, Hey, and he was still working into his, he was planning on working into his seventies. He ran his own business and he was like, well, I think I'm going to take it at 67, but just send you that money to invest for me so that it will grow. So that my net. So tell me, have you heard people say that where they're like, I'm going to take it early hoping that my investment returns will beat the growth of the benefit. What is your take on that strategy and have you heard people do that because heard that two or three times and I don't know, am I the person getting those clients?

Rick Luchini (26:25):

Well, I've heard it as a concept, but just the difference is the guaranteed what people view as a return. Because they're saying, well, and I don't even know that they know this, but social security is going to increase by let's round it up to say 8% a year. Right? Sure. That's not 8% market return. That's 8% of what the cash cash would

Hamilton Brandenburg (26:59):

Be, that the primary insurance amount.

Rick Luchini (27:02):

And I think maybe that's where the confusion comes in, is you actually have to have a lot more dollars to then turn around and produce that 8% increase in guaranteed cashflow.

Hamilton Brandenburg (27:14):

Yeah. Yeah, I agree with you. I'd say the cliff notes is, I generally think it's a bad idea. I'm sure there's a situation where it could make sense. You can always find some situation where something makes sense, right? Yeah.

Rick Luchini (27:29):

You invest in Apple 20 years ago. Yeah, exactly. You hit it, right? But in normal circumstances, even if you're getting just even eight to 10% return, it doesn't make sense.

Hamilton Brandenburg (27:44):

Yes. And that's the thing. If you delay, if your plan is to delay and that's a good plan for you, then getting the 8% guaranteed every year from 67 to 70, that's really compelling. I'll take that. That's really compelling. That's hard to beat. And it's definitely like if a financial advisor is coming to somebody and recommending that they do that, I have serious doubts on his motives or his competence or both, because the math just doesn't add up and you just can't guarantee this is what they'll say. Like, oh, the s and p 500 does 8% a year, does it though It actually rarely does 8% a year. It does way more or way less. And given enough time, it might average out to 8%, but the chances of you getting that three year window perfect, not super great.

Rick Luchini (28:36):

No, I think that's a good point. What would you tell somebody that is listening to this? I'm 60 or I'm whatever, it doesn't matter. I'm 62 and I'm strongly considering retiring, at least around the, we know all the other stuff, but at least around the social security decision. If they're not talking to you and going through all this stuff, what's the big takeaway from this? What should they be considering? What would you want them to take away from this and either go figure out for themselves or at least consider talk to their spouse about It's a big decision.

Hamilton Brandenburg (29:17):

Yeah. Yeah. I would say if you're cliff noting the important things that you should think about, like you said, how much of my benefit would my spouse be dependent on is huge. You need to also factor in your tax strategy because you might be doing things that can make your social security taxable, like we've talked about Roth conversions, and it might be a situation where you're like, Hey, if I just waited a few years, took it later, the benefit I would receive in my social security wouldn't be taxable because I'd be done with my weird tax stuff that I'm doing. So maybe that's something to keep in mind. Keeping in mind the earnings limitations is also big. Those are the big things. I'd say those start with the calculators and have fun, and then start to bring in those outside factors and see how they play together before you go pull the trigger.

Rick Luchini (30:06):

Yeah, I think that's a good place to leave it. And I'll just put a bow on that is do the calculator, have somebody do the analysis, look at all the strategies, awesome. But then don't make a decision off of that. Know that information and how it might apply to you, but then look at all of the softer decisions that go into that. The goal is not to receive the most amount of money from Social Security.

Hamilton Brandenburg (30:38):

And as a sidebar too, the person, if you decide to start asking people for your advice, like no offense, but your neighbors and your brother are not a great place to start. Or like, oh, billionaires and Warren Buffet. No, don't do that.

Rick Luchini (30:54):

Everybody's different. And just because your neighbor did one thing, first of all, doesn't, his situation might be completely different, but also he might not, what the hell he's doing. Yeah.

Hamilton Brandenburg (31:05):

He might be showing you his highlights reel only.

Rick Luchini (31:09):

Yeah, how he analyze, but then also go through some of those other scenarios, what actually matters and what outside factors are at play based on my decision, not just in a vacuum. Well, I'll receive an extra $250 from Social Security assuming I live till I'm 92 and everything's perfect. That's obviously the right decision, not necessarily. And then also, guess what? You have a less $250,000 in your portfolio who cared? So I think that's a great place to leave it. Look at everything, not just the math. Look at the value to you and how you plan to retire. And the decision at that point will just be clear.

Hamilton Brandenburg (31:59):

And if the decision's to delay, just casually reevaluate it every year. That's right. And always be open to outside factors changing your mind. Great talk, Rick. This has been a lot of fun. Probably the most fun buddy two millennials have had talking about social security maybe ever.

Rick Luchini (32:13):

I know. We're so cool. Right? Yeah. Alright buddy. Thanks. I'll talk to you later.

Hamilton Brandenburg (32:18):

See you.

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Content Disclosure: Luchini Financial LLC is a registered investment advisor. This content is provided for informational and educational purposes only and is not intended to be personalized investment advice, nor a recommendation to buy or sell any investment. Luchini Financial works closely with each client to gain a full understanding of their unique situation prior to rendering advice. The information contained herein is derived from numerous sources, which are believed to be reliable, but not formally audited by Luchini Financial. Information may include statements which are time-bound and subject to change without notice or opinions, which may not come to pass. Please consult Luchini Financial with any questions.

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