Social Security Choices

How Valuable is Your Social Security?

If you are a married couple and you both have earned Social Security benefits, look at Your Social Security Statements you receive each year. Many retirement advisors recommend that you should spend no more than 4% of your retirement savings each year to protect yourself against future inflation. If we use this as a guideline, then a Social Security annuity that pays you and your spouse $3500 a month or $42,000 a year will actually pay you more than you should be spending out of savings of more than $1 million. If your benefit is smaller, say $1700 a month, this would still generate more monthly income than the payout from accumulated savings of $500,000.

This may seem surprising until you think about the fact that, between you and your employer, you have been contributing more than 12% of your income in the form of Social Security taxes each year.

What makes Social Security a particularly valuable asset in retirement is that your benefits are inflation protected. Outside of inflation-protected-government bonds (TIPS), it is hard to find another investment which has this kind of protection. You might be retired for a long period of time. It is extremely difficult to predict what inflation will look like over such an extended period. So Social Security is a very special form of retirement savings.

The key decision that you need to make to maximize your Social Security benefits is to decide when you and, if you are married, your spouse should begin to collect Social Security benefits. If you wait to collect your benefits, your monthly benefit will be greater. In fact, if you wait until age 70, rather than taking your benefit starting at age 62, you will receive an inflation-protected benefit that is 76% higher than the benefit you would have received had you begun taking benefits at age 62. The trade-off is between receiving money now versus receiving more money later. The longer you and your spouse live, the greater the advantage in waiting to collect your Social Security benefits. There may be a big advantage in waiting even if it means spending down your 401K savings, or working longer so you can afford to delay taking your benefits. On the other hand, if either you or your spouse is in poor health, you may not receive benefits for long enough to make up for the benefits that you give up by waiting.

Social Security is a very important part of your retirement income. When to start taking benefits should be as carefully considered as any other financial decision that affects your future. It is a decision that will affect your family as long as you live. You paid your taxes, you earned it. It makes sense to make a careful, thoughtful decision.