Nashville Business Journal Guest Column: An 8% return on retirement income?
As seen in the Nashville Business Journal:
An 8% Return on Retirement Income?
The dynamic political climate of 2016 and uninspiring equity returns of 2015 have caused many families to be more intentional with their search for the best income strategy in their retirement planning. In addition to these challenges, we continue to see changes in the social security filing options that are available; as most recently as this year’s expiration of the “file and suspend” option resulting from the Bipartisan Budget Act of 2015.
Depending on one’s view of the long-term integrity of the Social Security program, an often overlooked strategy is to think of delaying Social Security as an investment in future retirement income. There are many strategies and planning considerations revolving around when and how to file for benefits, however, the two most simple and critical principles to understand are the potential reduction of benefits when working before full retirement age and the incentive for delay.
Potential Reduction in Benefits
Currently, for those eligible for full Social Security benefits today, the “full retirement age” is 66. That age increases gradually for those born in 1955 and later up to age 67. The earliest age to file for normal retirement income benefits is age 62. If one chooses to file for benefits at any point between 62 and the “full retirement age” there can be a temporary reduction of the payment for earning an income. Currently, benefits are reduced by $1 for every $2 earned over $15,720. Furthermore, the actual total income benefit paid is reduced permanently for filing before the “full retirement age.” So, this is typically not an advisable strategy unless one is certain to earn less than $15,720, or at least until after “full retirement age” when the reduction for earnings is removed.
Incentive for Delay
The current incentive to delay Social Security benefits is roughly 8% a year, but is proportionately credited for every month delayed until age 70. While investments traditionally used in retirement accounts may perform better than this, they are not guaranteed. Depending on the income needs and the assets available, it could mathematically be advisable to delay Social Security as long as possible, even if that means using some retirement investment assets for income during the period of delay. This also depends on longevity assumptions. However, for a married couple, the surviving spouse will receive the equivalent of the larger of the two spouse’s benefits, making the incentive for delaying the larger benefit amount even more prudent.
For many current and future retirees, the expected income from Social Security is a foundational income base, making the decisions surrounding filing some of the most important pieces of the retirement income puzzle. Understanding all of the options, and how those options relate to the larger income and tax plan, is as important today as ever before.
Cash Tunstall, CERTIFIED FINANCIAL PLANNER™
Southwestern Investment Group | 720 Cool Springs Blvd, Ste 100, Franklin, TN | 615-861-6100
Southwestern Investment Group is an independent firm. Securities offered through Raymond James Financial Services Inc. Member FINRA/SIPC.
This information does not purport to be a complete description of the social security filing strategies referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed in this article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Every investor’s situation is unique, you should consider your investment goals, risk tolerance and time horizon before making any investment, withdrawal, or social security filing decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation.