My clients frequently ask ‘when is the right time’ to start taking Social Security. The most correct answer which is given by both advisors and the Social Security Administration is that you should turn on this income stream when you reach your Full Retirement Age (FRA). Collecting at your FRA is the first opportunity at which you can collect your full benefits and continue to work if you so desire. If you collect your benefits before your FRA they will be reduced and, depending on your earned income, they could be reduced even further. Even so, some people are buzzing about the idea of taking benefits early. After some careful pondering I’ve concluded that this isn’t necessarily the worst idea for some people in certain situations:
First, as a market bull, I have to point out that both bond and equity prices are historically ‘cheap,’ even after the recent rally we’ve had in the major market indexes. Even if you don’t need to take social security at this point, you may be better off taking those payments and funneling them into a portfolio which matches your risk tolerance. If you started this strategy six months ago with a balanced portfolio of stocks and bonds, you’d be doing fairly well at this point. And if the S&P 500 crosses back above 1,000 this year like many are predicting, well, you do the math.
Next, the reality at this point is that retirement accounts are down in value across the board. Those who take withdrawals from their investment accounts, whether in lump sums or as income, are likely collecting less this year than they have in the past several years. They may need those social security payments—reduced or not—now! This is especially true of those in their late 50’s and early 60’s who recently got laid off. Their chances of landing a hot job with fabulous benefits isn’t exactly a given anymore. It may be smarter to plan around not getting a job and seeing how much you can squeeze out of the government through unemployment benefits, social security, etc. It also can be detrimental to a retirement plan to withdraw large sums of money during market downturns because you end up getting a lesser share of the market rally when/if it returns. This concept of ‘sequence risk’ has proved a real concern during this recession for retirees and has been one of the major marketing pushes for companies which sell annuity products.
The next reason involves a process which many people aren’t aware of. If you end up turning on Social Security and later realize that it would have been more to your benefit to have waited, you can fill out Form 521 (Request for Withdrawal Application) and repay the benefits which you have received. You can then start a new, higher level of monthly benefits based on your new, higher age. Cool, right? I’ve even had some clients get letters from companies which claim they can ‘increase your payments’ regardless of your age. After some research we determined these are people trying to expose Form 521 as a brilliant loophole and charge a fee to help people increase their incomes.
Finally, there’s always that ‘paranoia’ reason of taking the money while you can get it. The government claims that they will continue paying out promised benefits indefinitely, and that those in their 50’s and 60’s have nothing to worry about. I actually do believe the government after watching how much money they have thrown at the banks during this recession—it makes the ‘social security shortfall concern’ look somewhat insignificant. Even so, some might wish to take government handouts when they become available rather than trying to figure out when the most beneficial time may be.
I welcome any comments on these thoughts—it’s the first time I’ve ever considered telling certain clients to take Social Security benefits early.
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Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.