Last month we began a discussion on when to draw Social Security. This question is best addressed at an individual level considering the unique implications and objectives of each case. We framed four key factors to examine when deciding the right time to take Social Security. For a quick refresher on the first two factors – the cashflow decision and the break-even analysis — see last month’s blog. Our next two factors examine how the age one draws Social Security can impact death benefits and total assets.
For retirees who know they will need some income to meet monthly needs, there are typically a couple of places additional cash can come from: Social Security or other assets. Other assets could be the Thrift Savings Plan (TSP), a 401(k) from previous employment, an IRA or any other investment that is not a part of a federal employee’s retirement package. Even though there is certainly a tax angle when it comes to drawing from Social Security or other assets, we will consider this decision framed around providing for a spouse or non-spousal beneficiaries.
Benefits for a Non-Spousal Beneficiary.
A non-spouse beneficiary is someone a retiree is not married to. This could be a grown child, nephew, niece, or really anyone who a retiree would like to designate to receive funds at the time of the retiree’s death. Non-spouse beneficiaries are significant because typically they will not receive any sort of survivor benefit from the retiree’s Social Security.
Let’s assume that Bob has two main goals in retirement:
- Meet monthly income needs.
- Leave an inheritance to his two grown children.
Bob’s challenge is to implement a strategy that meets both of his goals. How would the age Bob draws Social Security impact these two goals?
If Bob lets his Social Security increase and draws down his outside assets, he meets his personal monthly income needs, but reduces the savings he planned on leaving to his grown children. If Bob begins drawing Social Security instead and lets his other funds continue to grow, he could meet his monthly income needs, while at the same time leaving the inheritance for his children untouched.
The Spousal Decision
The example above specifically addressed the Social Security decision from the perspective of leaving benefits to a non-spouse beneficiary. What makes the most sense when it comes to your spouse? If one spouse was the primary breadwinner for the family and is concerned about leaving the largest benefit for the spouse who was not the highest wage earner, here is an option to consider. The spouse who was the main provider may want to increase his or her Social Security benefit by as much as possible to leave the largest survivor benefit to the surviving spouse at the time of death. Increasing a Social Security benefit is achieved by waiting to begin drawing as long as possible. Remember that Social Security benefits increase by roughly 8% annually for each year a recipient delays drawing until age 70. So, in this specific example, it may make more sense for the breadwinning spouse to delay drawing and instead use additional assets to increase the spousal survivor benefit.
When it comes to Social Security, the factors listed above are not an exhaustive list. Certainly, a vast assortment of variables may impact an individual decision of when to take Social Security. Survival rates, life insurance, and tax considerations are just a few of the areas that come into play. For a detailed analysis of your individual situation, it may be wise to speak with a financial professional well versed in Social Security and federal benefits.
For more on the four key points to consider when it comes to Social Security, see our YouTube video below.