Key Issues for a Secure Retirement

For those who are winding down their working years, Social Security can be an incredibly helpful financial asset. To maximize the power of your Social Security payout, the big question is: When should you start taking it? There are five key factors to consider that will help you make the most informed decision to take advantage of your retirement years.

The first factor is the solvency of Social Security itself. SSA estimates based on current rules show that the trust fund is expected to run out in 2033, at which point the SSA will be able to pay only 79 cents on the dollar for benefits. While changes to the system may happen by then to avoid this reality, those considering their retirement outcomes may find it reassuring to join the program sooner rather than later, which could potentially mean the difference between being affected by the new rules or skipping them altogether.

Second, interest plays a huge role in Social Security considerations. Because simple interest increases monthly payments when a payment is delayed, some people decide to hold off on receiving payments. Because interest increases more after full retirement age, some will delay it even more when they start taking Social Security payments. This typically results in retirees drawing down their TSP or other retirement funds while they let their Social Security payments grow with the interest — but this plan of action is not without its drawbacks. It removes larger amounts of assets that could earn compound interest, which many experts advise against because compound interest is more powerful than simple interest. Evaluating this trade-off is key.

A third factor—though impossible to predict—is your own longevity, or life expectancy. For all Social Security recipients, regardless of the age at which they begin receiving payments, a breakeven point occurs when they receive the same amount of money from the government. That point usually occurs in the late 70s or early 80s. Waiting later to receive larger payments can be beneficial if a person outlives that breakeven point, but it can result in a smaller total amount of money received if the person dies earlier.

Taxation is another important factor. Although Social Security is not tax-free income, it is tax-advantaged income. Social Security recipients will receive at least a portion of their payments—between 15% and 50%, depending on their total annual income—tax-free. That means it can be beneficial to withdraw Social Security funds first before withdrawing from a traditional TSP or other pre-tax retirement account that is fully taxed as ordinary income. Leaving those taxable funds in place longer allows them to receive more tax-deferred compound interest.

The final thing to consider when it comes to Social Security payment timing is your beneficiaries. Unlike the TSP and other retirement accounts that can be left to anyone, Social Security can typically only be left to a spouse. This makes it a good idea for people who have beneficiaries other than a spouse to take advantage of Social Security first before tackling other assets that can be left to grow.

Approaching Social Security in an informed and strategic way can have a significant impact on your retirement years. Continuing to work past your full retirement age can mean you can receive your full Social Security payment while still earning a full salary, potentially helping you eliminate debt and fund other retirement accounts. While each person weighs the factors differently, one thing is for sure—Social Security is money earned through a lifetime of hard work. Research suggests that retiring a little earlier with less money can lead to a happier and potentially longer life. Armed with the right information, anyone can make a decision about Social Security that can help remove financial worries from the reality of their retirement future.

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