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Social Security: Choosing When to Claim

Social Security decisions matter. (Photo: YouVersion | Unsplash)

One of the most difficult decisions around retirement is when you choose to take your Social Security benefits. Deciding when to claim Social Security can make a difference in your monthly bottom line early in retirement and also influence your opportunity for a secure financial future later in life. Here are a few things to consider.

Before You Retire

Your monthly Social Security Benefit amount is calculated based on the number of years you have worked and the taxes you have paid into the Social Security Benefits program. Social Security counts the years you have paid taxes as “credits” for years that you have worked. For example, if you were born in 1929 or afterward, you must have 40 credits to receive Social Security benefits when you retire. This is equal to about 10 years of work.

Your benefit amount is also calculated by the number of credits you have earned during your working years. Fortunately, the Social Security Administration has made verifying your expected benefits easier by setting up an online account. It is worth double-checking your earnings to catch errors and factor in your expected benefits as you strategize for retirement.

What Age Should You Claim?

Several ages should be considered when deciding when to claim Social Security.

• Early Retirement Age: The earliest age you can claim Social Security benefits is 62. However, if you claim Social Security early, you will be penalized for not waiting until the full retirement age via reduced benefits.

• Full Retirement Age: This is the age when you are eligible to receive the full amount of your Social Security benefits. The full retirement age is calculated based on the year you were born. For example, for those born between 1943 and 1954, the full retirement age was 66. If you were born between 1955 and 1960 or beyond, the full retirement age rises to 67.

• Delayed Retirement Age: You can also delay the claim of your retirement benefits until age 70. If you wait until then, you will continue accruing opportunity for higher monthly income when you do retire. However, potential benefits stop increasing at age 70, so there is likely not any good reason to delay the claim of benefits past age 70.

Deciding when to claim Social Security benefits is important as you approach your retirement age. Cases can be made for taking Social Security early, late, or any time in between, but without looking at your comprehensive financial picture it’s hard to use any particular rule of thumb. The interplay between Social Security, Medicare, and other retirement decisions can have a major impact on your financial future, and sometimes you can’t easily undo decisions if you make the wrong choice!

There is a lot of information available online about Social Security, but of course we believe it’s wise to engage an advisor with experience and tools to help you make the right decision for you — and more importantly, be confident in that decision.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Investing to Retire

Photo: Anukrati Omar | Unsplash

When I look at the approximate amount of money I think I need to retire, I calculate that I’ll need to save half my take-home income for 60 years so that I can plan for 30 years with the same spending after I stop working. How does anyone manage to save enough to retire?

A: The most obvious good news here is that you don’t have to replace your income. In this highly simplified case, if you are working for a lifetime with a 50 percent savings rate, you only have to replace half your income because you were living on half your salary the whole time! This example is extreme, but even when a typical worker considers things like their 401k contributions, taxes paid, and money spent on commuting and business attire, they realize there’s no need to replace 100 percent of nominal salary in retirement to have the exact same lifestyle as today.

It’s true that if you had to save every dollar you need for retirement before you retire, you would need to work for a very long time. We are very fortunate that today we enjoy the power of capital markets which allows us to buy stocks and bonds to earn meaningful, real returns after inflation. For the last 50 years, U.S. large cap stocks have returned about 10 percent per year, which was a tremendous tailwind to the balance of investment accounts. By staying invested during your working years, your portfolio can grow much more quickly than money in a savings account. In fact, by mid to late career, it’s common to see market gains in a typical year far exceed the magnitude of contributions into retirement accounts.

Note that we didn’t say stocks have yielded 10 percent a year. There’s a strong instinct among investors and particularly retirees to “live on the interest” by spending bond interest and dividend income but never touching the principal in their investments. That probably comes from a time when retirees could buy intermediate term bonds and enjoy 5 percent-plus yields, which is not the case today. Today’s lower yields, rise of stock buybacks, and relatively low capital gains tax rate mean that dividends might actually not be the most desirable way to enjoy retirement returns. Retirees should definitely not be concerned about selling a small portion of the investment portfolio to fund annual expenses.

But how much money do you actually need? Every situation is different, but a general rule of thumb is that you only need to save about 25 times your annual spending in order to retire. A famous paper, known as the Trinity study, suggests that in the first year of retirement a retiree can spend 4 percent of the value of their investment portfolio, then continue spending that same amount indefinitely, adjusted each year for inflation. Markets will go up and down, and spending in retirement will likely rise and fall at different times, but the paper suggests (and our Observatory process confirms) that using this approach means a retiree would have been very unlikely to run out of money during most historical periods with good available data that we can test.

To answer the question directly, people retire by living below their means, investing the extra money in diversified portfolios, and staying invested in a prudent diversified allocation throughout retirement.

Retirement can be an overwhelming subject, so the peace of mind from a well-tested financial plan can be just as important as the details of the plan itself. Rules of thumb are useful but don’t tell the whole story, so at Telarray, we are always excited to use our proprietary Observatory process to help show you what that process might look like for you. You might find that with good practices you won’t need to work nearly as long as you think!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Overconfidence in Investments

Photo: Adeolu Eletu | Unsplash

The body of knowledge now called behavioral finance has been developing in earnest since around 1980. The more we learn about the way we interact with money, the more we see that our instincts are often not as useful today as when humans were developing many years ago. Our natural misconceptions are somewhat predictable and fall into identifiable categories. One of the most common biases is overconfidence, which manifests in many ways when it comes to investing.

For example, we will feel most comfortable investing in things we know well, even if it means we’re undiversified. One great example is the tendency to maintain large positions in your employer’s company stock. Geographic home bias is a problem, too, in that we’re more confident in investments in places we know. U.S. home bias has outperformed for the last few years, but then again Japanese investors did great investing locally up until the 1989 crash, too. Thirty-plus years later, the price return of the Nikkei 225 average is still underwater! When AT&T broke up into seven regional companies, investors were found not to invest in the Baby Bell with the best investment prospects but rather almost always in the one they knew locally.

To be provocative, perhaps the most costly form of overconfidence is when investors think they can select individual stocks and outperform the market consistently year after year. Most busy people have a hard time picking up their dry cleaning, so the idea that a working professional with family obligations can have the time to be effective at selecting individual stocks and bonds over the long run is a stretch, at best. What’s worse is that sometimes investors think they are winning, but it’s only because they remember the winners and forget about the losers.

I remember a TV show that did a tour of famous poker player Daniel Negreanu’s house outside Las Vegas. There was a large pool table in the basement, and the host asked him if he’s any good at pool. I remember he looked at her for a long moment and simply replied, “Well, I’m better than you are.” In the same way, with over a decade of daily experience in financial markets, several rigorous financial certifications, and a respected MBA, I suspect I’d be better at picking stocks than an average reader of this article. With that said, you might be surprised to learn that I think you would be foolish to ask me (or any other investment professional) to build a portfolio for you by picking a handful of individual stocks and bonds!

What value can an investment advisor add then? I don’t think an advisor can pick stocks to beat the market, but I do believe there are ways to beat the market in the long run without outguessing the market by picking the right kinds of funds. Aside from curating the investment portfolios, much of the value an advisor can add is behavioral. Talking clients off the ledge when they want to go to all cash almost always has been the right choice historically. Most people like to spend money on things and experiences, and a good advisor can get the signal from the noise and help determine if the time is right for a big purchase. Probably most importantly, advisors can figure out if those approaching retirement are likely to be okay or need to revise their plans.

If we were all like Star Trek’s Mr. Spock, then financial planning would be easy. We’re all fully human though, so you and advisors like me will have to continue to overcome our natural biases and emotions to make the best decisions amid uncertainty on our long-term financial paths.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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How to Find an Advisor

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Financial advice must be unbiased.

One of the most common questions I get is: “I’ve got a windfall/life change/more income. How do I pick a financial advisor to help me figure this out?”

My first impulse of course is to ask if they’re aware that I myself work at a financial planning firm. Joking aside, I never actually ask. I assume they must know, and either think they need to find someone in their local area or are just desperate for unbiased advice. I try to be objective but it’s true I’m biased — I tend to think Telarray is pretty great. So if someone asks and doesn’t express interest in me specifically, I don’t give them a hard sell — I give them my honest opinion. 

You want to find a true financial planner. Almost every firm says they’re a financial planning firm but very few really have the tools, expertise, and desire to make a real, useful plan for you. One way to determine if they’re planning or not is how they allocate you to an investment portfolio. Is it just based on age? Is it based on just your feelings about risk tolerance? Is it based on anything at all? In my opinion, true financial planners consider your need, ability, and desire to take risk based on all your expected lifetime expenses. They model scenarios using hard math to actually recommend the portfolio you need rather than accommodating you by agreeing to the portfolio you think you want.  

A good investment approach is necessary but not sufficient. I always say investments aren’t the head coach or quarterback — they’re the strength and conditioning coach. I would look for a valid concept with stability over time in an investment approach. Some firms hire a bunch of active managers and periodically kick out the underperforming ones, which seems sensible but is a recipe for overall long-term underperformance (and tax inefficiency!). The more an advisor focuses on their ability to pick winners or respond to short-term market trends, the more skeptical I would be. It’s a marathon, not a sprint.  

Figure out how they get paid. If the advisor is paid in any way other than the typical definition of “fee only” then there may be an element of objectivity that is missing. Are they required to be a fiduciary 100 percent of the time? I strongly recommend you research what these two terms mean if you’re not sure. One of the things I value about our firm is that we could put our investors in any investment we deem appropriate with no changes to our income as a firm. We can recommend things like insurance, but since we don’t sell it ourselves, you would know that we only recommend it if you really need it. If you work with someone that is captive to a larger organization that creates their own products, you’ll probably end up with some of those products, and I would always wonder if they just happened to be in your best interest or not.

There are countless other criteria I would consider, but this is just a start. As I mentioned above, everyone is desperate for high-quality, unbiased advice. Nobody can tell the future with certainty, but someone who is highly qualified at real financial planning, has no external agenda, and is incentivized to have your best interests in mind at all times is likely to best lead you down the path to your secure financial future.
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.  

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U.S. Treasury I Bonds: Not a Panacea

Photo: Sharon McCutcheon | Unsplash

There is a great instinct to try to distill complex investment matters into simple solutions. For years, online experts insisted that you could get all the benefits of the market by just investing in one index like the S&P 500. Now that the shine of U.S. large cap growth is wearing off, a new reductionist approach is gaining traction — U.S. Treasury Series I Savings Bonds, or “I Bonds.” The siren song is simple — why expose yourself to the ups and downs of the stock market if you can buy a principal-protected investment with a current high yield? How could anyone disagree?

There’s nothing wrong with I Bonds, but there are good reasons why they’re not a substitute for your diversified portfolio — or maybe even your bonds and cash:

• Your rate on these bonds is exactly CPI for Urban Consumers, so technically you only just keep up with inflation. Generally, the purpose of an investment portfolio is to achieve returns in excess of inflation in the long run — these bonds won’t help do that unless you can perfectly time the market. If you could perfectly time the market, you’d probably invest in much more exciting things than I Bonds!

• The interest is taxable, so by buying these currently you’re locking in a slight loss after inflation in real dollars. You’re technically losing purchasing power.

• The current yield is attractive at 9.6 percent, however it will almost certainly not persist this high. The rate resets every six months so really you only get 4.8 percent the first six months and then an unknown rate after that. You have to hold for at least a year and if you redeem before five years you lose three months of interest. I Bonds aren’t even great for an emergency fund due to that one-year lockup, and it’s very likely you will get less than 9.6 percent holding for one year when the second six-month rate (and early withdrawal penalty) is factored in.

• If we all had unlimited time horizons and no short-term cash needs, we probably wouldn’t own any bonds. One of the main reasons to buy bonds is so that if stocks drop significantly, yields are likely to fall and bond prices go up. Since these are floating rate bonds, you don’t get that potential increase in your bond price, which is a reason it’s not a substitute for a traditional bond allocation.

• You can only put $10,000 a year into I Bonds per person, so chasing this high interest rate means you’re only hoping to make hundreds of dollars (not even $1,000) the first year. By the time you can put more money in, yields probably won’t look this good. For investors with larger portfolios, I Bonds won’t make much difference. If $10,000 is most of your portfolio, you’re probably younger and should reconsider going 100 percent bonds to begin with!

There’s nothing wrong with I Bonds, they just aren’t the panacea that some would have you believe. At the end of the day, it’s hard to imagine a long-term scenario where an investor would be better off buying I Bonds rather than adding to a well-planned diversified portfolio. There will always be one-size-fits-all investment ideas, but in the end we believe it’s worth navigating a little complexity to make the best decisions toward a secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for their next free online seminar on the Events tab at telarrayadvisors.com.

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First Horizon to be Acquired by TD Bank Group

First Horizon president and CEO Bryan Jordan (Credit; First Horizon Corporation)

One of the region’s biggest financial institutions is about to be under new leadership. Earlier today, First Horizon Corporation announced that it is set to be acquired by Toronto-Dominion Bank and its subsidiaries (TD Bank Group). The all-cash transaction is valued at US $13.4 billion.

“First Horizon is a great bank and a terrific strategic fit for TD. It provides TD with immediate presence and scale in highly attractive adjacent markets in the U.S. with significant opportunity for future growth across the Southeast,” said Bharat Masrani, group president and CEO of TD. “Working with the First Horizon team, TD will build upon the success of its strong franchise and deliver the legendary customer experiences that differentiate us in every market across our footprint.”

As of December 31, 2021, First Horizon boasted 412 branches across 12 states and assets totaling $89.1 billion. Meanwhile, TD is the fifth largest bank in North America and serves more than 26 million customers. As of October 31, 2021, TD reported overall CDN$1.7 trillion in assets.

The transaction will turn TD into a top 6 U.S. bank, with about $614 billion in assets and a network of 1,560 stores across 22 states. According to TD, there are no plans to shut down any First Horizon branches in connection to the transaction. Upon closing, TD will also make a $40 million donation to the First Horizon Foundation.

First Horizon president and CEO Bryan Jordan will join TD as vice chair, TD Bank Group.

“We have built a very strong business at First Horizon, and by joining forces with TD, we will create extraordinary value for our key stakeholders with a shared customer-centric strategy, enhanced scale and a broader product set for our clients. This is a true growth story,” said Jordan. “We have long respected TD as a leader in U.S. banking and are confident that its continued and growing investments in our local markets will extend our long history of community support. Thank you to our First Horizon associates for their efforts and dedication to our clients and communities as we continue to deliver for them every day. We look forward to successfully completing this transaction and are excited to join TD.”

The deal is expected to close in the first quarter of TD’s 2023 fiscal year.

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New Year, New Budget

Invest in 2022. (Photo: Visual Stories || Micheile | Unsplash)

This time of year is always busy with new beginnings and new ideas. Resolutions sometimes stick but always give a good chance to think about the future. Here are three ideas for 2022 to help keep your finances running smoothly.

Watch out for cash.

With 2021’s inflation uptick and the low interest rates in bank accounts and CDs, there’s almost never been a worse time to hold cash. A cash position is losing 5-6 percent of purchasing power every year at this rate, so stashing cash isn’t as defensive as it might seem. While the stock market might seem due for a correction (and in fact one might be right around the corner), putting money in a diversified portfolio is still the best way to fight inflation and hopefully achieve some real returns.

If you have a specific need for cash soon, like an upcoming down payment or college expense, it can make sense to hold cash. However, if you’re holding cash just because you’re hesitant about uncertainty with no specific spending needs in the near future, you probably should consider putting that money to work. Big cash positions are eroded by inflation and can’t enjoy the long-term power of compounding.

Be skeptical.
I enjoy a good conspiracy theory, but I work hard to differentiate what might be possible from what might be probable. In the last year, I’ve seen an unprecedented number of people make major life decisions (financial and otherwise) on what I might charitably call questionable theories. Keep in mind that the modern information industry is extremely good at getting us hooked on information that connects with our biases and fears. Increasingly, the selective presentation of facts can appeal to our worst instincts.

Yes, our national discourse and politics seem unusually polarized right now. However, there are countless things that are going very right in our world. Markets move up and down and politicians come and go, and staying the course in a diversified portfolio is the best way to navigate toward a secure financial future.

Think about spending.
Markets are uncertain and always seem the most uncertain now. In retrospect, everything has always worked out okay in the past, but will this time be different? As investment professionals, we spend a lot of time and effort building the best portfolios we can for our investors, but we don’t know the future, either.

If you’re concerned about the future, the one thing you have absolute control over is to spend less. If you’re really concerned about the future, spend a lot less! This has two powerful effects. For one, less spending allows you to more quickly build up savings and investments, which give a margin of safety for future needs. Building a fulfilling life with less spending means in the worst case you can be more resilient to a job loss, unexpected health event, or other financial shock. In the best case, it means you can retire or downshift your career sooner than you planned. Investments are just one small part of a successful financial plan, and spending discipline can have a much more dramatic effect on your future than any other factor.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at
ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Paying Off Debt: When Should I Pay What?

Towfiqu Barbhuiya | Unsplash

Q: I have debt I want to pay off, but I also want to start investing to enjoy the value of compounding. How should I think about household debt?

A: It’s probably never truly wrong to pay it off, but sometimes a little debt might not be a bad idea.

Let’s start with the easy part. Some types of debt should be attacked mercilessly with singular focus and attention until it’s gone. This would include any kind of payday loan, credit card debt, predatory car loans, or anything with a high interest rate. To me, a high interest rate is anything above what a reasonable investment portfolio could hope to produce on average in the future. Over the last 20 years, U.S. stock market returns have annualized about 10 percent a year and are unlikely to exceed that going forward, so any 10%+ interest rate should certainly be considered high these days and attacked with all available resources.

What about loans with lower interest rates? There’s still a good case to be made for paying them off as soon as possible. Even 0 percent interest sounds like a great deal, but it’s still money spent that you didn’t have at the time, and those payments impact your future financial security and flexibility until they’re gone.

There’s a lot of debate about what defines good debt. The most common example is a mortgage, as it represents a hybrid of paying for shelter and investment in the future. Real estate has made many people wealthy over the years, but not without risk. It’s hard to make big returns in real estate without borrowing, which works great most of the time, but can also go wrong, as we saw leading up to 2008. I believe in buying a house because you need a place to live, not as a speculative investment. Enjoy any appreciation, but don’t expect it and certainly don’t rely on it. A mortgage is usually the lowest-priority debt to pay off in a given household.

A case can be made against almost all other kinds of household debt. The problem is that virtually all household borrowing is financing consumption of things that are currently unaffordable. Some things might be necessary, like a reliable car, but a lot of unnecessary money is spent and justified in the name of reliable transportation. Generally, consumer loans like these should be minimized and paid off as soon as possible.

Student loans are a tricky subject, because right now, many people are expecting eventual forgiveness from the government. Forgiveness might come, or might not. Regardless of your expectations, it’s probably wise to avoid taking advantage of any kind of deferment where payments stop but interest continues to accrue.If possible, make payments so that the balance declines each month.

Credit scores are also tricky. On one hand, a decent credit score is necessary for basic tasks like renting apartments or opening bank accounts. On the other, I’ve seen many financially destructive things done in the name of establishing credit or building credit history. In my experience, credit history will naturally build up over time with things like car loans and a credit card with reasonable limits. There’s no reason to focus on gaming your score.

For some debt, it might make sense to keep the low-interest debt and invest any extra money in the markets. Keep in mind that we may not get another 20 years of 10 percent stock market returns, but there’s a good chance the market will outperform a 2.5 percent mortgage in the long term. Investing in things like 401(k) plans with an employer match should probably be prioritized even above paying off non-mortgage, low-interest debt. Ask your financial advisor about both opportunities and risks in your particular situation. It’s important to look at the big picture.

Many lives have been ruined by overwhelming debt, while I’ve never heard anyone complain about being debt-free, even if it’s not optimal. If in doubt, it’s probably never completely wrong to just pay your debts off if you can.

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

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PayPal Brings Crypto to the Masses

Photo by Bitcoin BCH

Last month, PayPal announced that its users would be able to buy, sell, and hold four prominent cryptocurrencies – Bitcoin, Ethereum, Bitcoin Cash, and Litecoin – via Paypal.com. Through its website, users will be able to buy and manage their cryptocurrency in one place.

Globally cryptocurrency has quickly been growing in popularity as an alternative form of currency since its inception in 2009. Cryptocurrency, as the name implies, is a digital form of currency that is meant to take the place of, and function as, a real form of currency. Unlike traditional forms of currency, nothing physical exchanges hands, and its value is not backed by a bank in the same way most modern currencies are. Instead, users hold their “currency” in digital wallets and make all their transactions digitally, with the vast majority of cryptocurrency being backed by their communities.

The “currency” in cryptocurrency, usually referred to as tokens, is a unique string of numbers and letters that is tied to the specific cryptocurrency being used. While in a traditional transaction users would exchange money, cryptocurrency users exchange tokens. When users trade tokens, the transaction is sent to a continuously growing list of transactions called a blockchain. The transactions added to the blockchain are then verified by users through a process called mining. Users’ work for mining does not go unrewarded and the “miners” are rewarded in tokens for each successful transaction that they verify.

Buying is as simple as a few button clicks.

Due to the various steps and knowledge needed to jump into the cryptocurrency world crypto had long been pursued by few. As the popularity of cryptocurrency began to grow in early 2018 websites began popping up advertising easy ways to buy and sell crypto but PayPal is one of the largest and most recognizable names to join the cryptocurrency wave.

I tested out PayPal’s new crypto service, throwing in $10 for the opportunity to play around with buying and selling. For someone that has never bought cryptocurrency, the entire process was quick and easy. Within minutes I was the proud owner of $10 worth of Bitcoin and Ethereum.

The Crypto screen gives an accurate representation of the market trends for PayPal crypto partners.

After setting up my account, I was presented with a screen showing my present balance, as well as guides explaining the ins and outs of crypto. For someone less familiar with the technical aspects, the guides were helpful and gave me a better understanding of where my $10 had gone. They also assured me that the prices would rise and fall naturally depending on the current exchange rate of my specific currency.

The move to PayPal has made breaking into the cryptocurrency sphere a reality for the average person. It’s cool and an easy process, and PayPal recommends investing just a dollar to play around with it before making more rash decisions. Though it may not be the most feasible way to diversify your assets, PayPal’s expansion into the crypto market is a great way for the average person to jump into the world of cryptocurrency.

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When Should You Take Social Security?

As we head into the last stretch of summer, my thoughts go to my favorite part of August — my birthday! This year, I will be one year away from my ability to start drawing my Social Security benefit, albeit reduced since I would be starting at the earliest age of 62. And so I will begin the decision-making process: Should I draw, or do I wait?

Let’s start with a quick synopsis of Social Security. If you have earned income, you pay a percentage of that income into the Social Security system. The amount that you contribute over time will dictate what your monthly benefit will be when you begin receiving payments. Your primary insurance amount (PIA) is the benefit you will receive if you begin benefits at your normal retirement date (also known as your full retirement age, or FRA).

Kathy Williams

Let’s pretend I was born in 1960. Currently, if you were born in 1960 or later, your FRA is 67. What if I want to start receiving my benefits as early as possible, which is at the age of 62? Since this is five years prior to my FRA, Social Security will reduce my benefits a little for each month that I begin receiving benefits before age 67. Why? Because they will be paying me a benefit for a longer period of time than if I waited until my full retirement age of 67. A five-year (60-month) reduction is 30 percent of FRA. If my age 67 benefit is $1,000 per month, my age 62 benefit will drop by 30 percent to $700 per month. Except for certain circumstances, this is a permanent reduction in my benefit. Yikes!

What if I want to get a bigger Social Security benefit? Maybe my handsome husband is rich and I don’t need to begin taking benefits until later. Well, Social Security has a plan for that, too. For each year that I defer taking my benefit past my FRA of 67 up to age 70, I will get an 8 percent increase in my monthly check, guaranteed! This would amount to a 24 percent bump, which is a fun benefit … if I live that long. Of course, I can start any time during that three-year period and still get the raise for the months I defer.

Here is the easy math: If I begin my benefit at FRA of 67, I will get $1,000 per month. If I begin my benefit at age 62, I will get $700 per month. And if I begin my benefit at age 70, I will get $1,240 per month. How do I know which door I should choose? The only way I can give you a definitive answer is if I know exactly when I am going to die. That makes the math very easy. Other than that, my life and lifestyle will hopefully give me enough clues to make an educated decision. Here are some things I will consider:

How much money do I have saved?

How much money do I spend?

How much money should I spend?

What other income will I have during retirement?

Am I married?

Am I divorced?

Am I still working?

How’s my health?

The answers to these questions will help steer me to the optimal option available for my circumstances. I shouldn’t assume that starting at age 62 always makes the most sense “before Social Security runs out of money.” Nor should I assume that waiting to the age of 70 will always make the most sense. I would recommend consulting with my personal wealth strategist (me) to help devise my plan, and would advise you to do the same.

Kathy Williams, CFP, CDFA, is Principal and Senior Wealth Strategist at Waddell & Associates. She can be reached at kathy@waddellandassociates.com.