Longevity and Social Security Benefits: Factoring in Your Life Expectancy to Retirement Planning
diamondcpas
May 17, 2023
Longevity and Social Security Benefits: How Your Life Expectancy Affects Your Retirement Decisions

What is your life expectancy?

 

Let’s face it. Death is not something we like to think about. For the unfortunate few an accident will cut their life expectancy short, but most people will die of natural causes. In 2023 the average lifespan of an American reached 79.11 years, and it continues to climb. 

 

An average lifespan based on the US population of 334 million is of limited value for retirement planning purposes. Is it possible to get a better idea of how long you will live?  Life insurance companies know it is.  Insurance premiums are priced to bring in more revenue than is paid out in death benefits to people in the same risk groups. People in the same risk group have similar life expectancies.  

 

Your life expectancy can be calculated and is based on your present age, health, gender, family medical history, lifestyle, and where you live. There are a variety of life expectancy calculators online. The simplest is on the Social Security Administration’s website and takes into account just your age and gender. Using more complex tools found at LifeExpectancy Calculators will give you an age or a range of years you might expect to live based on a wide variety of factors. 

 

Some of these calculators suggest modifications to your current lifestyle that can add years to your life.  Our reason for recommending them, however, is for you to realize that there is a strong possibility that you will live well into your 80s and a good chance that you could see your 90s. For many people that means the “Golden Years” could last a long time and social security will play an important role in their retirement. 

What are my options when it comes to taking Social Security?

 

Social Security is an annuity you have purchased over your working life. It’s a guaranteed lifetime income stream, adjusted for inflation. Like other annuities, your social security payment is based on your life expectancy when you start collecting.  The longer you wait to collect, the larger the monthly payout. Full retirement age of 67 is the “official” age at which you are eligible to receive full social security benefits, but you can choose to start collecting as early as 62 or as late as 70. 

 

If you delay benefits until the mandatory age of 70, your monthly benefit will be 75% larger than if you were to begin claiming benefits at 62. For every year after full retirement age that you postpone taking your benefits, you will see an increase of 8%. If you choose to claim early at 62, then your benefits will forever be fixed at 30% less than what you would receive at full retirement age.

 

When it makes sense to take social security early

 

If your health is declining and you do not want to work any longer, you can elect to claim your Social Security benefits as early as 62. While your monthly benefit will be smaller, you might decide that it is better to collect what you can, particularly if you do not anticipate a long retirement. Claiming Social Security early for other reasons like caring for a family member or a mandatory retirement in many cases is preferable to taking on additional debt. 

 

But what if you decide to retire early and then change your mind? The market downturn in the last couple of years has sent many retirees back to work when they saw the damage to their 401ks. Like others have done, you have the option to start claiming Social Security and then withdraw your application within the first 12 months of receiving benefits. After paying back to the government what you have already received, you will be eligible to resubmit your application to restart your benefits later..

Taking Social Security Later 

 

Many retirement professionals have made a compelling case for delaying taking social security.  Consider the CDC’s most recent figures that the average American who makes it to 65 can expect to live another 19 years. 

 

Your accountant can calculate for you your Social Security breakeven age, which is when your cumulative benefits if starting Social Security at age 70 will equal those if you were to receive them early, or at full retirement age.  Your benefit starting date, the frequency and amount of COLAs (Cost of Living Adjustments), inflation and the taxability of your social security benefits based on your other income will all have an effect on your Social Security breakeven age. For this reason, your Social Security breakeven age is only a prediction.  However, if after trying out some of the life expectancy calculators you find you might be living much longer than you thought, think seriously about delaying when you start claiming Social Security.

Strategies For Claiming If You Are Married

 

At full retirement age, married couples have the option of collecting benefits based on their own work history or up to 50% of their spouse’s benefit. It may be more beneficial to claim the spousal benefit instead of your own in cases where there are significant wage gaps between you and your spouse. 

 

When a spouse dies, the surviving spouse is entitled to the larger monthly benefit for the remainder of their life. Therefore, delaying the higher earner’s benefits might be a wise decision for a couple where at least one member anticipates living into their 90s. Early filing may make more sense if both partners in the marriage have major health conditions.

Some Other Things To Consider

 

Social Security was created to be a safety net for workers who had little else to live on in retirement. The tax code still treats it that way. Taking it early while you are still working or even at full age when you have significant other income will have unpleasant consequences.

 

If you claim benefits early and continue to work part-time your benefit will be reduced by $1 for every $2 you earn over $21,240 in 2023. Whenever you decide to claim Social Security if you have significant other income, it is likely that 85% of your benefit will be taxed at your ordinary income rate. 

 

Half of the US population aged 65 and above relies on Social Security for at least 50% of their income, but for retirees with significant additional income sources to tap in retirement, waiting until the mandatory age of 70 to start collecting benefits could be the smarter move. 

 

Summary

 

Your anticipated life expectancy needs to be considered in your retirement planning. Not only can it inform your decision on when to begin collecting your Social Security, but it can help you and your financial advisor decide when and how to tap income sources available to you in retirement in the most tax-efficient way.

 

For more assistance with calculating your estimated Social Security benefits based on your life expectancy, schedule a consultation with us today.

 

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