Optimize Your Social Capital

As a reminder, there are 3 sources of capital – Human, Financial and Social. Today, we are going to dive deeper into the optimization of Social Capital, or money accumulated from the work of yourself and others. Practically speaking – social capital includes inheritances, pensions, and the most common source – Social Security.

Retirement: The process of executing your pre-defined financial independence.

What is financial independence?

Financial Independence: Placing no reliance on a job or anyone else to maintain your chosen lifestyle.

For many Americans – Social Security makes up the bulk of their retirement savings. The problem: “Social Security benefits are not intended to be your only source of income when you retire. On average, Social Security will replace about 40% of your annual preretirement earnings.”

Ouch.

This quote is taken straight from the templated Social Security statement that all Americans receive from the Social Security Administration. I encourage you to create your social security account and access your statement if you have not already done so – go to ssa.gov/myaccount/ to get started.

I want to make something very clear – social security is not the only source of income to fund your entire retirement lifestyle, and it was not created to do so by the government. However, it is a large portion of how to optimize your financial capital, or your retirement savings accounts. By optimizing social security – you can then optimize your financial capital investments.

The Basics:

Foundationally, there are some things we need to be aware of regarding Social Security:

• To receive social security benefits in retirement, American workers must have paid into Social Security for a minimum of 40 quarters (10 Years).
• Monthly cash benefits are calculated based on the average income monthly earnings (AIME)
• Amount you receive in cash benefits is the highest 35-year average of earnings
• Spouses can claim the higher of their earned benefits or 50% of their spouse’s benefit.

Good news – you do not have to do this calculation for yourself. Your Social Security Statement will show your monthly benefit at Full Retirement Age, as well as benefits earned for other ages.

What is Full Retirement Age? This again will be shown on your individual statement, but here is a quick chart below based on your birth year:

Why does Full Retirement Age Matter? By waiting to claim social security benefits at this age, you will not have your monthly benefits reduced.  You can begin to claim cash benefits at age 62, but this will reduce your monthly benefits up to 25% for good.

Lastly – you can delay receiving benefits up to age 70. By doing so, this increases your monthly cash benefit by 8% annually. Huge savings.

So given all of this – what does this mean from a dollar perspective? Let us present a real-life scenario of how we helped optimize social security payments for a household.

This couple was close to retirement, and they asked when the best time to receive social security payments. Answer: It Depends!

The couple’s social security statements show the husband will receive annual benefits of $35,300 at full retirement age, and his spouse will receive annual benefits of $34,500 at full retirement age. Both had great careers of high income. Both are currently age 65, and we are assuming of living until age 100 (financial ruin is outliving your money!)

Below shows the benefits received from Social Security at age 67 until age 100 for this household:

$1.57M received. Not bad at all. However, look at the change in benefits received from SS if delaying until Age 70:

$1.94M received. That is an annual difference of $19,300, and a lifetime difference of $375,929, calculated on a present value basis!

The point – I would prefer to plan for lifestyle costs between the ages of 67 and 70 through financial capital (savings) and/or human capital (work). Clients then have the benefit of not having to deplete financial capital as much by waiting until age 70 for social security payments from age 70 – 100, allowing compound interest to perform throughout retirement.  

If you recall from the previous article, the first order of business for retirees is determining your Lifestyle Number. Without determining this number first, it is hard for any advisor to make a recommendation on timing of social security payments. If there is no financial or human capital to draw upon, households may not have a choice in determining when benefits should be received.

As a side note - Social security has numerous other benefits. In the event you become disabled, widowed, providing for dependents, etc., this can impact your monthly cash payments from Social Security.  I encourage you to reach out to an advisor who can walk through your specific situation – simply just obtain a copy of your social security statement.

Conclusion:

Social Security is not meant to fund retirement, and it is vastly important that we understand that. This gives weight to the importance of your savings rate throughout your earning years – and let me be the first to tell you it is never too late to start saving.

No decision can be made in a vacuum – you need to know what your lifestyle number is, and what amount you have saved for retirement, and what you can earn throughout retirement. Bottom line – you should optimize your social security benefits for your specific situation.