The question of when to claim Social Security benefits is one of the most complex and consequential decisions for most retirees. It determines how many checks you’ll collect and how big they’ll be, both of which directly impact your budget, spending, lifestyle and financial security.
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Certified Financial Planner (CFP) Kevin Lum addresses tough issues like this one on his YouTube channel for his 175,000 subscribers. During a recent episode, Lum discussed his five-step test for planning when to claim Social Security.
It’s called LIFTS (longevity, income gap, family, taxes and security), and anyone facing the dilemma of claiming Social Security early, waiting until full retirement age, or delaying benefits should consider his formula.
L: Longevity
Step 1 is to use your family history, personal health, genetics and lifestyle to estimate your lifespan. The inflection point is usually at age 82.
“As a good rule of thumb, if you think you have a good chance of living past the age of 82, delaying Social Security as long as possible is often a smart decision,” said Lum.
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I: Income Gap
Those who retire before claiming benefits must plan to use up to eight years of savings or pension payments for income between 62, when eligibility begins, and 70, when delayed retirement credits max out.
“You have to wrestle with that yourself,” said Lum. “Can I handle that income gap? How am I going to fill that income gap?”
Delaying benefits can generate higher long-term income, but only if your portfolio can shoulder that early burden. If it can’t, claiming early can take pressure off your savings.
F: Family Considerations
The calculus is more complex for couples, but they have general formulas to guide them.
Lower-earning spouses don’t have much to gain from delaying, but higher earners do because they have the greatest ability to increase survivor benefits.
“If anything were to happen to the higher-earning spouse, the surviving spouse receives the higher of their benefit or of the other spouse’s benefit,” said Lum.
T: Tax Implications
One of the most important yet often overlooked elements of retirement planning is how Social Security will affect your obligation to the IRS.
“This is one of the reasons that financial advisors often encourage people to delay their Social Security benefits as long as possible,” said Lum.
Lum explained that claiming early can increase your taxable income and trigger Medicare IRMAA surcharges; Income-Related Monthly Adjustment Amount is a charge added to Medicare Part B and Part D premiums for higher earners. Conversely, delaying can allow for greater Roth conversion or gain harvesting flexibility in the years prior to required minimum distributions.
S: Security
Retirement security is all about ensuring your nest egg outlives you, and not the other way around. The longer you can delay Social Security, the more inflation-adjusted income you can guarantee for life, which becomes especially vital as you grow older and your savings dwindle.
“If you are light on guaranteed income, delaying your Social Security benefit helps create more security in your plan,” said Lum.
The Point System: Take the LIFTS Test
Lum devised a point-based test that he believes can help simplify the decision. Answer the following questions, one for each of the five LIFTS categories. Each “yes” gets one point, and each “no” gets zero.
- L: Do you expect to live past 80?
- I: Can your savings fund the income gap?
- F: Do you have a spouse depending on your Social Security benefit?
- T: Will delaying lower your taxes?
- S: Do you want a higher income that’s guaranteed for life?
Results:
- 0-1 points: Claim early when eligibility begins at 62
- 2-3 points: Claim at the full retirement age of 67
- 4-5 points: Delay claiming until credits stop at age 70
This article originally appeared on GOBankingRates.com: 5 Key Things To Consider When Claiming Social Security, According to Kevin Lum
