Social Security Dilemma...
As many Pilots and Flight Attendants are starting to turn 62 years of age or older, the question about Social Security and whether to take it is becoming increasingly more popular. At the very basic level, the question goes something like this…”Hey Alex—-should I take Social Security early?” The answer is usually—-”Yes!”
Some would argue my logic. That is perfectly OK. However, I am not just an advisor, but a Comprehensive Retirement Wealth Planner as well as a Fiduciary, and as such, I have to follow the numbers. The real answer for your particular situation, however, depends on many different variables of which some are fixed, and some are not. Keep in mind that once we step outside of the cockpit and into our personal lives, each of us is completely different, especially from a financial perspective. It is important to work the numbers with your trusted advisor for your situation.
Now that we have satisfied our regulators with our disclosures, let’s look at a typical scenario.
To arrive at the answer for the Social Security dilemma, you first must understand the inner workings of the system and establish a constant from which to work from. For our purpose, we will assume that the Social Security system will be around for quite a while, especially for those that are nearing or are at the qualifying age of 62. It is no secret that our Social Security system has seen better days, especially for us younger contributors. Whether or not it will be around to benefit those of us in our 40’s or early 50’s is probably better left for another discussion. We will also assume that in our example, our recipient is 62 years of age. We will look at the break even point, based on taking benefits early vs. late, the effects of working while taking Social Security, and the significance of this benefit from a Retirement Asset Management standpoint.
The first part of the equation should be mathematical. This is the most basic starting point. Let’s assume that our sample pilot does not work beyond the age of 62. Let’s also assume that the average Social Security monthly payment for a retired airline pilot is approximately $1,800.00 at 62 and $2200.00 at age 66. (This is the full retirement age for those born between 1943 and 1954). The difference between these two amounts is $400.00 per month. This may sound tempting, but you have to follow the math. We will also assume that payments are not taxed.
If our pilot’s monthly benefits are taken at the age of 62 at $1800.00 per month, he would receive a benefit of $21,600.00 per year. This means, that by taking the lower benefit at age 62, our pilot will have received $86,400.00 prior to turning age 66. Had he waited to 66 years of age, he would have been able to take advantage of the additional $400.00 per month.
To make up for the $86,400.00 not received during the previous 4 years prior to turning age 66, our pilot will have to receive the additional $400.00 per month for 216 months, or 18 years to make up for payments not received. Put in another way, if our pilot passes away at the statistical age of 82, he would have received $475,200, had he taken the benefit at 62 (the lower amount), as opposed $422,400 (the full amount at age 66). A difference of $52,600. This makes a pretty compelling case for taking your benefits early. So when is it prudent to wait to take your Social Security benefits late? Almost never!
One main reason is the fact that something may happen to you while you are waiting for that larger payment. If some-thing does happen, you will not have received anything at all.
There may be one exception, however, and that is if you decide to work past 62 years of age. The reason for this is that your benefits will be taxed at quite a high rate. In 2010, once you earn more than $14,160.00, you will be taxed $1.00 for every $2.00 (50%) on Social Security benefits. For a major Legacy-Carrier pilot, the $14,160.00 earnings limit is usually reached within the first two months of the year. This means that most of your benefit will be taxed at the 50% rate. This “penalty” is phased out in the year you turn 66 (Full Retirement Age) and is no longer applicable on the month you turn “full retirement age”. Some have argued that it is worthwhile taking it anyway since you at least receive something. I cannot disagree with that philosophy, but we would always to look at the pilot’s individual situation.
In my opinion, the most compelling reason to take Social Security benefits as early as possible really has nothing to do with break even points, or the fact that you may be able to “Pay Back” benefits received early, just to receive the higher amount at “full retirement age”. For those unfamiliar with the “pay back” concept, I would be happy to discuss this one individually with anyone, but from a retirement asset and management perspective, it carries no financial logic. The most compelling reason to take Social Security as early as possible is the fact that, in retirement, it is all about cash-flow and asset longevity.
From an assets management standpoint, there is no greater friend than time to invest. It is a historical fact that money does grow if given enough time. That being the case, I would say that if someone is trying to give you money and you hold out on taking it for the chance of getting a slightly bigger payout later, then I believe that you are hurting yourself in various ways, not to mention the fact that, should you pass away prior to getting that larger payment, you’ll never see any of it. Even if you do live longer, it will take you 18 years (as in our example) to break even. The risk of something happening in that period is far greater. Bottom line is, Social Security helps your cash-flow. The better the cash-flow, the lesser the money you need to take out of your own nest egg, and more than likely pay taxes on it if it is coming from an IRA.
I could quite comfortably argue that the first five years of retirement are the most crucial for the longevity of your assets. It’s not too often in our lives that we can take advantage of pension benefits and for those with lump sums, even the ability to invest a big portion, if not all, in the markets in some way. With the proper protections in place for your assets, you will have the ability to expose your assets to potential growth, which will, in turn, stretch out the longevity of those assets, not to mention, maybe leaving some behind as your legacy. So, when the question comes up about whether or not to take your Social Security payments early or not, follow the math and make the calculation for yourself with your actual numbers. More than likely, it will work out so that, at least mathematically, you will be ahead if you take them as soon as they are available.
Alex A. Tapia, AIF ® President and Retirement Wealth Planner Aviation Retirement Strategies, LLC.