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The Three (3) Full Retirement Age Enigma factors

The more you hurry, the behinder you get- Lewis Carroll (1865)

In a galaxy far and many light-years away, Full Retirement Age had been an enigmatic topic that Americans weren’t ready to discuss. The times, how they are a-changing!

The call from Sandra, a Registered Nurse, came in on my cell phone. Essentially, The cliff notes version of the conversation went like this:

“-Armando, I am 62, still in the workforce: I’m tired, have been working all my life, and have paid into the system for 46 years. I want to get my Social Security pension early since I don’t know what the future holds.”-

Though it may be really tempting to take the money-now approach to guaranteed income, is this the best alternative for one to take? Let’s look at several factors facing her and the case’s outcome.

 

Factor # 1: Longevity

Let’s face it. Longevity risk, the risk of living too long and outliving our money, is an all-too-real scenario and the greatest risk we all face, specifically baby boomers. Since half of all 65-year-olds will live longer than the average life expectancy, effective retirement planning must account for 25 to 30 years beyond expectancy.

In Sandra’s case, her Full Retirement Age (FRA) is age 66 and 6 months. If she decided to take benefits at 62, she would receive $1,450 a month which translates into a 30% reduction in monthly benefits. If she waited to take benefits at her FRA, her monthly Social Security benefit would be around $2,000.

However, if she waited until age 70 to file, her monthly Social Security income would be $2,560, an increase of more than 76% in monthly benefits. This translates to an increase of her lifetime benefits of no less than 24%. 

Let’s think this out clearly. Every year that we delay taking Social Security income past the Full Retirement Age, translates to a 7.36 to 8% increase in benefits. Since the Full Retirement Age now ranges between 66 and 67 years of age, the annual cost-of-living adjustment (COLA) is another critical factor to consider. If she decided to claim benefits at 62, not only would she start with reduced benefits, but her COLA-adjusted benefits would also be lower. Remember, during retirement, as my mentor Tom Hegna likes to say, every day becomes a Saturday. Things that make you go Hmm?

Factor # 2: Retirement Lifestyle According to the latest revamped Society of Actuaries mortality tables based on data collected for 2010-2014, a 65-year-old female’s average life expectancy is 88 years. Eighty-five (85) for a 65-year-old male is the new norm. In her case, I totally understood her WHY- her reasons for taking early retirement. However, at 62, her current nurses’ income, investment ability and benefits, are at the upper end of her lifetime earnings trajectory. Her retirement nest egg was not sufficient enough to fund 15 or 20 + years of retirement.

Factor # 3: Current and future healthcare costs

So,…

To stop working before her Full Retirement Age, taking a reduced Social Security income and not having another source of supplemental income for her retirement assets, would leave her with scant financial options by the time she reached her 80’s. Even if she was healthy enough to return to work at a later time, her ability to regain her current level of compensation would be seriously limited. Here’s a caveat to consider: 

While she can take reduced Social Security benefits at 62, she doesn’t qualify for Medicare until age 65. Since she is physically and mentally healthy, she doesn’t qualify for Medicare Disability benefits either. Giving up her current group health benefits at work would force her to seek and pay for private individual health insurance in the meantime. The current average health insurance cost for a 55-to-64-year-old individual in Florida runs between $1,100 and $1,300 per month. Annual Out-of-Pocket costs can be as much as $6,000 per individual. While every person and case are different, taking an early payout would result in a permanent Social Security income reduction of $1,100 a month between the ages of 62 and 70. If we factor that income reduction plus the annual private health insurance cost up to her Medicare-eligible age of 65, she faces an out-of-pocket outlay of $79,200 in the next 3 years. Using a conservative 5% cost of money rate, the actual out-of-pocket expense would be $87,387.

As advisors, we need to engage our clients by asking them about where they feel they are currently are in life. Our job is to help them bring substance to their thoughts, ultimately allowing us to help them plan better in both a financial and in a more practical lifestyle sense. Long Term illness, reduced mobility, and cognitive decline are some of the areas that could impact their financial decision-making as they age. Hence, these are key reasons why advisors need to annually meet with clients and end each appointment with another appointment.

A critical and needed approach was to assist Sandra in understanding what she needed to spend money on. Things like the basic and unavoidable expenses she would incur during her early planned retirement and determining the annual income need to cover them. Setting aside “buckets of money” towards Health Care, Housing, Transportation, Food, Debt, and Personal Spending, was the first step in her Retirement Planning.

The second step was to help her understand the consequences of taking an early Social Security income payout and the effect on her lifestyle in retirement. Specifically, how a reduction in the income stream would affect her plans to enjoy:

  • Travel
  • Hobbies
  • Investment opportunities
  • Philanthropic goals
  • And Legacy planning

Once she factored in her assets’ growth expectations, including social security income, she realized how much money she would have in retirement. However, she was not aware of how much income she could expect from that money. She learned that Longevity and Withdrawal are two of the biggest risks during retirement.

Assisting her through the Full Retirement Age Enigma process, gave her the peace of mind to understand, prioritize and ultimately make the right holistic financial decisions for her specific needs. Advice Lewis Carroll would be proud.

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