Date: January 10, 2022

Why Karen’s Decision About Social Security is Just Plain Wrong

Your golden years can be a wonderful time in your life. You can enjoy the fruits of decades of labor, and prudent investing. Your retirement income is greatly determined by your savings, investing, pensions and other retirement savings.

Social security is also a major determinant of your retirement income, and therefore, your standard of living as a retiree. But, before you begin taking social security, consider the pitfalls of taking it too early!

“Karen” is a friend of a client who I’ve been advising about wealth management and early retirement. Karen is a real estate broker in her early 60’s who loves selling luxury homes in the New Haven, CT area. Karen told my client how smart she was to take her social security at age 62 while continuing to work. 

She didn’t need the extra income, but said it will give her a steady baseline income plus some extra money to spend on her grandkids.  “I earned it. Let’s take it. And besides, everybody’s doing it! Why wait?”  My client wanted to know if this was a good idea.


Decision: Filing for social security early and continuing to work

I explained that you can begin taking social security as early as age 62, but you can maximize your benefits if you wait until age 70. For the most part, the longer you wait, the higher your monthly benefits will be. 

While it may seem like receiving social security benefits while continuing to work is a good idea, it can cost your retirement dearly, so it’s extremely important to know the risks first. Karen should have consulted with her financial advisor or asked for a second opinion from a financial planning and retirement specialist


Schedule a no-sales conversation with the team at Heritage Capital and get a second opinion before making a decision about social security!


The Problem With this Decision

Actual benefits can be reduced forever! 

One of the biggest problems Karen faces when taking social security early is reduced benefits. This can severely undercut your retirement income going forward. In fact, receiving your social security before your full retirement can reduce your benefits by 20% or more. Surprisingly, working and increasing your income can only exacerbate this. 

Your income can cause further reductions making a bad situation worse

Karen decided to keep working, so her social security benefits will be reduced if they exceed a certain limit. The 2021 Social Security earnings limit is $18,960 ($1,580 per month) if you’re younger than 65. If your income exceeds this amount, $1 will be withheld from your monthly social security benefit for every $2 you earn over the limit. So, attempting to “double-dip,” as you near your retirement can be costly.

Social Security Benefits can be taxable further reducing any benefits of this strategy

It sometimes comes as a surprise to many near-retirees that social security benefits are taxable, adding even further reductions to your social security decisions. My client was surprised to hear this.

If your individual income is between $25,000 and $34,000 (or up to $44,000 filing jointly) your social security benefits are taxed at 50%. Once your income exceeds $34,000 or $44,000 married filing jointly, they are taxed at up to 85%. 

The bottom line is to look at your personal financial situation closely before electing to receive social security benefits. This applies to folks at any age, but is especially important if you’re looking to receive benefits when they first become available to you at 62.

Consider Spousal Benefits First if Income is Needed

If you’ve been married for at least a year, and your partner is already receiving their social security benefits, it can be a great idea to tap into your spousal benefits before taking your individual benefits early. “Can” not “will” is the operative word. 

Spousal benefits can be up to 50 percent of your spouse’s full retirement age amount, but it depends on your actual filing age as well. The older you are, the higher spousal benefit you can receive, ranging between 32.5% and 50% of your spouse’s full retirement benefit. 

Consider this option before taking your own benefits early but only under the advice of your financial advisor. The Budget Act of 2015 abolished this strategy with some exceptions and you may not qualify. You could be “deemed” as taking your own benefits as well. The team at Heritage Capital has some very cool social security tools to run breakeven scenarios as optimizing spousal claiming strategies.

Unfortunately for Karen, it’s very easy to make mistakes involving social security. It’s also even more concerning that many financial advisors at big-name firms aren’t really able to help. They may offer some basic advice, or just leave you to your own devices. If your financial advisor or CPA doesn’t have the depth of knowledge or tools to analyze your situation, then you might want to consider a change or a second opinion. Many do not!

When it comes to social security decisions, you can’t use a cookie cutter approach. There are a number of different variables to consider, which can create a myriad of different scenarios.


How to avoid costly social security mistakes

Talking to the right advisor can add up to better retirement benefits

If Karen had consulted me before filing for her social security benefits, I would have advised her to conduct a financial analysis for retirement planning, where she could consider all of the variables of her financial picture, and find a way to project how those variables will play out in the future. 

At Heritage Capital we are outfitted with forecasting tools to run various scenarios to see how her age, income, benefits (and spousal benefits) might work together with her other financial assets. Once you have an idea of what the future can look like based on your current social security decision, you can easily identify the right choice. 

If you’re not completely satisfied with your current financial advisor, changing investment advisors may be the best decision at this critical time in your life cycle. 

Understand your breakeven age to optimize your retirement plan

Waiting to take your social security increases your monthly benefits, but also means fewer years of payments. You’ll need to find the happy medium between maximizing your monthly payments but not waiting too long to receive them. This is known as your breakeven age.

To calculate your break even age, divide annual benefit by the extra money you’ll receive if you postpone your benefits. This will tell you how many months it will take offsetting the wait.

How to calculate your social security break even age:

Suppose you’ve reached full retirement age, and you’re currently deciding whether to collect benefits now, or wait one year. You’ll receive $1,000 per month if you decide to take benefits now. But, if you wait, you’ll receive 8% more each year after your full retirement age until age 70. Waiting one year will yield $80 more, for a total of $1,080 per month, but you would give up $12,000 to receive it.

To find out the break-even age in this example, divide $12,000 by the extra $80 a month you’d receive, which equals 150 months (or 12½ years). So, if you wait one year to take your social security benefit, it will also take 12½ years to “break even.”

Understand your options before making any decisions

When you speak to your advisor, you’ll have a much better view of your available options as a social security recipient. Whether it’s better to wait, take your retirement benefits now, or tap into your spousal benefits, you’ll need to have a clear view of your available options to choose correctly.

Always consider all of your available options. The quality of your retirement life depends on it. If you are not happy with your current retirement plan, consider changing financial advisors. The team at Heritage Capital can help Connecticut residents with this decision or provide a no-obligation second opinion. 

Not sure how to switch financial advisors? Check out our new guide.

social security eBook Heritage Capital



Paul Schatz, President, Heritage Capital