FERS Supplement

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Once your FERS Supplement ends, should you take Social Security benefits?

This really comes down to a case by case basis. As you probably know by now, the additional income from the FERS Supplement ends once you turn 62, reverting to the regular pension that you normally would have received. We are fans of delaying Social Security for as long as possible, and the latest you can delay would be age 70. The benefit of delaying Social Security is that the way the rules are written today, your Social Security annuity will increase automatically the longer that you wait.

Technically, the Full Retirement Age (FRA) for Social Security is between 66 and 67, depending on the year you are born. FRA refers to the full annuity amount that a person would receive when they take their Social Security payment.

When a person chooses to take their Social Security sooner than when they’ve reached their FRA, then their Social Security amount actually decreases a little every single month that they take it early. If someone chose to take their Social Security at age 62 instead of their FRA of 67, then their Social Security annuity would be reduced by a maximum of 30%.

If instead, that person chose to delay receiving Social Security after they reached their FRA, then they would experience an 8% per year increase in their Social Security income. So if the person whose FRA is age 67 delayed taking their Social Security to age 70, their income would increase by 24%.

Because few things are guaranteed to grow in finance, we generally recommend that our clients take advantage of opportunities like these when they become available. That being said, sometimes delaying Social Security later than age 62 just isn’t prudent. Reasons for this might include life expectancy. If unfortunately a person isn’t in great health or has a terminal illness, it might make more sense to take their Social Security sooner. Other reasons for taking Social Security early would due to cash flow reasons. The reduced income received from the FERS pension might not be enough to pay the bills for some people, especially if relief doesn’t show up for several years later.

At the end of the day, we would recommend consulting a trusted financial planner before making the decision whether to take Social Security when your FERS Supplement ends, or instead to delay it.

If you do not take Social Security early, will you really never get your money back?

It is true that if you don’t take Social Security early, or even delay it past age your full retirement age, means no income for however long you choose to hold off on taking it. It is false that you won’t make your money back over time.

As previously described, the amount of Social Security grows the longer that it is delayed. Let’s look at an example to see how you can make your money back:

Bob is currently 62 and his full retirement age is 67. At age 67, his Social Security benefit is $2500 per month. If he chose to take his Social Security benefit now, his monthly benefit would be reduced to $1750 per month, a 30% reduction. $1750 per month multiplied by 48 months (4 years) equals $84,000, representing how much Bob would be losing out if he had chosen to wait until age 67 to start his Social Security.

This has become a long math problem but bear with us as we dive a bit deeper. The difference between $2500 (the amount Bob would receive at age 67) and $1750 per month is $750. If we divide $84,000 by $750, we get 112 months or a little over 9 years that it would take Bob to “break-even” on choosing to wait to take his Social Security at age 67 instead of 62. If Bob lives longer than 9 years, then Bob got his money back and is starting to make more by waiting to his age 67.

Assuming Bob is a healthy man, we can see how choosing to wait longer to start Social Security ends up making more money in the long run. The same reasoning applies when it is delayed past the full retirement age to age 70.

What happens if Social Security benefits run out?

The current forecasting predicts that trust fund reserves for Social Security are “expected to become exhausted” by 2037. In fact, that’s coming straight from ssa.gov’s website. After this point, if Congress doesn’t change anything, it is predicted that we’d see a 24% reduction in regularly scheduled benefits. The good news is that we still have time between now and then for Congress to make changes to the program either by immediately reducing benefits for everyone or by increasing the tax rate that is taken for Social Security (currently it’s 12.4% combined for both the employer and employee). If Congress does make changes to the program, it’s predicted the reserves would be sufficient to keep benefits status quo for the next 75 years.

With this information, it can help bring peace of mind to uncertainty related to Social Security, and hopefully expel any false claims about it.

Can you depend on Social Security as part of your retirement?

For those who are mid-career and approaching retirement, it is wise to plan that Social Security will be there throughout retirement. The real question is, is Social Security the main or only source of retirement income for someone. Hopefully, that’s not the case, because even a slight reduction in benefits would put that person in a bad spot cashflow-wise.

The biggest driver of a successful retirement is living within your means. You can have millions of dollars in the bank and have poor habits that lead to overspending and blow through all of that money. The same is true for someone who has very little outside of Social Security income.

Can you depend on Social Security being there when you retire? Yes. You should feel confident that it will pay out when you retire, even if it’s a reduced amount.
Should you depend on Social Security? Ideally, no. Ideally, it should be a slice of the retirement pie for you, alongside other slices including other pensions, retirement accounts, and savings and investment accounts. This is especially true for the younger generation who is recently entered or is just entering the workforce. They should be focused on saving on their own and have less dependence on future Social Security income.

Sources:

https://www.ssa.gov/oact/quickcalc/early_late.html

https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html#:~:text=As%20a%20result%20of%20changes,are%20projected%20to%20become%20exhausted.

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