Social Security is a vital source of income during retirement for Americans, but many people don't know that you have choices when it comes to utilizing your benefits. Make your benefits work for you and your unique situation.
Did you know, when you start collecting Social Security can make a big difference in how much you ultimately collect from the program? Most people look forward to the date they can first start receiving their benefits but not everyone should jump on the first opportunity to take payments from Social Security.
But what exactly is retirement age?
For many Americans, retirement age is 66 or 67, or somewhere in between depending on when you were born. However, you can start cashing in earlier or later. Depending on your financial needs, you can start collecting on your benefits as early as age 62 or as late as age 70. Many people choose to take Social Security early, primarily with the idea that it is better to hold off tapping into their IRAs and 401(k)s until they must. But, in reality, that is the opposite of what most people should be doing. Waiting to take benefits until a later age can pay off in more ways than one.
You’re probably wondering whether or not you should delay taking your Social Security benefits… As with most things in the financial planning world the answer is not black and white, there are many shades of grey and your answer to that question depends on a number of factors.
Ask yourself these questions:
- Do You Need the Money Now?
Waiting until your age 66 or 67 (depending on when you were born) to start taking your Social Security benefits, the resulting benefit amount is about 30% higher than if you start taking benefits at age 62. If you take it even further and wait until age 70, the benefit amount will be about another 32% higher. This is a fantastic option for people who have other sources of income to utilize during those years they are delaying Social Security. If you don't need the money at age 62 and have other savings such as a 401k, 403b, IRA or other plan, it may be wise to start taking distributions from those plans first.
- Are You Still Working?
If you are like many other Americans, you might still working when you reach retirement age. However, if you intend on continuing to work and start taking Social Security benefits before reaching your full retirement age, you could face some issues. By receiving a paycheck at the same time as your Social Security benefits you could exceed the annual earnings limit. If your total income exceeds the annual earnings limit then your benefits will be reduced. Though the amount will depend upon your age, the reduction is fairly expensive… your Social Security will be reduced $1 in benefits for every $2 that your earnings exceed the limit!
Although this annual earnings limit disappears once you reach your full retirement age, your benefits may still taxable. In fact, up to 85% of your Social Security benefits could be taxed! Taking this into consideration, if you are still working when you come of age to start collecting early benefits then you may want to think about holding off on taking benefits until either your income is lower or until you reach full retirement age.
- Are you married?
Another smart reason to file for Social Security benefits at a later age is if it's part of a joint retirement strategy between you and your spouse. Married couples, as well as widows and divorced people, have some more Social Security options than singles do. A married couple has the option of claiming one partner's benefits now while delaying the other person's benefit until later.
- Cash Now or a Larger Benefit Later?
It is important to understand that there is a considerable, not to mention permanent, decrease in your benefit amount if you start taking Social Security at age 62. When you start collecting early, the decrease in the benefit amount is proportionate for each year between the age you start until your full retirement age. The question you need to answer now is whether having the cash now is really better than the larger benefit you'd receive if you waited. Your decision will depend upon several factors:
- Calculate the break-even point of waiting.
- What is your life expectancy?
- Do you have other retirement resources?
Deciding when to start collecting Social Security is a major decision, and not always a simple one at that. There are many factors that you will need to consider, such as your other retirement income resources, life expectancy, marital status, and current financial situation. As one of the most important decisions you will make while planning for your retirement, you must be sure to make an informed decision. If you’re smart about when you start collecting this retirement income, and you may end up with thousands of dollars more.
Contact us to speak with one of our advisors to review your options.
This material is being provided for general information and educational purposes only and should not be construed as investment, tax, accounting, or legal advice, or used as the primary or final determinant of the best strategy on how and when to claim Social Security benefits. It is strongly recommended that each individual meet with a Social Security representative who can address his/her specific situation. A wealth of information, including interactive calculators, can be found at the Social Security Administration’s website: http://www.ssa.gov/pgm/retirement.htm.