Thursday, May 19, 2022

When Do I Have To Start Collecting Social Security

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Why Not Claim Early And Invest The Benefits In The Markets

When Can I Retire and Collect Social Security? What’s The Best Age?

This strategy is highly risky, said Elaine Floyd, the director of retirement and life planning with Horsesmouth, a New York company that trains financial advisers on Social Security strategies and other issues.

A beneficiary who goes the investment route, Ms. Floyd said, would need to reap consistently high returns and must be disciplined enough to sock away the money every month. And if the beneficiary is married and the higher earner dies first, the spouse would receive a relatively low survivor benefit.

Ms. Floyd offered a hypothetical beneficiary whose monthly Social Security benefit at full retirement age is $3,000. Say the beneficiary claimed a reduced benefit at 62 and invested the money, earning an inflation-adjusted return of 3 percent a year. By age 95, the cumulative benefits and investments would be roughly $278,000 lower than if the beneficiary had waited until 70 to claim the larger benefit.

Its really an apples-to-oranges comparison, she said. An 8 percent retirement credit and lifetime income from Social Security are the law, but investment returns are not that predictable.

How To Lower Your Social Security Taxes

There are several remedies available for those who are taxed on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividends that are used in the provisional income formula.

Therefore, the solution could be to convert the reportable investment income into tax-deferred income, such as from an annuity, which will not show up on the 1040 Form until it is withdrawn. If you have $200,000 in certificates of deposit earning 3%, which translates into $6,000 a year, that will be counted as provisional income.

But the same $200,000 growing inside an annuity, with the interest reinvested back into the annuity, will effectively yield a reportable interest of $0 when computing provisional income.

Is My Oas Pension Taxable

Yes. Like most other retirement income, your OAS pension is taxable.

To voluntarily request that federal income tax be deducted each month from your OAS payment, visit the My Service Canada Account or, complete the Request for Voluntary Federal Income Tax Deductions form .

If you do not request monthly tax deductions, you may have to pay your income tax in quarterly installments. For more information, contact the Canada Revenue Agency.

Read Also: How Many Years Of Earnings Is Social Security Based On

What Other Factors Should You Consider When Deciding To Collect Social Security

Before you decide to collect Social Security based on your break even point, you should also consider how collecting early or delaying could impact the benefit your spouse receives.

Since the Social Security formula benefit is based on an individual’s 35 highest earning years, women often collect less in benefits than men because of career breaks during motherhood and overall lower lifetime earnings. However, the Social Security spousal benefit erases some of the disparity in Social Security earnings between men and women.

The spousal benefit is available to all spouses, regardless of whether the spouse has a work history or not . The spousal benefit is 50% of the higher earner’s benefit and in order for a spouse to receive the benefit, the higher-earner must be collecting their own benefit.

The Social Security administration automatically determines whether an individual would earn more in Social Security benefits if they collected on their own work record versus their partner’s work record.

For example, if the higher earner receives a $2,000 monthly benefit, the spouse is eligible to receive up to $1,000, depending on whether they choose to wait until full retirement age, says Kiner. For example, if someone collects the spousal benefit four years before full retirement age, their benefit will be 35% of the higher-earner’s benefits.

What Counts As Work Earnings

Managing Your Social Security Benefits

If you are under your full retirement age and working, you are probably concerned about what exactly counts as work earnings. The following income sources count as earnings:

  • Wages from a job
  • Net earnings if you are self-employed
  • Bonuses, commissions, and vacation pay.

Income that is not counted includes pensions, annuities, investment income, interest, and veterans or other government or military retirement benefits.

Also Check: How Much Would I Get On Social Security

When Can You Claim Social Security And What Will You Make

The earliest you can claim Social Security benefits is age 62. In 2020, about 23.5 percent of men and 25.7 percent of women claimed their retirement benefits at age 62, according to the SSA. But you wont get your full retirement benefit at that age, meaning that retirees are settling for a much smaller benefit in perpetuity rather than wait for more.

But whats the concrete cost of waiting for a larger paycheck? Quite a lot, actually.

Youll receive your full benefit if you claim it at full retirement age . And youll receive extra benefits if you dont claim your check until age 70. After that, though, you wont receive any bonus payout, so theres no reason to wait past 70.

If you claim your benefits early, then youll lose five-ninths of 1 percent of your benefit each month for up to 36 months before normal retirement age. If you file more than 36 months early, youll lose another five-twelfths of 1 percent a month. So if your normal retirement age is 67 and you file at 62, youll lose 30 percent of your total benefit .

So if your full benefit were $1,000 a month at age 67, youd receive just $700 at age 62.

In addition to incentivizing you to wait until your full retirement age to claim your benefit, Social Security also gives you incentive to wait longer. Youll receive an additional 8 percent annually if you wait up to three additional years after full retirement age, .

So if your full benefit were $1,000 a month at age 67, youd receive $1,240 at age 70.

The Bottom Line On When To Claim Your Social Security

Every individuals and couples needs are different when it comes to claiming Social Security. But maybe waiting until age 70 is something we should seriously consider.

Even if youve already filed, you may find that youre eligible for a do-over. You can withdraw your application for up to 12 months after you file, and reapply later. But you only get one do-over. If it makes sense for you to do this, youll have to pay back the Social Security benefits that you received, and in many cases your IRA or 401 may be where you have to get that money.

If you arent sure which Social Security claiming strategy is the best fit for your needs and goals, talk to a financial adviser who is knowledgeable about retirement income planning and, specifically, Social Security benefits. An experienced professional can lay out all your options and help you work out a timeline.

Kim Franke-Folstad contributed to this article.

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Starting To Receive Benefits At 62 Isn’t So Bad

Don’t feel bad if it looks like you’ll be turning on the Social Security faucet early instead of waiting until age 70 for those much fatter checks. Remember that you’ll get many more checks by starting early. For example, if you start at age 62 and live to age 85, that’s 23 years, meaning 276 months of checks. Someone who starts at age 70 and lives to 85 is looking at 15 years and 180 months of checks.

Indeed, for those who live an average-length life, the total benefits received will be roughly the same, no matter when they start collecting. That’s how the Social Security program is designed.

Starting early also makes sense if your family tends to not live long life spans or if you’re in poor health and stand a decent chance of living a shorter-than-average life.

At What Age Do You Break Even On Social Security

Collecting Social Security after 67 How They Feel About It Now

If youre looking to maximize the amount that you withdraw from Social Security over your lifetime, you might consider doing a break-even analysis to see when its best to file. In other words, do you max out your lifetime take-home amount by claiming early and having more years of Social Security or by waiting and then claiming a much larger benefit?

For simplicity, lets assume your full retirement benefit would be $1,000. Well also assume 2 percent annual increases in the benefit, applying that to both the actual paid benefit starting at age 62 as well as the accumulated benefit to be claimed later at age 70.

So at age 62, your first monthly benefit would be 30 percent lower than your full benefit, or $700 total. At age 70, your benefit would be $1,240 plus the cost-of-living adjustments in the interim.

Heres how the numbers break down and a break-even age for claiming Social Security.

Age

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Get Ready For Retirement

No matter how much or how little you expect to receive from Social Security, you need to start saving for retirement right now. Retirement isnt an old people thing. Its a smart people thing.Thats why we recommend working with an investment professional through our SmartVestor program. Theyll sit down to help you figure out how Social Security fits into your retirement strategy and help you come up with a plan to reach your retirement goals.

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

What Is The Break Even Point And Why Is It Important

Whenever you wait until age 70 to collect benefits, you’ll be missing out on the years you weren’t receiving payments. If you’re deciding when to collect, you might consider calculating your break even point.

Your break even point tells you at what age you’ll receive more in total Social Security earnings, by collecting at full retirement age or at age 70, than you would have had you collected benefits early.

For many people, the breakeven point is around 12 and ½ years after age 70 or full retirement age, says Blair.

For example, if you collected early at age 62 rather than delay until your full retirement age of 67, you would be earning an additional five years worth of benefits. However, if you collected at 62, your benefit would be reduced by 30%. An individual collecting at age 67 would need to survive around another 12 years after collecting benefits to ‘break even’ compared to getting payouts starting at age 62.

You can calculate your own break even number, but note that the number might not be accurate if you don’t consider factors like the cost of living adjustment or having a spouse, divorced spouse or survivor’s benefit.

Read Also: What Will Social Security Pay Me

What If I Change My Mind

If you receive Social Security benefits at a reduced rate, but then change your mind, you have the option of withdrawing your application and paying back to the government what you’ve already received . Then, you could restart benefits at a later date to take advantage of a higher payout. But you are limited to one withdrawal per lifetime.

For example, let’s say you elected to receive early benefits at age 62, but then decided to go back to work at age 63. You could withdraw your Social Security application within the first 12 months of receiving benefits, pay back the years’ worth of benefits you received, go back to work, and then wait until a later age to restart your benefit checks at a higher level.

For important details about repaying benefits please read the SSA publication If You Change Your Mind.

How To Calculate Social Security Benefits

I was born in 1964. When will I be able to start ...

Lets say your FRA is 66. If you start claiming benefits at age 66 and your full monthly benefit is $2,000, then youll get $2,000 per month. If you start claiming benefits at age 62, which is 48 months early, then your benefit will be reduced to 75% of your full monthly benefitalso called your primary insurance amount. In other words, youll get 25% less per month, and your check will be $1,500.

That reduced benefit wont increase once you reach age 66. Rather, youll continue to receive it for the rest of your life. It may go up over time due to cost-of-living adjustments , but only slightly. You can do the math for your own situation using the Social Security Administration Early or Late Retirement Calculator, one of a number of benefit calculators provided by the SSA that can also help you determine your FRA, the SSAs estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, individualized projections of your benefits based on your personal work record, and more.

Although the cost-of-living adjustments announced each year are usually only slight increases, Social Security benefits will increase by 5.9% in 2022, marking the largest increase since 1982.

Also Check: What Will My Social Security Benefits Be At Age 66

What If I Take Benefits Early

If you choose to receive your Social Security check up to 36 months before your full retirement age, be aware that your benefit is permanently reduced by five-ninths of 1% for each month.

If you start more than 36 months before your full retirement age, the benefit is further reduced by five-twelfths of 1% per month, for the rest of retirement.

For example, let’s assume that you stop working at age 62. If your full retirement age is 66 and 2 months you elect to start benefits at age 62, the reduced benefit calculation is based on 50 months. This means that the reduction for the first 36 months is 20% and 5.83% for the remaining 14 months. Overall, your benefits would be permanently reduced by 25.83%.

Effect of early retirement on benefits

1.Represents Full Retirement Age based on DOB Jan. 2, 1955

2.PIA = The primary insurance amount is the basis for benefits that are paid to an individual

Is Social Security Based On The Last 5 Years Of Work

Social Security benefits are based on your lifetime earnings. Your actual earnings are adjusted or indexed to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.

Also Check: When Can I Collect My Social Security

Will My Social Security Benefits Be Reduced If I Work

A worker who claims benefits before full retirement age may run into the earnings limit, in which Social Security temporarily withholds $1 in benefits for every $2 in earnings above a certain amount in 2021, the limit is $18,960.

And though a person may need benefits to supplement low earnings, the downside of permanently reduced benefits also exists if you claim early, whether or not you exceed the earnings limit, Ms. Floyd said.

A working widow who collects a survivor benefit could also face the earnings limit. A widow can claim a survivor benefit as young as 60, though her benefit will be reduced by claiming before full retirement age. If she is working and exceeds the earnings limit, part of those reduced benefits will be withheld.

The earnings limit also applies to the spousal benefit claimed by a nonworking spouse if the other spouse is working and both are younger than full retirement age. Social Security withholds benefits on total household earnings that exceed the limit.

Withheld benefits are not lost forever, however. At the beneficiarys full retirement age, Social Security will adjust the monthly benefit upward to account for the withheld benefits. The beneficiary will continue to receive the higher payment even after she recoups the withheld benefits, which could take 12 years.

Your Income From Work Could Also Affect Whether Benefits Are Taxed

When Is The Best Time To Start Collecting Social Security? – Dave Ramsey Rant

There’s one final thing to consider when deciding if you want to work while getting benefits: the tax implications. This is an important consideration regardless of whether you’re working before or after FRA.

Social Security benefits aren’t taxed on the federal level if your income is below a certain threshold. But if your income is too high, a portion of your benefits could become subject to tax.

“Income” means something specific when determining if benefits are taxable. Income includes half of your Social Security benefit amount plus the full amount of other taxable income and some nontaxable income. So, if your Social Security benefit is $12,000 and income from other countable sources is $30,000, you’d have $36,000 that counts .

If your countable income is above $32,000 when married filing jointly or $25,000 for other filers, up to 50% of benefits become taxable. If income is above $44,000 for married filing jointly or $34,000 for other tax statuses, you could be taxed on up to 85% of your benefits.

Recommended Reading: How To Calculate Social Security Benefits At Age 65

The Length Of The Marriage Matters

In nearly every case, you need to have been married for at least nine months to claim Social Security survivors benefits. However, there are a few exceptions:

  • You share a child. If you were married fewer than nine months but your spouse was the parent of your child, you can claim survivors benefits.
  • It was an accident. Accidental death can waive the nine-month requirement for Social Security benefits.
  • Military service. If your spouse dies in the line of active duty for the military, you are entitled to survivors benefits.

What if you were married more than nine months and later divorced? Surprisingly, you can receive survivors benefits from an ex-spouse if you were married for at least 10 years. In fact, if you were married for at least 10 years to more than one ex-spouse who is now deceased, you can choose the biggest benefit. But if you remarried before the age of 60 and are still married, you cannot receive these benefits.

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Also, any amount you do receive may be shared with other family members who are also entitled to survivors benefits.

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