Waiting Until Later Is Ideal But Life Can Get In The Way
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Its best to wait until youre 70 to start taking Social Security retirement benefits even if it means tapping into your retirement assets at the bottom of a bear market. Why? Because the guaranteed, risk-free 8% annual Social Security benefit increase is an unbeatable deal.
And yet in 2018 only 6% of women and 4% of men waited until they turned 70 to claim benefits. Most advisers and financial columnists wag their fingers at people who take Social Security as soon as they qualify at age 62. Yet some 31% of women and 27% of men tapped into Social Security at that age in 2018. Its hard to say no when somebody is offering you a pot of money right now.
There are some bad reasons to do this, such as because all your friends are doing it or because youd better grab the benefits before Social Security runs out of money. I suspect that before that happened, Congress would raise payroll taxes for high-income people rather than cut benefits for one of the nations largest, most active voting blocs.
But there are some decent reasons to start taking benefits early, and the recession in the wake of the COVID19 pandemic has dramatically highlighted one of them: many people dont have much choice. Well get into that later.
Sometimes you just gotta do what you gotta do.
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If youre about to retire, you may be wondering whether you should start claiming your hard-earned Social Security benefits now. Here are a few key factors to consider in making that decision.
You May Have To Pay Income Tax On Your Social Security Benefit
When you earn money at a full-time or part-time job on top of your monthly Social Security benefit, you may have to pay federal income taxes on the benefit. This usually happens only if you have other substantial income in addition to your benefits , according to the SSA.
You may have to pay federal tax on up to 50 percent of your Social Security benefits if you file a federal tax return as an individual and earn between $25,000 and $34,000 in combined income . If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable.
If filing a joint return with a spouse, you may have to pay federal income tax on up to 50 percent of your benefits if your and your spouses combined income is between $32,000 and $44,000. If combined income is more than $44,000, up to 85% of your Social Security benefits may be taxable. If youre married and file a separate return, youll probably also pay taxes on your benefits, according to the SSA.
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Social Security And Children
Children also become eligible for monthly benefits when one or both of their parents retire, become disabled or die, but they must meet certain criteria. For example, when a parent retires, the child must be unmarried, under age 18 or be disabled from a disability that started before age 22. .
Any benefits paid to your children will not decrease your retirement benefit. In fact, the value of the children’s benefits, added to your own, may help you decide if taking your retirement benefits sooner may be more advantageous.
Within a family, each qualified child may receive a monthly payment of up to one-half of your full retirement benefit amount, but there is a limit to the total amount paid to family membersgenerally, 150 to 180 percent of your full retirement benefit.
Can You Still Work While Receiving Social Security
You can continue to work while you receive Social Security benefits. But there is a limit to how much you can earn and still receive full benefits. The earning limit may be adjusted each year.
If you earn above the limit, Social Security will deduct a certain amount of your benefits each year.
Social Security Benefits, Earning Limits and Penalties
|SSA deducts $1 from your benefits for every $3 you earn above the limit|
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What Is The Average Social Security Benefit
According to the Social Security Administration, the estimated average monthly retirement benefit in 2020will be$1,503.10 That adds up to right around $18,000 each year. No matter how you slice it, thats not a lot to live on.
Among the elderly, about 1 in 5 married couples and almost half of unmarried folks rely on Social Security for 90% or more of their income in retirement.11 Folks, social Security was always meant to replace some of your income in retirementnot all of it.
According to the Social Security Administration, the estimated average monthly retirement benefit in 2020will be$1,503.10 That adds up to right around $18,000 each year.
If you’re still working, its up to you to secure your retirement future. If youre out of debt and have emergency savings in place, its time to start saving 15% of your income for retirement.
Your 401 and Roth IRA should be the foundation of your retirement plan and your main source of income in retirementnot Social Security. If you feel behind, theres still time to get back in the game. Its never too late! Working with an investing professional like a SmartVestor Pro can help you get the ball rolling on your retirement dreams.
And now for the million-dollar question . . .
Youll Get A Bigger Monthly Social Security Check If You Wait Until 70
Claiming Social Security before you reach full retirement age will result in a reduction in benefits as much as 25% to 30% less than you would have received if you had waited. That reduction is permanent.
Instead, if you wait to take your benefits until after your FRA, Social Security will add an 8% delayed retirement credit to your eventual monthly payout each year you hold off, up until age 70.
Thats a guaranteed return of 8% per year of deferral after your FRA, which could be more than you might receive with any other fixed products right now. Its definitely more than the cost of living adjustments that Social Security beneficiaries have been getting for the past decade, which have averaged about 1.5% a year.
Those COLA increases are not always enough to keep up with true inflation. And, when there is a COLA for Social Security, it may be coupled with a Medicare premium increase.
The Problem: The Economic Toll From The Pandemic Will Very Likely Affect Social Security Benefits
The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy. Due to the economic fallout from the COVID-19 pandemic, the key measure of average wagesthe average wage index is very likely to decline in 2020. As a result, the initial retirement benefits for those who are first eligible to receive benefits in 2022when they reach the age of 62would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll. The effect is very likely to be so significant that workers turning 62 in 2022 would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history. This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in 2020 and first become eligible to retire in 2022 because benefits are normally expected to grow for each successive cohort of retirees. Moreover, the benefit reduction and notch would have long-lasting consequences, as they not only would affect benefits in the first year of ones retirement but also lower them for every year going forward, as annual benefits are determined by adjusting the initial level for inflation.
When Can A Spouse Claim Spousal Social Security Benefits
You can claim spousal benefits as early as age 62, but you wont receive as much as if you wait until your own full retirement age. For example, if your full retirement age is 67 and you choose to claim spousal benefits at 62, youd receive a benefit thats equal to 32.5% of your spouses full benefit amount.
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If Health Problems Force You To Retire Early
Sometimes health problems force people to retire early. If you cannot work because of health problems, you should consider applying for Social Security disability benefits. The amount of the disability benefit is the same as a full, unreduced retirement benefit. If you are receiving Social Security disability benefits when you reach full retirement age, those benefits will be converted to retirement benefits.
What Are Social Security Benefits
Lets talk definitions first. Social Security benefits are simply payments made to you when you retire or become disabled. These payments are designed to help replace someof the income folks lose when they retire or cant work anymore because of a disability. Benefits could also be paid to your spouse, children and other qualifying family members when you die.
There are three types of Social Security benefits you need to know about.
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An Example Of Taxed Benefits
Lets say you receive the maximum Social Security benefit for a worker retiring at FRA in 2021: $3,148 per month. Your spouse receives half as much, or $1,574 a month. Together, you receive $4,722 a month, or $56,664 per year. Half of that, or $28,332, counts toward your combined income for determining whether you have to pay tax on part of your Social Security benefits. Lets further assume that you dont have any nontaxable interest, wages, or other income except for your traditional individual retirement accounts required minimum distribution of $10,000 for the year.
Your combined income would be $38,332half of your Social Security income, plus your IRA distributionwhich would make up to 50% of your Social Security benefits taxable because youve exceeded the $32,000 threshold. Now, you may be thinking, 50% of $56,664 is $28,332, and Im in the 12% tax bracket, so the tax on my Social Security benefits will be $3,399.84.
Fortunately, the calculation takes other factors into account, and your tax would be a mere $225. You can read all about the taxation of Social Security benefits in the Internal Revenue Service Publication 915.
If You Work While Getting Social Security
Yes, you can work full or part-time while also getting Social Security retirement benefits. However, if you have not yet reached your full retirement age, and if your net income from working is higher than the annual earnings limit, your annual benefits will be reduced. Beginning in the month you reach full retirement age, Social Security will stop reducing your benefits no matter how much you earn.
During any full calendar year in which you are under full retirement age, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual net income limit. The income limit changes every year. In 2017, the income limit was $16,920.
Tax Considerations For Social Security Benefits
How do these tax considerations affect when you should apply for Social Security benefits? At todays , they may not have much of an impact on most people. Still, tax rates and income thresholds can change, so its worth remembering that you will lose less of your Social Security to taxes if you are in a lower marginal tax bracket when you begin to collect.
You should also note that if you decide to return to work, even part-time, and arent yet at your FRA, your Social Security benefits may be temporarily reduced. The reduction is $1 for every $2 of earned income over $18,960 in 2021 . During the year when you reach your FRA, your benefits will be reduced by $1 for every $3 in income over $50,520 in 2021 until the month when you become fully eligible. That money isnt lost, however. The SSA will credit it to your record when you reach your FRA, resulting in a higher benefit.
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How aggressive an investor are you?
How worried are you about future reductions in Social Security?
The Social Security trust fund is projected to be depleted in 2035, at which time there would only be enough revenues to pay between 75-80% of the expected benefits. While the proposals to make Social Security solvent have generally involved higher taxes or reductions in future benefits, there’s no guarantee they won’t reduce payments to retirees, especially ones with higher incomes. If you’re concerned about that, you may want to get as much under the current benefit formula as you can before any reductions are made.
What’s your life expectancy?
All things being equal, if you live to the average life expectancy, you would get about the same amount of benefits no matter when you decide to start collecting. The longer you live beyond that, the more you can benefit by delaying benefits. Of course, no one knows for sure when they’ll kick the bucket. But you can get a free estimated life expectancy based on your gender, health, lifestyle, and family history from the Living to 100 Life Expectancy Calculator or a much simpler version at the Actuaries Longevity Illustrator.
What about Medicare?
As you can see, there are many factors to consider in deciding when to collect Social Security. There’s no right answer for everyone, but make sure yours is an informed one. If youre still not sure, you may want to consult a qualified and unbiased financial planner.
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What A Social Security Break
In a nutshell, a Social Security break-even calculator can tell you when the best age is to start taking Social security benefits, in terms of how much money you could expect to receive over time. Going back to the previous example, lets assume that you track your benefit amounts over a 10-year, 20-year and 30-year period. Heres how your total benefits received would look over each of those periods, for all three starting points.
Your cumulative benefits after 10 years:
- $144,000, starting at age 62
- $122,400, starting at age 66
- $52,800, starting at age 70
Your cumulative benefits after 20 years:
- $288,000, starting at age 62
- $326,400, starting at age 66
- $316,800, starting at age 70
Your cumulative benefits after 30 years:
- $432,000, starting at age 62
- $530,400, starting at age 66
- $580,800, starting at age 70
You can see that youd draw the most Social Security benefits in total if you wait until age 70 to start taking them, assuming you live to age 100. But that could be a big if when youre not in the best health.
What you have to keep in mind when using a Social Security break-even calculator is that the numbers are hypothetical. They dont take into things that could affect your ability to draw benefits or how far those benefits might go, such as:
What Are The Risks Of Early Retirement
Some risks are involved with early retirement. If the Social Security Administration decides you did not become disabled until after you began collecting early retirement, then the SSA will not pay the difference between early retirement pay and disability pay.
Also, if the SSA denies your disability claim, you will receive early retirement payments at that rate for the remainder of your life.
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When Can You Start Receiving Social Security Benefits
You can start receiving your Social Security retirement benefits as early as age 62 and as late as age 70. According to the Social Security Administration, you are entitled to full benefits when you reach normal retirement age or “full retirement age.” Learn more about when you can draw Social Security benefits.
Defining The Social Security Break
Your Social Security break-even age represents, in theory, the ideal point in time to apply for benefits in order to maximize them.
Remember, you can begin taking your benefits at age 62 at a reduced amount. But by taking your benefits at this earlier age, youll receive more Social Security checks over your lifetime assuming you reach your desired life expectancy.
On the other hand, delaying your benefits past full retirement age increases them year over year until you reach age 70. Currently, the full retirement age for most people is either 66 or 67 years old, based on Social Security Administration guidelines. If you wait until age 70 to start claiming your benefits, youd receive 132% of your regular monthly benefit amount. So the trade-off is receiving fewer checks from Social Security but the ones you do get would be larger.
Your break-even age is the point at which youd come out ahead by delaying Social Security benefits. Your actual Social Security break-even age can depend on the amount of benefits youre eligible to receive, your tax situation and things like how inflation might affect the purchasing power of your benefits.
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