Saturday, August 13, 2022

When Should I Start Drawing Social Security

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You Could Help Keep Your Tax Bill Lower

New tool can help you decided when to start drawing Social Security

Many people dont realize that they could end up paying federal income taxes on as much as 85% of their Social Security benefits.

If you file a federal tax return as an individual and your provisional income is between $25,000 and $34,000, then up to 50% of your benefits may be federally taxable as earned income. If your provisional income is more than $34,000, you may have to pay federal income taxes on up to 85% of your Social Security benefits.

If you file a joint return and you and your spouse have a provisional income between $32,000 and $44,000, up to 50% of your Social Security benefits could be taxed. If your provisional income with your spouse is more than $44,000, up to 85% of your Social Security benefits may be taxable.

If you dont have much taxable income in retirement, you may not have to pay any federal taxes on your Social Security benefits. But if youre like many Baby Boomers you may have a hefty amount of your retirement savings in tax-deferred IRAs or 401s and the federal income taxes on those savings could be substantial.

To help with that, you may be able to take distributions from your tax-deferred accounts , etc.) now, and perform some Roth conversions, and/or perhaps conversions to other vehicles that can provide you with tax-free income, such as life insurance, so that Social Security benefits later may not be taxed at all by the federal government.

The Best Age To Start Collecting

There are two schools of thought about whether to start collecting Social Security at 62 or wait.

The first is that everyone should start getting their money out of the system as soon as possible.

This theory is based on two things:
  • You have no assurances that you will live to full retirement age.
  • You must live deep into retirement to make up the difference in the two potential payouts, the one you can collect at 62 and the one you can collect if you wait until full retirement age.
  • In other words, getting some benefits now is better than the promise of more benefits later.

    The second theory states that you should wait until full retirement age in order to collect larger monthly sums. If you live long enough, this option will be more profitable.

    Lets take a closer look at your total payout potential based on the age at which you begin collecting benefits. Assume your full benefit amount would be $1,000 per month, or $12,000 each year, and your full retirement age is 67. Heres the total amount you could receive from the Social Security program.

    Starting benefits at age 62 would mean more money overall if you dont live past age 79. However, if you live to 79 or older, youd receive more money during your lifetime if you began earning benefits at age 67.

    When Should I Start Drawing My Social Security Benefits

    Planning for Social Security can be tricky. With so many different caveats and exceptions it can be a daunting task to decide when to start your draw? While Congress took away some of the loophole planning strategies in 2015, there are still many factors to take into consideration.

    Youre eligible to draw Social Security in retirement if youve worked a total of 40 quarters over your lifetime. You can earn up to four quarters a year, as long as you have earned more income than the indexed requirement in a given tax year and pay Social Security tax on that income. Your benefit amount is calculated using the 35 highest years of earnings.

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    Whats Your Social Security Break

    If youre looking to maximize your total lifetime Social Security payout, youll want to conduct a break-even analysis to determine when you should start drawing your benefits.

    Your break-even age occurs when the total value of higher benefits starts to exceed the total value of lower benefits .

    For example, if you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

    If you expect to live beyond that age, it could make financial sense to delay drawing benefits. The Social Security Administrations life expectancy calculator can help you decide.

    When it comes to calculating a start date for Social Security benefits, however, theres not an age thats appropriate for everyone. Consider your own financial needs, health and other retirement plans before making the call. If you cant reasonably afford to live without taking benefits, it may make little sense to delay taking your benefit.

    What A Social Security Break

    Should I start drawing Social Security and put it in a ...

    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:

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    You Already Have Your 35 Highest

    Your Social Security benefits are based on your earnings in the 35 years that you had the most compensation. If you’re in your peak earning years, you could boost your benefits if you keep working a few more years and delaying your benefits. However, if you aren’t going to increase your average earnings, such as if you’re only working part-time or you’ve had to retire early, you won’t miss out on the chance to boost your benefits with higher earning years. However, you’ll still receive a smaller benefit for not waiting until full retirement age.

    How Will Working Affect Social Security Benefits

    In a recent survey, 68% of current workers stated they plan to work for pay after retiring.1

    And that possibility raises an interesting question: how will working affect Social Security benefits?

    The answer to that question requires an understanding of three key concepts: full retirement age, the earnings test, and taxable benefits.

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    Can A Divorced Woman Who Was Married For More Than 10 Years Claim A Spousal Benefit On Her Ex

    Not any longer. The government eliminated a strategy that allowed a spouse or a divorced spouse to use a restricted application to file for a spousal benefit while letting her own retirement benefit grow. Now only people born before 1954 can do this.

    Instead, when a spouse or divorced spouse files for benefits, the government will give her all the benefits she is eligible for whether it is her retirement benefit or a spousal benefit, said William Reichenstein, a principal of Social Security Solutions, a company that helps individuals maximize their lifetime income.

    A divorced spouse can file for a spousal benefit even if the ex-spouse has not yet claimed a benefit as long as both are at least 62 and are divorced for more than two years. A married spouse must wait until her spouse has filed.

    But if the ex-spouse dies, the picture changes. The surviving ex-spouse can claim a survivor benefit as early as 60 and allow her retirement benefit to grow until as late as 70. Or she can claim her reduced retirement benefit early and then switch to a higher survivor benefit at full retirement age.

    If you were married for 10 years, keep tabs on the ex, Ms. Floyd said. Once he dies, that survivor benefit could be higher than your own.

    When Should I Start Collecting Social Security

    When You Should Start Drawing On Social Security

    You can start collecting Social Security payments once you hit the age of 62. However, is it wise to do so?

    That depends on your situation. For most people, though, it makes more financial sense to wait at least until the age of 66. That is the age when people born from 1943 to 1954 first qualify to receive full Social Security benefits. That full retirement age increases for people born after 1954, hitting a maximum of 67 for anyone born after 1960 and later.

    Wondering when you should begin collecting Social Security? You will have to take a long look at your health and your finances to make the right decision.

    Retiring early

    It can be tempting to retire early and begin collecting Social Security benefits before you hit the age of 66. The thought goes like this: I have been paying money into Social Security my whole life. Why shouldn’t I start collecting it as soon as possible?

    You can start collecting Social Security once you hit the age of 62. However, there’s a financial penalty that comes with collecting at such an early age: You will receive less money each month than you would have had you waited until you turned 66.

    The Social Security Administration website provides a Social Security benefits calculator that tells you how much your monthly benefits will fall if you begin collecting payments before full retirement age.

    Suddenly, that $250 a month seems like a bigger deal, right?

    The benefits of retiring later

    That is a difference of $320 a month or $3,840 a year.

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    When To Apply If You’re Turning 70

    Social Security won’t automatically start sending you checks once you turn 70, with one exception: If you took benefits after reaching full retirement age and then suspended your benefits to earn delayed credits of 8% per year, your benefits will automatically restart at 70.

    Otherwise, you’ll need to file an application. The earliest you can file for Social Security is four months before you want your benefits to start.

    Regardless of when you file, make sure you specify that you want your benefit to begin the month you turn 70 to get the maximum amount. Social Security pays a month behind, so expect your first payment to arrive the month after your 70th birthday. For example, if you were born on May 10, you’d request that your benefits start in May and receive the first payment in June.

    But there is an exception if you were born on the 1st of the month. For those people, Social Security calculates benefits as if they were born the previous month. So if you were born May 1, you’d request that your benefits start in April. Your first payment would arrive in May.

    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.

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    Determining Which Retirement Age Is Best For You

    Should you take the money and run at age 62? Or hold out until you’re 70? Approximately 50% of people don’t wait past age 62, usually because they need the money, are convinced that Social Security might collapse at a later date, or are fearful of a short life span.

    But is early retirement a good option for you? The questions below will help you decide.

    Are you still working? Some people, especially construction workers and other physical laborers, are less physically able to handle work at 62, even though they don’t qualify for disability. They may be good candidates for early retirement. However, if you’re still able-bodied and interested in working, you might want to avoid claiming early retirement benefits. If you’re earning a high salary, you’ll miss the opportunity to boost your Social Security payment amount.

    Second, you’ll lose one dollar in benefits for every two dollars you earn over the SSA’s earnings limit . There are no such deductions if you work after reaching full retirement age. The SSA provides an online earnings test calculator to determine whether working will lower your retirement benefits.

    How’s your health? If you’re convincedâeither by genetics, research, or the amount of time you spend in doctors’ officesâthat you’ll have a shorter lifespan than your peers, it doesn’t make much sense to delay your retirement benefits.

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  • The Bottom Line On When To Start Social Security

    Should I start drawing down my savings or claim Social ...

    Timing your Social Security benefits is a complex decision that will vary from person to person. Knowing the answers to the above questions will help you gauge when might be right for you, but consider speaking to a retirement professional, like a Certified Financial Planner , to map out when may be the right time to file for Social Security.

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    Who’s The Higher Earner

    Compare the estimates for you and your spouse, and pay special attention to the difference between your estimates. The higher earner is the spouse with the larger primary insurance amounts .

    When you’re deciding who will collect first and who should wait, consider having the lower earner collect first and having the higher earner wait. Over time, the higher earner’s increases will be worth more than the lower earner’s increases.

    And if one spouse’s estimates are more than twice as high as the other’s, it might make sense for both of you eventually to collect on the same spouse’s earnings record.

    In that situation, the spouse with the lower benefits can claim first based on his or her own earnings record and apply for spousal benefits later when the spouse with the higher benefits starts to collect.

    The longer the spouse with the higher benefit waits to start collecting, the higher benefits will be for both spouses. Delaying the higher earning spouse’s benefits could also eventually increase the other spouse’s survivors benefits.

    Get Your Social Security Estimates

    The SSA website provides estimates for how much you’ll collect if you start receiving benefits at age 62, your full retirement age , and age 70. Remember that you don’t have to start taking your benefits at those milestone ages you and your spouse can start collecting anytime between ages 62 and 70.

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    Youre Concerned Social Security Will Disappear

    Some people are concerned about potential Social Security changes in the future, such as higher retirement ages, lower benefits or higher taxes on benefits. As a result, they want to take the sure thing as soon as possible. In a 2017 Social Security summary, the government said Social Security trust funds will be depleted in 2034. Even then, however, annual Social Security taxes are projected to keep benefits at almost three-fourths of current levels.

    Determining When To Take The Money

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

    Some advisors offer complicated strategies, youll be better off keeping things simple. When deciding when to start drawing Social Security, consider the following in order:

  • When do you need the money? If you need it now, take itbut for each month youre able to delay, your monthly payment will increase.
  • How long do you expect to live? Are you in good health? Do you come from a long-lived family? The longer you live, the more you stand to gain by delaying payments. The break-even point for people between the ages of 62 and 66 is 84, meaning that if you live longer than 84 years, youll collect more if you wait until after age 66. You might want to claim benefits sooner if you dont think youll live to age 84.
  • If youre married and earn more than your spouse, when you die, your spouse can swap their benefit for your larger one. If you put off taking Social Security until age 70, your spouse will get more when you die. In the interim, they can claim their lower benefits.
  • Although Social Security likely will survive in some form, plan as though Social Security wont be there for youthat is, follow the simple path to wealth of living beneath your means, staying out of debt, saving F-You money, and investing in index funds. If you get Social Security, it will be a bonus.

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    Reasons You Should Claim Social Security Early

    Your retirement planning likely includes getting income from the Social Security Administration, but when you start collecting Social Security benefits can have a big impact on your planning. The earliest you can collect is age 62, but you’ll get more money if you delay your benefits past your initial Social Security eligibility. If you wait until after your full retirement age to start collecting Social Security you can earn delayed retirement credits, which will increase your benefits even more.

    Read: When Social Security Runs Out: What the Program Will Look Like in 2035

    You might think that waiting for bigger benefits is better, but that’s not always the case. There is no definitive answer to when you should collect Social Security benefits, and taking them as soon as you hit the early retirement age of 62 might be the best financial move.

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