Dont Just Stick To The Plan
Remember that your life changes as you age.
I remember when I stopped really worrying about break even and started looking at the clients life instead. A client came in wondering whether or not to claim a little early. Generally I recommend people wait until full age if they are still working, but in his case, by collecting 17 months early, he could pay his house off by making double payments with the money from the Social Security benefit while still earning his usual paycheck. There was no reduction in his benefit for continuing to work .
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Even though he was pretty sure he would live past where the break even point, which would technically mean he would get less money overall, the difference was retiring with no mortgage right away, and far less expenses. In other words, instead of retiring and still making mortgage payments for a few years and trying to live it up around that, he would have no house payment right when he retired. Besides, he said, hed rather have the money in his early retirement when he was still spritely than later when he might not be able to travel and go fishing as much.
Either way, remember its your life, not a contest with Social Security.
When To Start Social Security
Most people have the option to begin taking Social Security at the age of 62. Spouses can also elect to start taking benefits on their spouse’s Social Security as early as age 62.
But that doesn’t mean taking Social Security as soon as you’re eligible is a good idea. If you don’t need the income to live on, it may make sense to wait especially if you are in reasonably good health.
That’s because the longer you wait to begin taking Social Security benefits, the higher the monthly benefit you will receive, up until age 70. If you can wait that long, your monthly Social Security amount will be 132% higher
Conversely, if you elect to take your benefits early, you will receive a reduced amount for each month you take benefits early.
For every year you can delay taking Social Security benefits, your monthly benefit check when you do begin receiving benefits will increase by 8 percent. So if you have other income to meet your living expenses, waiting until full retirement age to take your benefits can make a substantial difference in your income later in life.
However, your monthly benefit doesn’t go up after you turn age 70. There is no reason to continue to delay taking benefits after that point.
How A Social Security Break
Figuring out the right time to start taking Social Security benefits isnt always a straightforward process. A Social Security break-even calculator can help you get some perspective on the numbers so you know what you stand to gain or lose by taking benefits earlier versus later.
Social Security break-even calculators help you find the best age to start taking retirement benefits. They do this by comparing your cumulative Social Security retirement benefits paid at age 62, your full retirement age and at age 70 and estimating how long it would take the benefits paid at age 70 to break even with benefits paid starting at age 62.
Heres a simple calculation to give you an idea of how a Social Security break-even calculator works. Say that you have the option to begin receiving $1,200 a month in benefits at age 62. Youd receive $1,700 in benefits if you wait until full retirement age at 66. Or you could receive $2,200 a month in benefits by delaying them until age 70.
The break-even point represents when the cumulative benefits even out. So if you wait until age 70 to start taking benefits, it would take you until age 79 to break even with the benefit amount youd receive if you started taking them at age 62. If you were to start receiving benefits at age 66, it would take you until age 75 to break even with the benefits youd receive if you started them at 62.
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What Is The Future Of Social Security
If you’re skeptical about the future of Social Security or wary of potential changes such as means testingwhich could reduce or eliminate benefits for the wealthy, or an increase in the full retirement ageyou may be tempted to start benefits early, under the assumption that it’s better to have something than nothing. The 2021 annual report from the Social Security Trustees, released in August 2021, projects that the Social Security Trust Fund has enough resources to cover all promised benefits until 2034. Then, absent a change from Congress, the trustees project that benefits would need to be cut for all current and future beneficiaries to about 78% of scheduled benefits. The 2021 report includes the trustee’s best estimates of the impact from the pandemic, which were not reported on last year.
Over the longer term, changes such as later benefit dates or means testing may be considered.
In any situation, if you’re particularly concerned about the future prospects for Social Security, that’s a good reason to save more, and earlier, for your retirement.
Taking Social Security At 62 And Investing
First, lets calculate the earnings we could invest from.
We know there are 58 months earned at $708/month from age 62 to full retirement in this scenario. Thats $41,064 in benefits paid over that period.
Presumably, wed start investing the benefit value immediately. But lets run an easier calculation thats less advantageous.
Using the simple 4% rule, what could we expect to safely draw from a $41,064 investment? The answer is $136.88 per month.
That only gets us to about 47% of our $292/month goal!
More realistically, wed conservatively invest each $708/month benefit.
What about investing the monthly benefit?
Lets see what thatd look like when considering typical appreciation and dividends over a 58 month period .
If we expect our monthly $708 investment to earn about 6% when including dividends, our investment should be worth about $47,600 after 58 months. Thats an improvement of about $6.5K. Nothing to sneeze at. But its not going to more than double how much we can safely withdraw.
At this point, it sure looks like my idea is bunk. Dead in the water. Everyone should wait until full retirement age to start drawing from social security.
But wait. Is that really so?
Were missing a pretty key component to the calculation so far.
And that is, to put it grimly, how long you expect to live.
Social security and longevity
For example, for my father, the SSA calculates his longevity as 84.4 years. My mom is a bit younger and so her estimate is 86.0 years.
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Policy Basics: Top Ten Facts About Social Security
Social Security provides a foundation of income on which workers can build to plan for their retirement. It also provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies.
Eighty-five years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nations most successful, effective, and popular programs.
But Delaying Distributions From Retirement Accounts Can Be Beneficial Too
Tax-deferred retirement accounts are true to their name: they allow investors to defer paying tax on invested dollars. With the exception of the Roth IRA, Roth 401 and your original non-deductible IRA contributions, once the funds are withdrawn the entire amount is taxable as regular income.
All else equal, money in a retirement account will grow faster than money in a taxable brokerage account. Why? Assuming the brokerage account pays its own way, investors need to sell a bit of their investments to pay capital gains tax. This leaves fewer dollars invested to benefit from future compounded growth.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Early Benefits Can Still Pay Off
However, taking early benefits can still pay off despite the reduced monthly check. But youll want to be sure you budget for a reduced benefit.
No one can predict how long youll live, but if youre facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate, Neiser says.
Married women are also good candidates for claiming early benefits because they are likely to outlive their husbands. Those widows then become eligible to receive the greater of either their benefit or their late husbands benefit.
However, this scenario works only if the husband does not claim his benefits early. By not claiming early benefits, the husband effectively increases the monthly benefit his wife eventually receives. So youll want to calculate how filing early will affect your spousal benefit here.
Taxes On Your Benefits
Your Social Security benefits may be partially taxable if your combined income exceeds certain thresholds. Regardless of how much you make, the first 15% of your benefits are not taxed.
The SSA defines combined income using this formula:
- Your adjusted gross income + nontaxable interest + half of your Social Security benefits = your combined income
If you file your federal tax return as an individual and your combined income is $25,000 to $34,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, you may have to pay tax on up to 85% of your benefits.
If youre married, filing a joint return, and your combined income is $32,000 to $44,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $44,000, you may have to pay tax on up to 85% of your benefits.
Do You Have An Immediate Use For The Money
One of the most common reasons for taking Social Security early is simply because you need it. If your Social Security benefit is the only way you can keep the lights on, then its reasonable to file for it when you need it. However, its important to remember that working longer in your 60s to delay Social Security may be far easier than living on a reduced benefit in your 80s, especially if youre physically able to work now.
But what if you have no immediate use for the money but think you might be able to manage it better than Uncle Sam? Your Social Security benefit can feel like free money you can take now to grow into larger retirement income later. But Weston and Kate Horrell, an Accredited Financial Counselor and the founder of KateHorrell.com, dont see this as the optimal use of your Social Security benefit.
You may invest your Social Security income, but it does not count as earned income to be placed into an individual retirement account , Horrell points out. That means if Social Security is your only income, you may not be able to contribute to an IRA, and if it isnt, youll be limited to the lesser of $7,000, the IRA contribution limit for those over 50, or the amount you make outside of Social Security.
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Delay Starting To Collect Benefits
Each of us can start collecting our benefits as early as age 62 and as late as age 70. For each of us, there’s a full retirement age in between, at which we can collect the full benefits to which we’re entitled, based on our earnings history. If you start collecting your benefit checks before your full retirement age, they will be smaller . Conversely, for each year beyond your full retirement age that you delay , they’ll grow about 8% bigger .
The table below shows how much of your full benefits you’ll receive, depending on when you start collecting:
Start Collecting at:
Data source: Social Security Administration.
Not everyone can afford to delay some will simply need that retirement income as soon as they can get it, perhaps due to an unexpected job loss or health setback. But if you can delay, it will boost the size of your benefit checks.
Doing A Breakeven Analysis And Other Ways To Decide How Soon To Start
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A Tea Reader: Living Life One Cup at a Time
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.
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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.
No One Else Is Relying On Your Benefits
In the event of your death, a surviving spouse, minor or disabled child can receive money from the Social Security Administration based on the amount of your benefits. For example, a surviving spouse can receive between 71.5% and 100% of your benefit amount, depending on the surviving spouses age. A disabled child can receive 75% of your benefits each month even after youre gone.
If no one else can qualify for benefits based on your record, you might want to retire early because no one is depending on that money. If everything else falls into place and you meet the minimum Social Security retirement age, consider collecting your benefits early and enjoying life.
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Costs Of The Solution
Two issues that are likely to arise in any discussion of fixing this problem are its cost to the Social Security trust fund and its cost to the federal budget. With regard to the cost to the Social Security trust fund, there are three ways to look at the issue.
One way is to view the cost relative to costs in a world in which no pandemic had occurred. For example, the cost could be measured using the economic assumptions in the most recent Social Security trustees report , which were formulated before the pandemic began. From this perspective, the cost would be zero because the legislative change would restore the world of Social Security benefits to what it would have looked like had there been no pandemic.
A second way of looking at the issue is to view the cost of the change relative to costs in a world that reflected economic assumptions indicative of the economic recession caused by the pandemic. From this viewpoint, there would be a cost associated with fixing the problem. For example, the chief actuary of the SSA estimates that if the AWI in 2020 were to fall 5.9 percent below its 2019 level, the AWI adjustments proposed by Chairman Larson would cost $90 billion in present-value dollars for the 75-year period from 2020 through 2094about 0.02 percent of taxable payroll over that period. . The cost over the 10-year period from 2020 to 2029 would be about $21 billion in nominal dollars.
How To Calculate Social Security Benefits
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.