When it comes to deciding when to take Social Security retirement benefits, it may seem appealing to get the money earlier rather than later. However, does this really work to your advantage? The answer depends on several factors. It depends on whether you plan to work between age 62 and full retirement age. Life expectancy and marital status are also taken into account. Additionally, our desire to protect purchasing power is affected if your life lasts longer than expected.
Earned Income Before Age 66 or 67
The Social Security Administration defines full retirement age as the day you can start collecting benefits. This is based on your birth date, and for most people, it ends around age 66 or 67. However, you are allowed to retire, as defined by Social Security, at age 62. If you reach this age and are still working, you may want to begin receiving your benefits right away, but this doesn’t always mean it’s the best option in the long run.
Why? Because if you earn more than the maximum earnings limit, your benefits will be reduced. Social Security uses your income to determine how much they should pay you each month. They assume you don’t need the full amount if you are making money. But once you reach full retirement age, your benefit amount each month remains fixed, regardless of whether you have other sources of income or not.
Expected Life Span
Just as with the planned retirement age, Social Security also has specific criteria for life expectancy. Standard life expectancies for both men and women have increased over time to take into account better health and longer lives, from around age 60 in 1930 to about 80 today. If you live to the average life expectancy, even though it might seem strange, you will receive approximately the same amount whether you take Social Security early or delay it. To understand how this works, it helps to look at an example using real numbers.
Let’s assume George is 61 and is contemplating when he should start taking Social Security. Here are the numbers from his Social Security statement showing how much he will receive at each age: Age 62: $1,643 ($19,716 annually), Age 66: $2,238 ($26,856 annually), Age 70: $3,009 ($36,108 annually).
A 62-year-old man has an average life expectancy of twenty more years, or until age 82, according to Social Security tables. As a side note, Social Security adjusts for cost of living, providing an increase in the benefit amount over the years, but to keep things simple, we’ll set this aspect aside. Let’s look at three options: Suppose George starts receiving his monthly benefit check at age 62. He receives $1,643 per month, or $19,716 annually, for 20 years. He will receive a total of $394,320. If he waits until age 66, he receives $2,238 per month, or $26,856 annually, for 16 years (until age 82). He will receive a total of $429,696. If he waits until age 70, he receives $3,009 per month, or $36,108 annually, for 12 years (until age 82). He will receive a total of $433,296.
In summary: He will receive $394,320 if he starts benefits at age 62. He will receive $429,696 if he starts benefits at age 66. He will receive $433,296 if he starts benefits at age 70. If George lives until age 82, he will accumulate the maximum income throughout his lifetime by choosing to receive benefits at full retirement age, or in George’s case at age 70.
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It may seem suspicious to guess your lifespan, but why not think like social security and rely on data and common patterns? Many calculators have been created for this purpose that will ask you health and lifestyle questions to help you assess your average life expectancy.
Marital Status
For single individuals, life expectancy is a factor that significantly impacts future payments. Analyzing the breakeven point based on your lifespan can be a good starting point for single individuals trying to determine when to start taking social security. You should also be aware of how your choice affects your taxes in any given year.
For some single individuals, it may make sense to delay starting social security and withdraw funds from their retirement accounts to cover living expenses instead. This is due to the additional tax benefits that come with some types of individual retirement accounts or other accounts.
For married couples, social security is not straightforward. When married, you also need to consider survivor benefits. This works as follows: when the first spouse dies, the surviving spouse can keep the larger of their own benefit or the spouse’s benefit. There are many ways couples can arrange how and when each takes benefits so they can maximize their total as a couple.
Desire to Protect Purchasing Power
Most people want to claim social security benefits as soon as they can, which is at age 62. However, often they make this choice without knowing how it may affect them in the future. They do not take into account the additional income that may come from delaying the start date by even a few years. If you live into your mid-eighties, you could lose between $50,000 and $150,000 in extra income due to making a hasty decision on when to collect benefits.
This should be considered in the context of those golden years. Later in life, you may have expenses that you don’t have now. Healthcare becomes more expensive for many people, or you may have new hobbies to support. You might want to travel more. Also, you will be living off your monthly social security check, and possibly from a fund you set up many years ago.
Your golden years are not the time you want to be financially constrained. So before taking any action with social security, consider how your choice of when to collect benefits will affect your budget for the rest of your life. Delaying the start date may protect your income. It may provide you with significant purchasing power later in life.
Source: https://www.thebalancemoney.com/when-to-take-social-security-2388925
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