Deciding when to take Social Security can impact how much you receive, how soon you may need to tap other savings, and possibly your tax bill.
Many discussions about when to take Social Security focus on waiting until age 70, arguably for good reason. The longer you delay Social Security beyond your full retirement age (currently 66 or 67 depending on your birth date), the higher your income payments may be. At the very least, it seems logical to wait until you reach your full retirement age (FRA) to avoid having your benefits reduced.
Given the gains in longevity, healthy folks have a real probability of living into their 90s—and some may see 100 years or more. Social Security, while not guaranteed, can provide a stream of income to help hedge against outliving your assets. It can also help you manage inflation risk since the benefits are generally adjusted each year for the cost of living.
So it may be surprising to learn that 39% of workers plan to take Social Security between ages 62 and 65, according to the Employee Benefit Research Institute (EBRI) 2018 Retirement Confidence Survey. And 69% of retirees said they did indeed begin their benefits between ages 62 and 65. Why would someone start before their Social Security full retirement age, knowing they’ll receive 25 to 30% less than what they’re entitled to? Here are five possibilities.
Perhaps you’ve built a sizable nest egg and are ready to start the next chapter of your life. You could start collecting Social Security at age 62 as way to help cover the “go-go” early years of retirement and attempt to preserve the potential tax benefits of the money in your IRA or employer-sponsored retirement plan. The less you have to tap your savings now, the more income you may have later in life. Creating a formal retirement income plan that identifies and addresses the potential risks of early retirement may help you evaluate your decision. For example, you might have other assets that could help protect you from outliving your money such as longevity insurance or a pension plan with cost-of-living adjustments. If so, taking Social Security early might work for you. Be sure to also take into account the potential tax implications of any asset withdrawals and the amount of your Social Security checks.
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Along that same line, assuming your savings is sufficient to address your retirement income needs, you might choose to collect your benefits early and invest the money to help save for your children or grandchildren’s education and other goals. Or you could invest the checks to help build a legacy for your heirs. You may be able to generate a better rate of return investing the funds yourself. You could also use your benefits to help pay off any debts faster and save money on interest. This can be a risky proposition however. Remember if you take your benefits before your FRA, you’re expecting to earn more than 8% PLUS the Social Security cost-of-living adjustment for the next several years. In addition, you’re receiving these reduced Social Security benefits for life. So if you or your spouse do live into your late 80s or 90s, you may not have enough money to cover the medical costs common at older ages. Even Medicare Part B premiums are deducted from your Social Security, thus your actual spendable cash later in life may be lower than you planned. And if you’re still working, your Social Security may be taxable to you as well.
If you’re married and earn more than your spouse (or vice versa), it might make sense for the person with lower wages to take Social Security early while the other person waits until age 70. This strategy could provide extra money for your retirement wants and wishes, while helping to maximize future benefits for the surviving spouse.
Planning on working past age 65? You may need to use Social Security as part of your contingency plan. Personal health issues and those of family members, along with job layoffs, often force individuals to stop working sooner than expected. According to EBRI, only 26% of retirees actually receive income from work. If you find yourself in this situation, taking Social Security early might provide some much-needed income to help cover monthly expenses and other costs like medical bills. Even those who plan to delay Social Security should do some contingency planning to review the options, just in case an unexpected life event occurs. For example, you might be able to hold off on taking Social Security for a few more months if your spouse has some other insurance available now to pay current expenses.
To help choose their start date, many people look to their “breakeven” age, which is when the amount of money you’ve collected will be the same whether you begin at age 62 or wait until your Social Security full retirement age. Most analysis puts this age at the mid to late 70s or very early 80s, depending upon when you actually start taking Social Security.
If you don’t expect to live to your “breakeven” age because of your current health or family history, you might consider taking Social Security early to help make the most of your benefits. For example, someone who dies at age 72 would have collected benefits for only two years if they waited until age 70, versus possibly 10 years if they had started sooner.
This example is for illustrative purposes only.
Keep in mind that your “breakeven” age should not be the only factor you consider. And it’s based on a lot of assumptions. You should work with a tax or financial professional to help you run the numbers. Most importantly, don’t view Social Security solely as a present value calculation of the money received versus what you might have earned had you invested yourself. Your Social Security payments could help supplement your other sources of retirement income, which may help your savings last longer. If you do take Social Security early, remember to replace this income with another source like longevity insurance for example. No one wants to be 93 years old and have to try to find a job after being retired.
It’s also worth noting that if you plan to work and collect Social Security, your payments may be taxed or reduced further. For individuals under age 66 in 2018, benefits are reduced $2 for every $1 earned over $17,040. The reduction is only temporary until you reach your FRA. Plus, you may have to pay taxes on 85% of your benefits if your adjusted gross income for 2018 exceeds $34,000 ($44,000 married filing jointly). And even though you’re collecting Social Security, you won’t generally be eligible for Medicare until age 65. So make sure you have a way to pay any medical expenses until then.
You’ve paid into Social Security throughout your career, and now it’s time to enjoy the benefits. As you think about your start date, remember the right age—62, 66, or 70—is the one that potentially helps you live the way you want in retirement.
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