Time is money with Social Security benefits
When you start taking Social Security benefits could dramatically affect your quality of life in retirement.
You can sign up for benefits any time after age 62, but the size of the monthly check you receive for the rest of your life will depend on when you begin collecting those benefits and your “full retirement age.” Also called “normal retirement age,” it is when you are entitled to receive your full benefits without incurring a penalty.
Full Retirement
So, what is your full retirement age? It’s tied to your birth year. For folks born in 1960 or later, it is 67 years old. People born between 1938 and 1959 fall into a period in which the government incrementally raised the full retirement age from 65 to 67.
For practical purposes, let’s look at people currently aged 62 to 70, those facing the decision about when to start collecting Social Security. They were born from 1949 to 1957. But even people just short of age 62 should be considering when to start taking benefits.
Time Is Money
Those who start taking Social Security early are penalized roughly 5 percent for each year remaining before full retirement age. Those who delay are rewarded with roughly 8 percent more for each year they wait after full retirement, up to age 70. There is no extra benefit to waiting beyond age 70.
Looking at it another way, a person who elects to take Social Security benefits a year before his or her full retirement age will collect a monthly amount 5 percent lower for the rest of his or her life. One who opts in two years early will receive a check 10 percent smaller, and so on.
Conversely, a person who delays taking benefits for a year past full retirement age will receive an 8 percent larger monthly check for the rest of his or her life. Wait two years, and it will be 16 percent larger, and so on until age 70.
Married folks should consider their spouse’s benefit situation. A surviving spouse will receive the larger of the couple’s individual Social Security benefits; the other goes away. Since the date you elect to start collecting benefits affects the size of that monthly check, take into account your spouse’s income and lifestyle.
‘Break-Even’ Age
Folks considering when to start taking Social Security benefits should figure out what their “break-even” age would be in various scenarios. Put simply, this is the age at which a retiree who waits longer but gets a bigger check catches up.
The above example is hypothetical and for illustrative purposes only. Please note that each person’s situation is different. Please consult your financial or tax professional regarding your circumstances.
Data Source Ibbotson Associates
If he started taking Social Security at 62, his monthly benefit would be 25 percent lower ($750) for the rest of his life. But he’d collect $45,000 in the 60 months before his full retirement age. If he retired at 67 and collected his full $1,000 a month, $250 more than in the other scenario, it would take him about 14 years to catch up, so he would be 81. Remember, in this example, the early retiree still collects $750 a month even after he reaches full retirement age.**
If our hypothetical retiree expects to live beyond 81, waiting until full retirement age would be the better option.
Now, consider the opposite scenario.
Let’s assume the same fellow waited until age 70 to start collecting benefits. His monthly check would be about 24 percent higher ($1,240) than if he’d signed up at 67, but he’d be three years ($36,000) behind. It would take him just under 12 years to catch up, meaning he’d be 82 before the wait started to pay off.**
As you can see from each scenario, delaying the start of benefits might be the better choice for one who expects to live beyond the break-even age.
Of course, there are other factors to consider, such as current income needs, depletion of assets and much more that also can factor into when one starts to collect Social Security. This is one of the many reasons why a financial analysis is so important for retirement preparation. It is very easy to want the money right away, but don’t forget to consider the long-term consequences of collecting your Social Security benefits early.
Taxes
Whether you have to pay income taxes on your Social Security depends on whether you have a significant amount of non-Social Security income. That could be wages, pension income or self-employment income – or interest and dividends from investments.
I’m not a CPA, so I won’t go into detail. Suffice it to say that, in general, the federal tax code is in accord with Social Security rules in that it tends to benefit people who delay the start of benefits until they no longer are working, and annual income determines what portion of your Social Security is taxed. At the state level, Arizona doesn’t tax Social Security income, but 13 states do. If you maintain an official residence outside Arizona, be aware of tax law wherever that is.
Overall Strategy
Social Security isn’t meant to pay for retirement on its own. You will continue to generate income as long as you work. And, hopefully, you’ve saved for retirement through a tax-deferred option – IRA, 401(k), 403(B) or similar plan – an after-tax Roth IRA or some other savings option.
Everyone’s situation is unique. To help my clients figure out when to start taking Social Security benefits, we discuss life expectancy, income needs and the break-even point. Other variables include your health, the cost of living where you want to live and whether you want to leave money to your heirs.
So, look at the big picture and do the math. That should help you decide when to start collecting Social Security.
Representative registered with and offers only securities and advisory services through PlanMember Securities Corporation (PSEC), a registered broker/dealer, investment adviser and member FINRA/SIPC. 6187 Carpinteria Ave, Carpinteria, CA 93013 • (800) 874-6910. One2One Wealth Strategies and PSEC are independently owned and operated companies. PSEC is not liable for ancillary products or services offered by this representative or One2One Wealth Strategies.
The opinions expressed in this article are those of Adam Carlat and are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your tax, legal and/or financial services professional regarding your individual situation. The views expressed in this letter are those of the author and may not necessarily reflect those by PlanMember Securities Corporation.
** The above example is hypothetical and for illustrative purposes only. Please note that each person’s situation is different. Please consult your financial or tax professional regarding your circumstances.