Social Security Questions Answered: educating and empowering pre-retirees everywhere
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One of the most common questions people ask about Social Security is when they should start taking benefits. This is the $64,000 question. Making the right decision for you can have a meaningful impact on your financial income in retirement.
Before considering how personal circumstances and objectives may play into your decision, it may be helpful to preface that discussion with an illustration of how benefits may differ based upon the age at which you commence taking Social Security.
As the accompanying chart reflects, the amount you receive will be based upon the age at which you begin taking benefits.
Monthly Benefit Amounts Based on the Age that Benefits Begin¹
*This example assumes a benefit amount of $1,000 at the full retirement age of 66.
*The difference in age-dependent benefits is due to two factors:
- Starting your benefits prior to full retirement age (FRA) reduces them forever
- Delaying your benefits past your FRA will increase them by 8% per year until age 70
At first blush, the decision may seem a bit clear-cut: Simply calculate the lifetime value of the early benefit amount versus the lifetime value of the higher benefit, based on some assumed life expectancy.
The calculus is a bit more complicated than that because of the more favorable tax treatment of Social Security income versus IRA withdrawals, spousal benefit coordination opportunities, the consideration of the surviving spouse, and Social Security’s lifetime income guarantee that exists under current law.²
Here are three ideas to think about when making your decision:
1. Do You Need the Money? Retiring before full retirement age may be a personal choice or one that is thrust upon you because of circumstances, such as declining health or job loss. If you need the income that Social Security is scheduled to provide, however reduced, then taking benefits early may be the only choice for you. However, it would benefit you to explore all other income options prior to making this decision.
2. Consider the Needs of Your Spouse If your wife is expected to depend on your Social Security income, it’s important to remember that, based on current life expectancy tables, she will likely live longer than you. Consequently, the survivor benefits she receives may be reduced substantially if you begin taking benefits early—a penalty with which she may be burdened for many years to come.
3. Are You Healthy? The primary risk in retirement is living too long and running out of money. The odds of living a long life in retirement argues for waiting at least until you reach full retirement age so that you receive a full benefit for as long as you live. However, if your current health is poor and/or you have a strong family history of premature death, then starting early may make sense for you. There are several elements you should evaluate before you start claiming Social Security. By determining your priorities and other income opportunities, you may be able to better decide at what age benefits make the most sense.
Irina V Andreasen, MBA, Andreasen Financial, LLC
1Social Security Administration, 2016
2Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
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