Social Security is one of the biggest sources of retirement income. And yet, most people are not taking advantage of its benefits. Social Security Administration estimates that about 66% of individuals aged 62 and older have a steady date in mind for when they will begin collecting their benefits.
Although there is no “right” date to start your Social Security benefits, it is important to understand how your decision will affect you financially so you can choose a date that works best for your particular situation.
The duration you collect benefits plays (along with other factors) an important role in determining how much money you will receive from Social Security over your lifetime.
What You Will Learn:
- What are the age limits for Social Security?
- The advantages and disadvantages of collecting Social Security at various ages
- At what age should you take your Social Security?
- How to find your projected Social Security benefits?
- How to calculate your Social Security benefits by age?
- What About taxes on Social Security?
WHAT ARE SOCIAL SECURITY BENEFITS?
Social Security benefits provide a partial replacement of income for people who are disabled or who have reached retirement age. These benefits come from Social Security taxes that a taxpayer has contributed into the system over their working lifetime. This amount is known as the primary insurance amount (PIA).
WHAT ARE THE AGE LIMITS FOR VARIOUS LEVELS OF SOCIAL SECURITY BENEFITS?
To qualify for Social Security retirement benefits, a person must be at least 62 years old. You can collect Social Security before 62 if you are approved due to a disability or have a deceased spouse who was disabled. Bear in mind that the 62-year age minimum will not qualify you for your full Social Security benefits. Here is a look at three different age levels and how they correlate to your level of Social Security benefits.
- Early Social Security Benefits -The Social Security Administration considers collecting social security before your full retirement age as taking early benefits. The earliest you can begin receiving benefits is at 62. If you start receiving your benefits early, it will lock you into receiving a lower monthly amount for your lifetime compared to if you wait.
- Full Social Security Benefits - Full retirement age is the age at which you are eligible to receive 100% of your earned benefits as calculated by your lifetime earnings. This age depends on when you were born, as shown in the chart below:
- Delayed Social Security Benefits - You can also delay receipt of your social security benefits until after full retirement age. For every month you wait, you can receive two-thirds of 1% more in benefits. The latest you can delay is age 70.
Collecting Early Social Security Benefits
There are advantages and disadvantages to electing early Social Security benefits. They are as follows:
- Collect money early - You get to enjoy your benefit at a younger age. If you expect to have a shorter life expectancy, this could be a good option.
- Need money now - If you are in a situation that your financial plan does not work without your social security income, then starting at 62 may be the best option for you.
- Collect less money monthly - When you collect Social Security early, you will receive less money. Depending on your full retirement age, you will receive 25-30% less than what you would have received at full retirement age.
- Some of your benefits may be withheld if you earn too much - Collecting Social Security early will leave you subject to what is called the Retirement Earnings Test. This “test” reduces your payout based on your current earned income. The money you lose through the reduction is not lost forever. Your benefits after full retirement age will increase for any months you were affected by the test.
Collect Social Security Benefits at Full Retirement Age
If you wait to claim benefits until full retirement age, you will receive your full social security amount based on your lifetime earnings. This situation also offers its own set of advantages and disadvantages.
- Collect your full Social Security benefits - When you elect to wait until your full retirement age, you will receive 100% of your earned benefit.
- Might be your “Goldilocks” option - Waiting until you are at full retirement age can give you the benefit of collecting more money but also gives you the ability to do Roth conversions from when you retire up until you start collecting social security at full retirement age (FRA).
- Lose the opportunity to collect more money - By electing to collect Social Security at the full retirement age, you lose the opportunity to collect excess benefits earned for waiting.
- You may need the money earlier - There is a chance that you may need to collect Social Security earlier if your retirement income plan cannot support your spending needs without Social Security.
Collecting Excess Social Security Benefits
Waiting until after your full retirement age to collect Social Security will give you over 100% of your earned benefits. This situation also offers you its own set of advantages and disadvantages.
- Collect more money annually - When you wait until after your full retirement age, you can collect more than 100% of your Social Security benefits.
- Allows you to have better purchasing power - You can enjoy higher purchasing power with your Social Security benefits if you experience a longer than normal retirement.
- You must wait longer for your money – Obviously, late retirement means that you will wait longer to get your money. You will need to use other assets to fund your income until social security kicks in.
- You may collect less money if you have a lower life expectancy - If you have a lower life expectancy, then you collect less money versus collecting benefits earlier.
WHEN SHOULD I COLLECT MY SOCIAL SECURITY?
Now you know you have three options when it comes to collecting your social security: Early enrollment, full retirement enrollment, and later enrollment. Which one should you choose?
There has been an understanding that the longer one waits to take their benefits, the more he or she is going to have as a recipient. However, there is also the fact that the longer one takes to withdraw, the shorter time one might have (depending on the age you die) to collect at all.
Below is a chart that explains the probability of one or both of you being alive at various ages.
In general, if you believe that you and your spouse might live past the age of eighty, it could be wise to put off the thought of claiming social security for as long as possible to receive a larger benefit.
If you do not expect to live past the age of eighty due to health or family-history reasons, it might be best to claim a smaller check. If you have saved up excess retirement funds, it could be wise to use that and wait if possible, to enroll for Social Security benefits.
Below is a chart of the number of years that you would have to live to break even on your decision to wait and collect Social Security.
If you elect to retire after your full retirement age, you may be wondering how much excess payment you will receive. The Social Security Agency will give you something called a "delayed retirement credit” (DRC) which equals an 8% multiple times the number of years that you wait.
Here is an example: Let's say that you were born in 1951, and your retirement age is sixty-six. If you waited until you are 68 to retire, then your delayed retirement credit will be 8% multiplied by the number of years you waited. That means that your Social Security check will be 16% higher than your full retirement amount.
This amount does not include any potential additional cost of living adjustments for inflation from age 66 through age 68. Note that you may still need to sign up for Medicare at age 65 even if you do not decide to collect Social Security at that age.
HOW TO FIND YOUR PROJECTED SOCIAL SECURITY BENEFITS
It is a good idea to start understanding and planning your Social Security benefits prior to retirement. Your first step is to see how much money that you are projected to get for your full retirement age. There are currently two ways that you can find your full retirement benefits.
- Read your annual SSA-1099 statement - Every year, you receive your 1099 statement from Social Security. This letter will tell you how much work credits you have accumulated and how much your estimated benefits will be at full retirement. This statement is usually sent to you in June of each year.
- Register your online account at ssa.gov - If you want to get your projected Social Security benefits information right now, then you can register an account at the official Social Security website. After you register, you can access your online account regularly.
You can also use the Social Security Quick Calculator to get an estimate of your benefits. This calculator allows you to adjust certain variables such as your retirement age and your earnings to see your projected benefits in today’s dollars or inflated dollars at your retirement age.
WILL SOCIAL SECURITY BE FULLY FUNDED IN THE FUTURE?
When planning your Social Security, you should consider if Social Security will have the money to pay your full benefits. Currently, the funding for Social Security is through the year 2034. After the year 2034, about three-quarters of Social Security benefits are funded.
Certain factors such as Federal government budgeting, tax revenue, and the national debt will play a role in the future funding of Social Security. But with some small changes from Congress, it could fairly easily fund social security until the year 2100.
We recommend that you stay up to date with Social Security's funding as you get closer to planning your retirement date.
WHAT ABOUT TAXES ON SOCIAL SECURITY?
One big question you may deal with is taxes on your Social Security benefits. Yes, your Social Security benefits may be taxable, depending on your “combined income.” Your combined income is equal to your adjusted gross income (AGI), plus non-taxable interest payments (e.g., interest payments on tax-exempt municipal bonds), plus half of your Social Security benefit.
If your combined income increases above a certain threshold, then more of your benefit is subject to income tax, up to a maximum of 85%. If you are still working, you may want to postpone Social Security until you reach your full retirement age or until your earned income is less than the annual limit.
In any event, make sure that you do not postpone your social security benefits past the age of 70.
The traditional thinking has been that a person who worked for about thirty years and then retired, would be in a lower tax bracket than when they were working. This would allow their retirement benefits to be taxed at a lower rate.
However, these days, working retirement is becoming far more common. And that means the income plus benefits plus any retirement account withdrawals starts to bump people up into higher tax brackets.
So, in some cases, it makes sense to rely on earnings or savings first and hold off on claiming social security benefits to avoid unnecessary tax hits. On the other hand, others argue it's better to take the government benefits early and then rely on personal savings later.
As you are going through the retirement planning process, what you will find is that there is no clear default path to rely on. Each retiree must map out his or her personal situation and make the best choice that applies at the time.
It is never too early to start planning for your Social Security benefits. Those who research, educate themselves, and time their decisions right can often gain more than their peers who otherwise are the same income level, timing, and age.
By knowing at what age, you would like to collect your Social Security, you will be in a much better position to plan for your future retirement.
If you would like to get a FREE retirement assessment, click the link to schedule your 15-minute call to start the retirement assessment process.