“When Should I Take Social Security?”
As clients approach retirement, this is one of the first questions asked. It is a question that shouldn’t be taken lightly because the timing could have a big effect on retirement cash flow. Here are 5 key facts everyone should know about the timing of Social Security benefits:
- Early Retirement: You can file for Social Security retirement benefits as early as age 62 (60 for widows). However, for those reaching 62 this year, you’ll take a 25% cut in your benefits for the rest of your life. The additional 4 years of benefit between ages 62 and 66 may not make up the loss in benefits. For example, take a 62-year-old man whose full retirement benefit is $1,500/mo. At age 62, that benefit will be $1,125/mo. If that individual lives past age 77, he would have more cumulative lifetime benefits if he would have waited until his full retirement age of 66 to take benefits. As a reminder, normal life expectancy for a man is around 83 years old.
- Working while receiving benefits: If you wait until your full retirement age to receive benefits, you can work and receive benefits at the same time without any penalty. However, if you are younger than full retirement age, there is a limit to how much you can earn without being subject to a penalty. If an individual has not reached full retirement age, but will within the calendar year, their benefit is reduced $1 for every $3 earned above $41,400 (for 2014) until they reach age 66. If an individual is under age 66 for the entire year, works, and takes Social Security, their benefit is reduced by $1 for every $2 earned above $15,480 (for 2014). These reductions are in addition to the reduction mentioned in fact #1. The Social Security Administration will recalculate your benefit upon you reaching full retirement age to leave out the months that your benefits were withheld, which will result in a slightly higher benefit, but this benefit will still not be as high as the benefit that would have been received had you simply waited until your full retirement age to take your benefits.
- Delaying Benefits: You can delay benefits until a maximum age of 70. For each year you delay taking your Social Security beyond full retirement age, you receive an 8% increase in benefits. It is hard to beat an 8% increase that is backed by the government. If you consider the individual mentioned in fact #1, his benefit would increase from $1,500/month at full retirement age to $2,040.73/month at age 70. If he lives past age 80, he would have more cumulative lifetime benefits if he would have waited until age 70 to take benefits.
- The Marriage Factor: The timing of Social Security benefits has a bigger effect if you are married. In fact, I’d even suggest that a married couple should look at the decision of when to take benefits jointly, even if one spouse hasn’t reached age 62 yet. If you are considering taking benefits, you’ll also want to consider the survivorship benefit for your spouse, especially if you think your spouse will live longer than you. It may be best to maximize one spouse’s benefit by delaying just so that a higher survivorship benefit can be locked in for the other spouse. If spouse #2 waits until his/her full retirement age to receive benefits after the spouse #1’s death, then spouse #2 will qualify for 100% of spouse #1’s benefit. The survivorship benefit could be substantially higher than spouse #2’s own benefit.
- Lesser Known Strategies: If you wait at least until full retirement age to apply for Social Security benefits, there are two lesser known strategies, file and suspend and restricted application, that can be used maximize family accumulated benefits through Social Security. Under the file and suspend option, one spouse can apply for benefits and have payments suspended so that the other spouse can receive spousal benefits. The restricted application allows a spouse to file and receive a spousal benefit, but not take his/her own benefit. The purpose of these two strategies is to find a way to receive some benefit while letting the other benefit, usually the higher income earner’s benefit, grow until age 70. This will also help to potentially lock in a higher survivor benefit when one spouse dies. These options can lead to more accumulated family benefits over the lives of both spouses.
The Social Security system is complex. If you don’t have a good handle on what you are trying to accomplish, you could leave thousands on the table over your lifetime. Luckily, Longview financial planners are equipped to help you with this important decision. We recommend you give us a call before you begin any benefits.
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