Many people begin their retirement planning with the assumption that they will retire at age 65. But it’s not the best option for everyone.
While it shouldn’t be, Social Security is the most important source of income for many retirees, and the level of that income can change dramatically depending on the age at which they start claiming benefits. As retirement planning becomes more complex, assumptions change and potential retirees need to ensure that they consider all options and understand the ramifications of when they withdraw before setting things in motion.
The deferral of benefits has a definite advantage
The amount of your monthly Social Security benefit is based on lifetime income, changes in the cost of living, and the age at which you start receiving benefits. The sooner you activate the Social Security income stream, the smaller your monthly checks will be. The later you wait to start, the bigger the monthly check.
Full Retirement Age (FRA) is the Social Security Administration’s expression for the age at which you are eligible to receive 100% of your benefit. It’s currently 66 for people born before 1955, and it goes up to 67 for anyone born after 1960.
If you start claiming Social Security at age 65, you won’t get your full payment. Your monthly benefit would be reduced by 13.3%, assuming a full retirement age of 67. The average Social Security benefit is expected to be $ 1,657 in 2022. A reduction of 13.3% may seem modest, but it means that a person receiving average benefits would get $ 220 less each month.
A retired couple entering the program at age 67 and each receiving the average amount would accumulate an annual family income of $ 39,768 solely through the program. The two-year advance on benefit collection would drop that annual income to $ 34,478. This is a significant difference in cash flow, and it only increases if you are one of the beneficiaries eligible to claim the maximum of $ 3,895 each month at age 67.
The postponement beyond the retirement age at full rate allows retirees to receive more than 100% of their benefit. Your monthly benefit increases by 8% for each year you are late. There is no bonus for delaying the age of 70, but it is still a 24% higher benefit for people applying for benefits at the full retirement age of 67.
Of course, every situation is different. You can check your own statements with the Social Security Administration to customize your numbers and find a best time for you to start claiming Social Security.
You may want to collect earlier
The benefits of postponing collection until full retirement age (and beyond) are pretty clear, but an argument can also be made to claim Social Security even earlier. It really depends on your personal situation and what you are trying to accomplish.
The first consideration is really a math problem. If you wait until age 70, you will have more each month. However, you will receive these payments in less than months, so it takes some time for the payments to even out.
For example, Mr. Smith is working enough to qualify for the average of $ 1,657 per month at age 67. If we ignore cost-of-living adjustments over time, Mr. Smith would accumulate about $ 70,000 upfront in overall benefits by starting to receive them at age 62 rather than waiting until retirement age. full rate retirement. If Mr. Jones qualifies for the average of $ 1,657 per month and starts the payments at age 67, how much each receives in the overall benefits would not be equal (i.e. the age of break-even) before the age of 78 and eight months. But if both live longer than that age, Mr Jones would start accumulating more globally with each passing month.
This suggests that if you think you will likely live to be at least 79 years of age or older, it would be up to you to delay the start of benefits because you will come out on top overall. If your health, lifestyle, or genetic history suggests that you probably won’t live to that age, taking Social Security earlier might be the best option. It’s hard to know for sure anyway, but some people can make a pretty educated guess.
It is also important to take into account your needs, your desired lifestyle, and your financial resources outside of Social Security. The first years of retirement are often the most active (and the most expensive). Suddenly every day is a Saturday, and your mid-60s might be the best time of your life to travel, dine out, and actively enjoy countless hours of leisure. Social Security could provide the extra cash you need to comfortably enjoy your golden years.
It is also important to make sure that you are distributing the correct amount to your retirement accounts, especially at the beginning. The current economic environment has forced financial planners to revise the 4% rule downwards. Dipping too much into your retirement savings too early can blow up the plan. There is a real risk that you will outlive your money if your 401 (k) or IRA runs out too quickly. This is doubly true if there is a market correction eating into your savings accounts. Getting a head start on Social Security benefits could help preserve your savings to keep your retirement plan intact.
Everyone is different
The best course of action really depends on the situation and personal goals. There are pros and cons to any decision you make regarding Social Security, and it’s impossible to know what the future holds. To ensure the best course forward, it’s important to know the numbers you’re dealing with and make an informed decision.