Understand your estimated Social Security benefit, analyze the best time to start taking it, chat with a trusted advisor, and decide.
A common question we receive in meeting with clients is the question, “When should I start taking Social Security”? The short answer to the question is, “it depends”.
For individuals and couples nearing the age of 62, deciding when to claim Social Security benefits will have a permanent impact on the benefit you receive. Here are four steps which can help with this important decision:
Step #1: Understand Your Estimated Social Security Benefit
First, it’s a good idea to understand your estimated benefit. You can obtain this information by requesting a copy of your Social Security statement. This can be done online by visiting www.ssa.gov/myaccount
After getting a better understanding of your current benefit, you may need to dig deeper into your personal situation. For instance, you may want to research your Social Security benefit as an ex-spouse.
Regardless of your individual circumstances, keep in mind your current statement only provides estimated benefits and will change with future cost of living adjustments (COLA).
Step #2: Analyze When To Start Taking the Social Security Benefit
Once you have your estimated benefit, the next major decision is to analyze when to start taking payments. You can begin to understand the best approach by looking at the timing tradeoffs.
Access to retirement benefits can start as early as age 62 or as late as age 70. Your Full Retirement Age (FRA) is determined by your birth year. For those born in 1954 or earlier, full retirement is age 66 while for those with a birth year of 1960 or later, full retirement is age 67. For those born between 1955 and 1959, full retirement falls between age 66 and 67. Full Retirement Age (FRA) is the age at which you would receive 100% benefit from Social Security once started.
Two Examples: Mary (older) & John (younger)
Looking at the chart above, let’s review two examples:
Assume Mary was born in 1954. She can start her benefits four years earlier at age 62, but her benefits will only be 75% of the 100% benefit that she would have received had she waited until she was 66. For each year she delays taking the benefit, her payout increases a compounded 7.3%.
Based upon her financial situation, Mary could also choose to wait up until age 70 to take her benefits. If she does so, her benefits are 132% of the original benefit amount.
Now consider John who is younger. John was born in 1960 (this situation applies to anyone born after 1960). The reduced benefit at age 62 is only 70% of the full retirement benefit. John loses 6% average per year by starting early. Again, at age 67, John receives 100% benefit. Waiting until age 70 results in the benefit increasing 8% per year with a maximum benefit of 124% of full retirement benefit.
One other note on the chart above. The cost of living adjustment (COLA) for 2017 was only 0.3% since inflation has been low. Considering a longer time period from 1985 – 2017, the average adjustment was higher at 2.6%. So, when looking at your Social Security statement, realize that you are looking at benefits in today’s dollars which will likely be adjusted in the future for increases in the cost of living.
The benefit of taking Social Security at a younger age is that you start receiving funds earlier. The negative is that the amount of benefit is reduced. So how long do you have to live to justify delaying taking the Social Security?
There are some assumptions of the “crossover age”. In this example, the crossover in terms of taking at age 62 versus at FRA is around age 76 and 2 months. Given that an individual has a high probability of living to this age (73% for men and 81% for women), based on probabilities a person would have a higher benefit by waiting until full retirement age. Secondly, if you compare taking at FRA versus at age 70, the person has to live to age 80 and 5 months to receive the full benefit of waiting until age 70 to start receiving benefits.
Step #3 – Talk To A Trusted Advisor
After you have a good understanding of various details of Social Security, we recommend consulting with a trusted professional for a second opinion. Your investment advisor or CPA can help provide some needed perspective. An good advisor should assesses your entire financial situation including your overall assets and other sources of income to help you make an informed decision.
Step #4: Decide When To Start Taking Social Security
After you visit with your financial advisor or CPA, understand your Social Security benefit, and analyze your particular situation, you should have adequate information to make a decision. A word of warning: You you can’t undo your benefit once you start. As such, we strongly encourage you to gather enough information and appropriately consider your options before locking in the benefit.
Deciding when to take your Social Security benefit is not easy. If we can be of assistance in helping you to answer any questions, we are happy to help you navigate these sometimes-confusing waters. Please reach-out to talk with us today.
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