For Americans entering retirement, social security is becoming even more of a necessity. Here’s how to get what’s coming to you.
In February 2008, Kathleen Casey-Kirschling, the nation's first Baby Boomer, made history as the first of her generation to receive a Social Security retirement benefit. In a sign of the times, Casey-Kirschling, born January 1, 1946, applied for her benefits online.
Casey-Kirschling is the first of 80 million baby boomers heading into retirement – all of whom will be looking to maximize their benefits. The good news is that, with a little planning, managing your social security benefits is easier than one might think.
What are my options?
That’s typically the first question we hear at WrapManager from clients asking about social security. By and large, the answer lies in three categories:
- Apply at age 62 and receive a reduced benefit for life
- Apply at full retirement age and receive full benefits for life
- Apply at age 70 and receive an additional credit for life
Note that Social Security payouts also depend on when you were born. Current Social Security rules state those born in 1960 or later can't collect full benefits until they reach 67. But if you were born before 1960, full benefits kick in between ages 65 and 67. According to the Social Security Administration, if you start taking benefits at age 62 and continue to work, your benefits will be reduced by $1 for every $2 you earn above $12,000 a year. That reduction ends when you reach your full retirement age.
When should you apply?
A little financial physics tells us that the U.S. Government discourages people from applying too early, and wants to reward people who delay getting their benefits until age 70. With advances in health care and longer life spans, some advisors encourage healthy clients to hold off until age 70 to apply for benefits. This chart explains how much a 60-year-old with $100,000 in earnings gains by delaying Social Security benefits:
Social Security Payments at Different Retirement Ages
| In today's dollars | In future inflation- adjusted dollars | |
|---|---|---|
| Apply in 2010 at age 62 | $1,507 | $1,640 |
| Apply in 2014 at age 66 | $2,071 | $2,522 |
| Apply in 2018 at age 70 | $2,822 | $3,874 |
Source: Social Security Administration
While any social security benefits strategy requires as much a visit to the family physician as it does to one’s financial advisor, the larger pot of money available at age 70 may come in handy, especially if you outlive the proceeds of other investments.
Other key considerations before deciding on Social Security benefits:
Are you still working? If you’re age 62, or age 65, and still very much in the workforce, you’ll likely bump into limits on how much of your Social Security assets you can withdraw. The more you work, the less benefits you can draw out. If you can manage, waiting until age 70 has its advantages – there are no limits on Social Security benefits at that age.
What’s your “break-even” age? We mentioned that waiting to age 70 gains you a bigger Social Security check every month. But there might be some financial gains in applying early. It all depends on your break-even age. That depends on potential benefits and any opportunity cost involved in getting your Social Security payout early (via investments or inflation adjustments). To figure out your break-even age, check out the SSA’s age calculator.
Taxes: Don’t make any decisions on Social Security payouts until you plug in any tax liabilities. For example, if you file jointly and have a combined income of between $32,000 and $44,000, you’ll owe (federal) taxes on half your Social Security payment. But if you’re adjusted gross income – including 50% of your Social Security benefits – is under that $32,000 mark (for married couples, it’s $25,000 for single people) you’ll pay no income tax at all. To calculate your Social Security tax liability, use this tax calculator.
Spousal Benefits: If you’re married, you’ll need to take your spouse’s financial situation, now and down the road, into consideration. Your spouse also benefits from waiting to take Social Security benefits, although if you delay your Social Security payday, there is no reason why your spouse can’t take his or her benefits at age 62, as long as you are still alive.
By and large, when you take Social Security depends, more than anything else, on your life expectancy. If you’re in good health it may make more financial sense to wait – you’ll likely earn more money that way. But if you’re in ill health and may not make it to your break-even age, you may want to take all the money you can get as soon as you’re eligible.
For more information on when to take your Social Security benefits, contact your WrapManager wealth strategist at (800) 541-7774.
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