While Social Security benefits are unlikely to fully fund your retirement, they nonetheless represent an important building block in most people’s retirement income plans.
Many people might think of Social Security as something that kicks in automatically some time in their mid-60s. But in fact, people choose when to take their Social Security benefits, and the age at which they take them can significantly affect the amount of money they receive every month – for the rest of their lives!
This decision can be complicated. It’s also extremely important, because the choice you make is permanent.
As a financial advisor in Utah, there are a few things I want you to know when it comes to your Social Security benefits. If you have questions that aren’t addressed here or want to discuss your specific situation in more detail, let’s talk! At Rock House Financial, we’re here to help!
Don’t guess when it comes to your retirement. Schedule a complimentary conversation with the team at Rock House Financial to see how we can help.
Choosing When to Take Benefits Can Significantly Affect the Amount You Receive
The Social Security Administration (SSA) allows those eligible for Social Security to begin taking their benefits as early as the age of 62 or as late as the age of 70. Those who take these benefits at age 62 will see their monthly benefits reduced by up to 30 percent of what they would have received at their full retirement age.
One’s full retirement age varies according to birth year. For people born in 1960 and later, their full retirement age is 67.
What does this mean? Let’s say you were born in 1963 and your Social Security benefits will be $2,000 per month if you start collecting them at age 67, your full retirement age. If you retire at 62 instead, the amount you receive will be reduced 30 percent. You’ll receive $1,400 per month rather than $2,000, or $7,200 less per year. (If you choose to take benefits between age 63 and your full retirement age, the amount will increase by a graduated percentage every year up to your full amount.)
Conversely, if you choose to take benefits after your full retirement age, the amount you’ll receive increases, climbing roughly 8 percent every year between your full retirement age and the age of 70, after which increases stop.
In other words, if your Social Security benefits equal $2,000 if you take them at your full retirement age of 67, you would receive roughly $2,500 if you delayed taking these benefits until age 70 – $500 more per month.
The difference between receiving your benefits at age 62 and age 70 could potentially be worth more than $1,000 per month.
Again, this decision is permanent. The choice you make, and therefore, the amount you receive, will continue as long as you live, with occasional cost of living increases determined by the SSA.
Financially speaking, the decision may seem pretty straight-forward – the longer you wait, the more money you’ll receive. But this is where it can get tricky.
As a financial advisor in Utah, please take note: The amount of money is not the only important factor in determining the right age to start taking Social Security benefits. Your health, longevity, goals, needs and overall finances should also be considered. Everyone’s situation is different. If you are laid-off in your 60s, for example, and have a difficult time finding work, deciding to receive Social Security benefits early, at age 62, can be very helpful to you and your family. (If you find yourself in this situation, this blog post may also help: What a Job Change Means to Your 401(k): Financial Advisor in Utah Gives 4 Examples.)
Remember, you are also making a decision about how much money to receive over a lifetime. If you choose an earlier age, you will receive less monthly, but will receive benefits, presumably, for a longer period of time. If you choose a later age, the amount you receive will be higher, but you may be collecting benefits for a shorter period of time, depending on your expected longevity.
How do you balance expected longevity against the amount of benefits you’d receive over your lifetime? Work with a financial advisor to calculate your breakeven point. Your breakeven point is the age at which you’d receive as much money in total as you would had you taken benefits earlier. At Rock House Financial, we can run the numbers for you to see what age makes the most sense based on your unique situation. Clearly, your expected health and longevity is an integral part of determining your breakeven point. If you don’t expect to live long past your full retirement age, or past 62, it may be more advantageous to take benefits earlier.
Many other factors also play a role, such as your expected income from retirement funds and investments, your predicted expenses in retirement, and your goals! So, while breakeven is important, working with a financial advisor can help you see the big picture and choose the right age for you to start receiving Social Security.
Here’s a quick overview:
Taking Your Benefits Early: Age 62 to Full Retirement Age
Pros: A guaranteed source of income every month.
Cons: Your benefits will be up to 30 percent lower per month, permanently, from what they could be if you wait until your full retirement age.
Considerations: Taking benefits early can be helpful if you are taking care of a spouse in ill health, are in poor health yourself or suffer a layoff from a job later in life and the income is needed. This strategy can also work to your advantage if you simply want to retire at an earlier age, especially if you will have sufficient retirement income from other sources. Make sure to weigh potential drawbacks first!
Taking Your Benefits at Your Full Retirement Age
Pros: A guaranteed income source every month.
Cons: You are leaving potential income on the table, approximately 8 percent every year between your full retirement age and age 70.
Considerations: Only you and your financial advisor can determine whether taking your benefits early or delaying is a good strategy for you. Your goals and health will play a big role!
Taking Your Benefits Later: After Your Full Retirement Age to Age 70
Pros: A guaranteed source of income every month, with a full maximized amount.
Cons: You forfeit benefits at an earlier age.
Considerations: Your expected longevity, health, goals and plans play a large role in determining whether waiting is the best choice for you.
The Bottom Line
At the end of the day, the best age to take Social Security benefits is highly dependent upon many factors. Even as a financial advisor in Utah, I can’t tell you that one age works best for everyone. Take the time you deserve to determine the best age for you. It’s your financial future that’s at risk here!
