Our featured article of the month, Before You Claim Social Security, poses some preliminary questions that should be considered prior to making your claim. Ironically, the most pressing question is also the most difficult one to answer. How long will you live? For obvious reasons, that question is rather impossible to answer with true accuracy.
However, an intimate discussion about personal health history, family health experience, and longevity is a very useful exercise to help narrow down your choices. Additionally, modeling using updated statistics from the Social Security Administration could provide broader perspective on the experience of millions of fellow Americans who have collected under the plan.
Working retirees and those who are married have a few more considerations prior to making the decision on when to file for social security benefits. Consequently, while the determining mathematical factor is the time frame for collecting benefits, the real life factor is something altogether different.
Your retirement lifestyle should be prioritized over the “optimal” mathematical determination for benefits because figures don’t ultimately decide how long you will be around to enjoy those benefits. A personalized approach based on the perspective of your unique retirement priorities and goals should be paramount. Otherwise, you may short change your enjoyment during retirement in an attempt to fulfill something much more arbitrary.
A few things you may want to think about before filing for benefits.
Whether you want to leave work at 62, 67, or 72, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.
How long do you think you will live?
If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (which varies from age 66 to 67 for those born in 1943 or later), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at FRA or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, and c) have sizable retirement savings.1
If you really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them. Essentially, the choice comes down to more lifetime payments that are smaller versus fewer lifetime payments that are larger. For the record, Social Security’s actuaries project that the average 65-year-old man to live 84.0 years, and the average 65-year-old woman, 86.5 years.2
Will you keep working?
You might not want to work too much, since earning too much income may result in your Social Security being withheld or taxed.
Prior to Full Retirement Age, your benefits may be lessened if your income tops certain limits. In 2018, if you are aged 62 to 65, receive Social Security, and have an income over $17,040, $1 of your benefits will be withheld for every $2. If you receive Social Security and turn 66 later this year, then $1 of your benefits will be withheld for every $3 that you earn above $45,360.3
Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + nontaxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000 to $34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000 to $44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income taxes on up to 85% of their Social Security benefits.3
When does your spouse want to file?
Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household.4
Finally, how much in benefits might be coming your way?
Visit SSA.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple years might translate to a slightly higher Social Security income.1
A claiming decision may be one of the most significant financial decisions of your life.
Your choices should be evaluated years in advance – with insight from the financial professional who has helped you plan for retirement.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – MarketWatch.com, November 2, 2019
2 – SSA.gov, May 28, 2020
3 – BlackRock.com, May 28, 2020
4 – MarketWatch.com, November 11, 2019