Choose Your Social Security Age with Care - It Could Cost You a Bundle
With more than 10,000 Baby Boomers crossing the retirement threshold every day, the Social Security check-writing machine has kicked into overdrive. Following a tumultuous decade in which pre-retirees and retirees saw their 401k plans rocked by two stock market crashes, two recessions and a financial crisis, an increasing number of people are more reliant on Social Security benefits than ever before. While the temptation to start taking benefits at the normal Social Security retirement age of 66, or even earlier at age 62 is great, retirees may be leaving tens of thousands of dollars on the table by not waiting as long as they possibly can to tap Social Security.
How Your Social Security Retirement Age Affects Your Benefits
Most people know their full retirement age (FRA) – the Social Security age at which they can receive their full Social Security benefit. For most people retiring today, their FRA is 66 and most people know that they can take reduced benefits as early as age 62. Few people know, however, that if they delay their retirement they can effectively earn an 8 percent annual return on their available benefits. That is based on the Delayed Retirement Credits (DRCs) earned each year you delay your Social Security benefits.
Think about that. Where else can you earn a guaranteed 8 percent on your money? To understand the overall impact it can have on your total Social Security benefits, consider the following example:
- Mr. Jones is eligible for a Primary Insurance Amount (PIA) of $2,000 or $24,000 per year at age 66 (FRA).
- If he were able to wait until age 70 to take Social Security, his annual benefit would increase to $31, 680. Although this increase in retirement benefits won’t affect the Spousal Retirement Benefits, it will apply to a Surviving Spouse’s Benefit.
- In cumulative terms, Mr. Jones would increase his total benefits from $378,000 received by his life expectancy age of 82 to $411,000.
However, this example doesn’t account for Cost of Living Adjustments (COLAs). Assuming a 2.5 percent COLA, Mr. Jones' delayed benefit would grow to $38,599 and her total benefit amount would increase to $584,000 by age 82.
What about the four years in which he wasn’t receiving benefits? Had he taken his benefits starting at age 66, he would have received $139,000 by age 70. That’s where calculating the “break even” year will help you determine whether it’s worth the wait. In this example, Mr. Jones will break even at age 80, and, if he lives longer, he’ll receive more money by having waited until age 70 for his Social Security benefits.
Of course, if you are considering taking early benefits at age 62, you will leave much more on the table due to the reduced early benefit amount. Unless you have no other choice, it doesn’t make since to take early retirement benefits.
Choose Your Social Security Age Wisely
The big mistake many pre-retirees make is to simply fill out the form and check the boxes without having consulted a retirement expert. There are dozens of different facets of Social Security, which all but the most qualified retirement experts don't truly understand. Making a mistake with any one of them, especially when spousal retirement benefits are involved, can be extremely costly. Make sure to seek the guidance of a retirement income advisor knowledgeable in the areas of decumulation and sequence of return risk. If you ask an advisor about these two terms, and they look at you with crossed-eyes, move on to another advisor.
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