Table of Contents
Table of Contents
Video Transcript
In planning for retirement, your Social Security retirement benefit is an important component of retirement income because it's paid for life and is inflation adjusted. Maximizing your lifetime benefit requires the knowledge of Social Security claiming strategies. Some of the most common questions people ask when getting ready for retirement include: When should I claim my Social Security benefits? I've heard I can take them at age 62. I hear that some wait until age 70. Should I take it then? Or maybe sometime in between? When should my spouse claim his or her benefit? And what factors should we be considering?
Generally, there are no simple answers. There are a lot of different factors and circumstances that will influence the decision. And what works for one person will not be the same for others.
Here are a few important factors, though, that can influence the benefit you'll receive and that you should keep in mind. Your Social Security benefit is calculated based upon an average of your 35 highest earning years, adjusted some for inflation, and it's always expressed as the benefit you'll receive at your full retirement age. That's the age you're first eligible to receive benefits without any reduction for early collection.
There's a common misconception that the full retirement age is age 65, and though that used to be true, the full retirement age was increased to help reduce the strain on the Social Security system. And for most baby boomers, full retirement age will fall somewhere between age 66 and age 67, depending on the birthday. Some choose to take Social Security a bit later to receive an increased monthly benefit.
That higher benefit can help ensure that the income they're receiving is enough to cover their needs and in many cases, waiting actually helps them maximize the total amount they receive over their lifetime from Social Security. Though it's true that most individuals are eligible to start collecting an early benefit at age 62, they may not realize how big of an impact that can have on their retirement income.
Let's take a look at an example to help illustrate that point. Michael is currently age 61. He's been working since age 18. He's starting to look a bit more closely at his Social Security benefits to plan for retirement. Michael's full retirement age will fall at age 66 and is currently estimated at $2,000 per month. If Michael starts collecting at age 62, his benefit will be permanently reduced by 25%, taking his monthly payment down to $1,500 dollars.
The longer he waits, the more he'll receive. Taking his benefit in age 63 results in only 20% reduction. At age 64, a bit over a 13% reduction. And at age 65, about a 7% reduction. Michael is also considering collecting his benefits after reaching his full retirement age. And each year he waits after age 66, up until age 70 will increase his benefit by 8%.
When he looks at things on an annual basis, there's almost a $14,000 per year spread between his age 62 benefit and his age 70 benefit. However, Michael is also keeping in mind that by collecting early, he would be receiving more years of income. But he was surprised to see how quickly he would reach the break even point, sometimes called a crossover point where the larger payment that came from waiting catches up and then surpasses what he received by collecting early.
In his case, that point comes prior to his 80th birthday. He also has to consider what impact taking a reduced benefit would have on his wife as her survivor benefit will also be reduced from his early commencement. Michael decides it's best to sit down with a financial professional to talk through the circumstances and find a claiming strategy that will meet him and his wife's needs.
Together, they look at things like this. You know, are there sufficient sources of income available that will cover their expenses until they would start collecting Social Security a bit later? Is Michael going to remain fully retired or will he go back to work somewhere else, maybe on a full time or part time basis? What's Michael's life expectancy realistically, and what clues can they draw from his family's medical history?
What sources of income will be there from Michael's life if he passes away? Would a reduced Social Security benefit be sufficient? Or is it important to wait a bit longer so that her survivor benefit would be larger? These are only a few of the many questions that they will need to answer when it comes time to plan for retirement.
The good news is that they and you don't have to figure it out all alone. Take a few moments to talk with a financial professional. They can help you better understand how Social Security works and can help you make sure you're choosing claiming strategies that will work best for your needs.
Western & Southern Life does not guarantee the accuracy of the information provided herein. Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Life does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. Western & Southern Life makes no warranties with regard to the information or results obtained by its use. Western & Southern Life disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation. Insurance products may be issued by member companies of Western & Southern Financial Group, Inc.
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Social Security provides income to you and your dependents in a way that virtually no other financial account can.
- It provides automatic cost of living adjustments; and
- You don't have to be an investment expert to use it.
Social Security can help address a significant fear for most everyone — outliving your income. And, unlike many retirement plans that pay out a fixed, level benefit, Social Security adjusts as the cost of living goes up. Finally, you don't have to be a financial expert to receive a Social Security benefit — the ups and downs of financial markets or reinvestment and sequence of return risks don't apply.
Key Takeaways
- You need 40 credits to qualify for Social Security benefits.
- Your retirement benefits can start at age 62, but filing later may result in a larger benefit.
- Social Security may not provide enough income, so consider other sources like pensions, savings, and retirement plans.
Qualifying for Social Security
To receive Social Security benefits, you need to have 40 credits (formerly known as 'quarters of coverage.') The most credits you can earn in a calendar year is four — and you qualify for four credits as rapidly as you earn them.
- Your retirement benefits are available to you as early as age 62. Your spouse can also receive benefits based on your work history as early as when they turn 62. This is known as a spousal benefit.
- If you die, your surviving spouse can receive survivor benefits as early as age 60. This is known as a widow/widower's benefit.
- All benefits are based on Full Retirement Age (FRA). For those born between 1943 and 1954, FRA is 66 years and 0 months. For those born in 1960 or later, FRA is 67 with those born between 1955 and 1960 falling in the middle by months. If you decide to receive benefits at any other time (either before or after FRA), your benefit may decrease or increase. Bottom line is that filing for benefits later means a larger benefit.
When Should I Claim My Social Security Benefits?
Generally, there are no simple answers. There are a lot of different factors and circumstances that can affect your decision, and what works for one person will not be the same for another. Social Security is specifically tailored to you and your family based on your work history and situation. Ultimately, it's important to learn as much as possible about claiming strategies, their benefits and any expected consequences if you want to maximize your own Social Security benefit.
Will Social Security Be Enough?
Although Social Security generally provides an income stream that you can't outlive, will it provide enough income? Maybe not. Having other income sources may not only be smart, but it may be necessary! Pensions, savings, retirement plans and work will likely be needed to supplement Social Security income.
A smart step may be to consider ways to close the gap. Consider IRAs and non-qualified annuities — both deferred and immediate — for lifetime needs, and life insurance for your surviving spouse and/or dependents.
For further insight on Social Security, talk to a financial professional or your local Social Security Administration office, or visit the Social Security website at www.ssa.gov.1 With a thoughtful and comprehensive retirement plan, you can feel confident about the steps you need to take to design your retirement to be both financially secure and personally rewarding.
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Sources
- Social Security Administration. https://www.ssa.gov/.