Social Security: When and How
Many are foggy on the different levels of Social Security benefits they can claim. No wonder. This is a complex subject.
Social Security payouts are a big part of retirees’ incomes, making up an average 40% for people over 65, according to a 2008 study by the Employee Benefit Research Institute.
Your retirement plan needs to be funded from different sources. After all, you shouldn’t put all of your eggs in one basket. Social Security is a very significant one, but hardly sufficient for most retirees. Here is a guide to what you can take, when and how.
When is the best time to begin receiving your Social Security payments? You don’t have to wait until you are 65 to start drawing on your benefits. But starting earlier brings penalties.
For example, 62 is earliest you that you can elect to begin receiving benefits, but your payments are 25% to 30% lower than if you wait until later. Waiting until you are 63 means a guaranteed 8% higher payment.
The reason: The later you file, the less time the actuarial tables say you have to live, meaning the government can afford to pay you more. The level of benefits increases year by year to what is known as full retirement age, now 66. The latest you can start payments is age 70. You receive even more money then.
Some take early payments because of health issues, a shorter than average life expectancy or a financial shortfall. If you don’t have these problems and you can continue working, then you should delay receiving payment for as long as possible.
Your annual earnings limit is the maximum an employer can pay you before the government reduces your Social Security benefit. Your benefit falls by $1 for every $2 you exceed your limit. In 2013, this cap is $15,120. This reduction applies to those years before your full retirement age, and affects income earned after you start receiving your checks.
Once you reach full retirement age, the limit no longer applies and you can earn as much as you want without affecting your Social Security benefit. So if you earn more than this amount, it is even more advantageous to delay collecting benefits.
There are additional strategies that married couples can employ to get more out of their combined benefits. For example, if one spouse’s benefit is significantly greater, delaying benefits for the higher-earning spouse can be smart because it increases the amount the couple receives, as long as either spouse is living. Having one spouse wait to start Social Security benefits until age 70 might be the best option.
You can find online calculators that can help determine the approximate amount of Social Security that you are entitled to based on different retirement scenarios, which you can then incorporate into your retirement plan. The Social Security Administration has one, as do AARP and BankRate.
Depending on the amount you have in your portfolios, your projected passive income stream, your preferred standard of living and your health, Social Security may comprise a smaller or larger part of your retirement plan. Do your research and consult a financial advisor to fully understand the nuances of when you should take Social Security to ensure a long, prosperous and enjoyable retirement.
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Alan Moore, MS, CFP, is the founder of Serenity Financial Consulting in Milwaukee, Wis.
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