After paying into the Social Security system for their entire career, many Americans on the edge of retirement suddenly realize they don’t understand how the system works. They have heard conflicting strategies of when to start taking their benefits. Some say it is best to start collecting a reduced benefit at age 62, others recommend that it is best to delay collection as long as possible because the delayed benefit will be much larger. Other arguments exist about when couples and surviving spouses should claim benefits, and whether or not to take benefits while you are still working.
Social Security confuses many of us, and that is a problem because these monies will be a major source of income for most retirees. Consider the findings in a March ‘13 study “Longevity Risk and Reward for Middle Income Americans,” from Bankers Life and Casualty Company:
• 72% of Americans say that Social Security benefits make up at least half or more of their total retirement income
• In 2009, 74% of Americans (nearly 32.3 million) received reduced benefits because they elected to begin taking their benefit payments before full retirement age.
• One in three of those 55 and older do not understand that delaying when they start to collect Social Security can increase their future benefit amount, and how annual cost-of -living increases affects that
• 35% of Americans age 55 and older who are not yet receiving Social Security do not know what their benefit will be when they retire.
Electing your benefit early or late
There are many who are fearful of the solvency of Social Security to continue to fund retirees. This may be unfounded, because the changes needed to get Social Security into balance are among the easier challenges that our policy makers in Washington, D.C. are facing. A combination of a slight adjustment to the [full] retirement age, raising the earnings cap, changing the CPI, and a slight increase in the payroll tax could put Social Security back into actuarial balance without a great amount of difficulty. So why do retirees still take reduced early retirement benefits? Is it fear of loss?
Remember that your benefit is a guaranteed lifetime benefit, with rights of survivorship and inflation protection- this is a life pension that you have built over a lifetime of earnings. So a “how do I get my money’s worth?” approach is the wrong way to go about deciding when to start benefits. Instead you should be asking yourself: “How do I insure against a potentially long life?” Retirement is no longer a 20-to-25 year period; these days you need to assume it will last 30 to 35 years. The longer you wait, the bigger your benefit becomes. By waiting until your age 70 to collect, the retirement benefit would be worth 132% of the full retirement age benefit. So each year delayed past full retirement age increases the benefit by 8%. It’s the only retirement income that has an automatic inflation adjustment built in, so that your buying power doesn’t erode as you age. By waiting, in effect you’re buying a [larger] cost-of-living-adjusted annuity.”*
Working while collecting benefits
Another key consideration is whether you elect to start benefits while still working. If you have not yet reached your full retirement age, and you earn wages, your benefit may be reduced. Once you reach your full retirement age, you can work with no reduction to your Social Security benefit. Your tax situation is another important factor to consider. A portion of your Social Security benefit may be taxed depending on your income, so you should talk with a financial professional about this before you choose to elect your benefits.
Consider your spouse’s benefit
If you are married, and are both eligible to collect SS benefits, it is important to assess your age and benefits together. A lower-earning spouse may be eligible for up to 50% of the higher-earning spouse’s benefit (SSA.Gov). Understanding your options can help you to maximize your household SS benefit. There are also survivor benefits at the loss of the family’s primary wage earner. SS compensates a surviving spouse up to 100% of the deceased spouse’s benefit (SSA.gov, “Survivors Benefits 2013”).
At the very least, do some research and do the math before you pull the trigger to start your benefit. The Social Security website has some great calculators that allow you to see how your monthly check will change based upon when you begin (go to ssa.gov and view your personal SS benefits). But above all, don’t worry about Social Security disappearing. Social Security is such a popular program, and we know that seniors vote, so it would be legislative suicide for policymakers to scale it back in any material way. I highly recommend that 50+ year olds start to plan out their SS income and start a file of your projected benefits.
*Filing to begin receiving Social Security before you reach your full retirement age always results in a smaller benefit amount. For those born from 1943 through 1954, FRA is age 66. Starting with individuals born in 1955, the full Retirement Age increases by 2 months per year until it reaches a maximum age of 67 for those born in 1960 or later. Increasing the FRA is one option being considered to help bring Social Security’s long-term financial situation into balance. See: socialsecurity.gov/retire2/agereduction.htm for more information.
Jeff Masters is an Elder at Coral Ridge Presbyterian Church and has 20 years experience in Financial Counseling and Professional Financial Planning. He has a Master’s Degree in Administration, is certified with Crown Financial Ministries, and is a qualified advisor with Kingdom Advisors. He has facilitated Dave Ramsey’s Financial Peace University, and has taught a Biblically Based Stewardship classes over the last 15 years. Jeff and his wife, Paula, have 5 daughters and 5 grandchildren. Jeff has a heart to help others handle their finances using prudent biblical principles.