When should you take social security?
For many years, financial advisors would speak about the “three-legged stool” approach to retirement income. This meant that the stool was supported by: (1) Social Security benefits, (2) an employer pension plan or other employer-sponsored plan, and (3) personal savings and investments. It was expected that Social Security would replace approximately 40 percent of your pre-retirement wages.
Today, because fewer employers offer pensions, Social Security has taken on more importance to replace your income during retirement. Social Security is now a primary source of retirement income for tens of millions of Americans each year. According to the United States Government Accountability Office’s May 2015 Retirement Security Report, Social Security provides 52 percent of retirees’ household income needs, on average.
Since Social Security income is such an important component to one’s retirement income, the questions become: When should you apply for Social Security? Many Americans start taking benefits as soon as they’re eligible at age 62, but this can be a very big mistake.
The urban myth is that full retirement age is 65, but in 1983, Congress changed filing rules that gradually moved full retirement age up to age 67. If you were born before 1937, the full retirement age is still 65 years old. For people born between 1938 and 1959, the full retirement age increases by two months each calendar year. For people born in 1960 and on, the full retirement age is 67 years old.
So when should you take Social Security?
Early, normal, or delayed filing
Some people wait until they reach full retirement age to file for Social Security benefits. Others postpone taking benefits until age 70 (the oldest age at which you can start benefits) to secure the largest monthly benefit. However, if you file at age 62, you will receive a reduced benefit for the rest of your life. By waiting to file for Social Security until your full retirement age, you will receive 100 percent of your benefit. And if you delay filing beyond your age, you will receive more than 100 percent of your benefit. This age varies depending on your birth year.
For example, if you turn 62 this year and start receiving retirement benefits, you will get 75 percent of the monthly benefit, because you will be getting benefits for an additional 48 months. If you wait to file for Social Security at age 65, you will get 93.3 percent of the monthly benefit because you will be getting benefits for an additional 12 months.
This is just one example. There are many strategies for filing for Social Security benefits, and for a married couple, the strategies are more involved. Choosing the wrong strategy can cost you thousands of dollars over your lifetime. For this reason, it’s important to think carefully and consult with a financial advisor who is well versed in Social Security strategies about which strategy is right for you.
Now or later?
Filing for Social Security before reaching your full retirement age may offer certain advantages. You can turn on an extra income stream at an early age. The benefits you receive may allow you to retire early or to cut back on your hours at work (but don’t forget to consider earning rules while receiving Social Security payments).
Remember, claiming benefits early comes at a price. If you start collecting benefits at 62, your monthly benefit amount could be permanently reduced by as much as 30 percent per year, depending upon the year you were born. The longer you wait, however, the higher your benefit will be.
Know your situation
Deciding the right time to take your Social Security benefits involves many items to consider, including your earnings history, life expectancy, financial needs, lifestyle choices, other savings, and other items. Working with a financial professional can help you make retirement calculations based on your own age and earnings. Call me or speak with a financial advisor to help you better understand your Social Security options.
Anthony N. Corrao is president of Manhattan Ridge Advisors, with 25 years of financial-planning experience.
The information is intended for informational purposes only, and is not intended to be a substitute for specific tax, legal or investment advice. Securities offered through First Allied Securities Inc., a registered broker dealer. Member FINRA-SIPC. Advisory services offered through First Allied Advisory Services, a registered investment adviser.