Choose Your Social Security Age with Care – It Could Cost You a BundleSubmitted by David Vaughan Investments, LLC on June 2nd, 2017
by Margaret L. Bilby, CFP®
Relationship Manager, Florida Region
June 5, 2017
Did you know that more than 10,000 Baby Boomers cross the retirement threshold every day? One of the biggest challenges pre-retirees and retirees face is determining how they will cover their retirement expenses. With the steady decline in Defined Benefit Pension coverage, retirees are depending on Social Security more than ever. Therefore, the question “What age should I take Social Security?” becomes increasing critical to a successful retirement plan.
While there is great temptation to start taking benefits at the normal Social Security retirement age of 66, or even earlier at age 62, retirees may be leaving tens of thousands of dollars on the table by not waiting as long as they possibly can to start receiving their Social Security checks.
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 also know that they can take reduced benefits as early as age 62. But very few people know that if they delay their retirement they can effectively earn an 8 percent annual return on their available benefits. That’s based on the Delayed Retirement Credits (DRCs) earned each year you delay your Social Security benefits.
Think about it. 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:
- Based on his work history, Mr. Jones is eligible for a Primary Insurance Amount (PIA) of $2,000 or $24,000 per year at age 66 (Full Retirement Age).
- If he has the financial wherewithal to delay collecting his Social Security until age 70, 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.
But, 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.
Choose Your Social Security Age Wisely
Many pre-retirees make the mistake of simply filling out the form and checking the boxes without consulting a retirement planning expert. There are many different facets of Social Security that require careful and detailed analysis, such as income taxes and potential spousal needs. Making a mistake with any one of them, especially when spousal retirement benefits are involved, can be extremely costly.
At David Vaughan Investments, we feel that it is vital to consider the unique financial and personal aspects of each pre-retirees life, like health and longevity, in order to make a knowledgeable and thoughtful decision.