Considerations Before You Begin Social Security Benefits
The full retirement age for Social Security benefits, also called “normal retirement age,” is generally between ages 66 and 67. The age was set at 65 for many years. In 1983, Congress passed a law to raise the age because people are living longer and staying healthier in older age. The law raised the age by a few months for every birth year, until it reached the age of 67.
Many people have to choose what age is appropriate for their personal and financial situation. You can take a reduced benefit (by as much as 30%) starting as early as age 62. You can also increase the amount of your benefits (for example, by 8% per year up to a maximum of 32%) by delaying your start date to as late as age 70. Here are some questions you should ask if you are considering one of these options.
Other Sources of Income
As a general rule, you should try to delay Social Security benefits if you have other sources of income. By waiting until full retirement age or, if possible, delaying benefits to age 70 the benefit is roughly equivalent to an investment with a guaranteed rate of return as high as 8%. That option is hard to duplicate in a current low-interest-rate environment.
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Other Available Assets
Consider tapping the equity in your home or taking distributions from IRAs or qualified retirement plans as another alternative to early Social Security benefits. The use of retirement funds may have a tax cost and there is a timing difference to receive the funds based on life expectancy. Recently, the Secure Act increased the required minimum distribution (RMD) age from 70-½ to 72, marking the first change in RMD age since becoming law in 1986. The age increase will only apply to people born on or after July 1, 1949 but it means taxpayers should consider whether to defer distributions from retirement accounts until age 72.
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As a practical matter, many retirees cannot afford to hold off using retirement savings to age 72. Even for those who have adequate savings to reach RMD age, it may not make sense to wait. The ‘right’ withdrawal strategy will depend on multiple personal factors that change over time along with tax laws, available income and the individual’s personal financial situation.
Impact of Earnings
The delay of Social Security benefits is particularly helpful for those still working. If you start benefits before reaching full retirement age, the benefits are reduced by one dollar for every two dollars you earn above a threshold ($18,240 in 2020). In the year you reach full retirement age, benefits will be reduced by one dollar for every three dollars you earn above a new threshold ($48,600 in 2020) up to the month before you reach full retirement age. After full retirement age, your benefit will be recalculated to get credit for months you missed benefits due to earnings.
The amount of Social Security benefits is based on an actuarial calculation. If you take a reduced benefit starting at age 62, the benefits you receive over your remaining life expectancy will be roughly the same as the benefits you receive if you choose to start at age 70.
If you live beyond your statistical life expectancy, you will receive a windfall by waiting longer to start. Likewise, if you wait and fail to reach your life expectancy, your total benefits will fall short. Those with health concerns preventing them from reaching life expectancy might consider starting Social Security benefits early. Fortunately, you can change your mind after your choice. For example, you might start collecting Social Security early and then suspend benefits once you reach full retirement age. At age 70, you could then restart them and resume at a higher rate.
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If you have additional questions and concerns about your potential options, please consider contacting your ORBA advisor or Tom Kosinski at firstname.lastname@example.org or 312-670-7444. Visit ORBA.com to learn more about our Wealth Management Services.