There
is a conventional belief that collecting Social Security benefits should begin
as early as possible, which currently means age 62. While this may have been
a prudent strategy for millions of retirees in the past, Baby Boomers have
created a new paradigm—they’re expected to live longer than any previous
generation, making a delayed retirement strategy potentially more lucrative and
prudent for themselves and their surviving spouses.
When
to begin collecting benefits may be the most important decision in determining
retirement income from Social Security, and there are several factors to
consider before selecting a date, including:
- Health
status,
- Life
expectancy,
- Need
for income, and
- Plans
for continued employment at any level.
Married
retirees have additional factors to consider, including spouse life expectancy
and who is the higher wage earner. This analysis is complex and requires
careful consideration of the input, assumptions and additional factors such as
taxes that will impact your benefits.
Your
benefit eligibility will depend upon:
- How
much the person earned over his/her working career,
- The
age at which the person applies for benefits,
- Spousal
benefits (extra money allocated to married couples), and
- Survivor
benefits (reassessment of benefits to help the surviving spouse).
According
to the Social Security Administration, Social Security benefits are
based onone’s average earnings over the highest 35 years of earned income,
with earnings through age 60 indexed to reflect increases in U.S. workers’
average wage level. For example, if the wage level in the U.S is twice as high
when a person turns 60 years old as when the person was 40 years old, the
formula will double the age 40 earnings. If a person worked less than 35 years,
each year the person missed is calculated as a 0. The maximum income in any
year is equal to that year’s maximum income subject to Social Security taxes.
If
an individual decides to claim benefits earlier than his/her full retirement
age and continues to have more than a modest amount of earned income, he/she
may see a reduction or elimination of Social Security benefits. In addition, if
an individual earned wages not covered by Social Security, then the estimates
provided to by Social Security may be too high.
Most
retirees feel that the two most important goals they have when examining their
options are to maximize their expected lifetime benefits and to minimize
longevity risk (running out of funds too early because of poor investment
choices).
Making
a sound decision about collecting Social Security benefits requires knowledge
of spousal benefits and tax impacts. For example, many people don’t realize
that divorced spouses are still entitled to their ex-spouse’s benefits. If a
person is unmarried but was previously married for 10 or more years, he/she is entitled
to collect spousal and/or survivor benefits when both individuals reach the age
of 62 and the former spouse files for benefits. Benefits paid to a former
spouse do not reduce benefits to current spouses.
Taxes
matter too. Many people are unfamiliar with the taxation of Social Security
benefits. If Social Security is an individual’s only source of income, then it
is not taxable. If the person has other income, however, including pension
income, 401(k) withdrawals, earned income or investment income, he/she may owe
taxes on up to 85% of his/her benefit. In a description of Social Security tax
law, TurboTax notes there is a range of income where 50% or 85% of benefits may
be classified as taxable income for each taxpayer. The actual rate depends on the
person’s marginal bracket. This
tax can make a significant difference in what an individual is planning to
receive on a net basis, and may point to an alternate claiming strategy that
maximizes after-tax benefit. Careful analysis can point a person in the right
direction.
It’s
critical to formulate a strategy for when to initiate benefits, based on an
analysis of all retirement assets. A trained and experienced financial
consultant offers individuals the expertise, knowledge and software tools to
help them design a plan that takes all these important factors into
consideration. This type of guidance may pay big dividends in making sure the
person leaves no financial benefit on the table after you retire.
More
information about creating a sound retirement strategy and making the most of
Social Security benefits is at www.burnhamgibson.com.
Stuart Friedman, CLU,
ChFC has had more than 34 years of experience as a financial services
professional providing clients with the guidance they need to help them reach
their risk management, investment and financial planning goals. In addition to
being a Chartered Life Underwriter and Chartered Financial Consultant, Stuart’s
continuing education includes a certificate in Retirement Planning from the
Wharton School of Business. He holds a bachelor of science degree in business
administration from Boston University. CA Insurance Lic. #0613874
NOTE: This feature
is to provide general information only, does not constitute legal
advice, and cannot be used or substituted for legal or tax advice.