December 12, 2008
By Stan Johnson, CFP®
www.compfinancial.com
One of the most important and least-understood decisions we face as we approach retirement is when to start taking Social Security retirement benefits. Should you start early and receive benefits longer, or should you wait to get a larger monthly check?Unfortunately, many people make the wrong decision.
The Social Security Administration just added a new Website for financial planners, but anyone can go to it at www.socialsecurity.gov/financialplanners. In the Retirement section of the site, there is a table that shows how your monthly check will be reduced if you start benefits at age 62, as compared to taking it at your Normal Retirement Age (NRA). The NRA has been going up in recent years, and for those who were born from 1943 through 1954, it will be66. Anyone in this age group will reduce his or her monthly Social Security check by 25 percent if they start receiving their benefits four years early, at62.
The Website also provides a link to a “Breakeven Points” calculator, where you can calculate at what age the accumulated value of the benefits taken at 62 and at your NRA are equal. Presumably, one could base the decision on whether you think you will live beyond the breakeven age. An example on the Website shows that for someone who was born in February 1942, the breakeven age is 77 years 10 months. So, a person who thought he probably would not live to see his 78th birthday might decide to take the benefit early.
The Website lists several factors that should be considered in making the decision (in the link “Other things to consider“), but it falls well short of even mentioning several other factors.Failing to understand these additional factors is what leads people astray:
1) There are really two decisions to make. The first is when to start your benefits, and the second is when to quit working. If you start your benefit early but continue to earn income, your benefits will be reduced if you earn over$12,960/year until you reach your NRA. Your benefits are not affected once you reach your NRA, no matter how much you make or whether you have taken an early benefit. If you delay starting benefits several years after you quit earning any income, your income might be squeezed. However, there are ways to manage the situation.
2) Surviving spouses are entitled to the benefit of the deceased worker or to their own benefit, whichever is greater. However, if the deceased spouse took a reduced benefit and the survivor’s benefit is lower than the deceased’s benefit, the survivor will live with a reduced benefit also. (For more information, read an article posted at www.CompFinancial.com on the Documents page that discusses this and other issues concerning married vs. single workers.)
3) Once you have taken your first benefit check, it’s hard to change your mind. Your decision isn’t exactly irrevocable, but you have to file form SSA-521, “Request for Withdrawal of Application,” with the Social Security Administration and payback the funds you have received. If you can’t afford to pay it back, then you and your survivors are stuck with the reduced benefits for life.
4) Last,and most important, what are the real risks? Most people need a nest egg to produce income during retirement to supplement their Social Security check. The biggest risk all of us face is outliving our nest egg. If you live well beyond the breakeven age, having a larger benefit will decrease the odds you outlive your nest egg. And remember that your benefit will be increased by the Cost of Living adjustment every year, so the gap will get wider as you age.
In 2003, 59 percent of women and 53 percent of men opted to claim their retirement benefits at age 62,and most of the remaining retirees opted to take a reduced benefit before their NRA. Yet, most of those people will live until they’re over 80, and almost one-third will live into their 90′s. Most of them would have benefited by waiting to take their benefit at their NRA or even later. (It’s not often realized that your benefit can be increased by 8 percent for every year you delay starting your benefits beyond your NRA.)
What should you do? Hire a financial planner with the right tools and experience to provide you with a detailed analysis and a recommendation.
Retirement Planning and Social Security Retirement Benefits
December 12, 2008
By Stan Johnson, CFP®
www.compfinancial.com
One of the most important and least-understood decisions we face as we approach retirement is when to start taking Social Security retirement benefits. Should you start early and receive benefits longer, or should you wait to get a larger monthly check?Unfortunately, many people make the wrong decision.
The Social Security Administration just added a new Website for financial planners, but anyone can go to it at www.socialsecurity.gov/financialplanners. In the Retirement section of the site, there is a table that shows how your monthly check will be reduced if you start benefits at age 62, as compared to taking it at your Normal Retirement Age (NRA). The NRA has been going up in recent years, and for those who were born from 1943 through 1954, it will be66. Anyone in this age group will reduce his or her monthly Social Security check by 25 percent if they start receiving their benefits four years early, at62.
The Website also provides a link to a “Breakeven Points” calculator, where you can calculate at what age the accumulated value of the benefits taken at 62 and at your NRA are equal. Presumably, one could base the decision on whether you think you will live beyond the breakeven age. An example on the Website shows that for someone who was born in February 1942, the breakeven age is 77 years 10 months. So, a person who thought he probably would not live to see his 78th birthday might decide to take the benefit early.
The Website lists several factors that should be considered in making the decision (in the link “Other things to consider“), but it falls well short of even mentioning several other factors.Failing to understand these additional factors is what leads people astray:
1) There are really two decisions to make. The first is when to start your benefits, and the second is when to quit working. If you start your benefit early but continue to earn income, your benefits will be reduced if you earn over$12,960/year until you reach your NRA. Your benefits are not affected once you reach your NRA, no matter how much you make or whether you have taken an early benefit. If you delay starting benefits several years after you quit earning any income, your income might be squeezed. However, there are ways to manage the situation.
2) Surviving spouses are entitled to the benefit of the deceased worker or to their own benefit, whichever is greater. However, if the deceased spouse took a reduced benefit and the survivor’s benefit is lower than the deceased’s benefit, the survivor will live with a reduced benefit also. (For more information, read an article posted at www.CompFinancial.com on the Documents page that discusses this and other issues concerning married vs. single workers.)
3) Once you have taken your first benefit check, it’s hard to change your mind. Your decision isn’t exactly irrevocable, but you have to file form SSA-521, “Request for Withdrawal of Application,” with the Social Security Administration and payback the funds you have received. If you can’t afford to pay it back, then you and your survivors are stuck with the reduced benefits for life.
4) Last,and most important, what are the real risks? Most people need a nest egg to produce income during retirement to supplement their Social Security check. The biggest risk all of us face is outliving our nest egg. If you live well beyond the breakeven age, having a larger benefit will decrease the odds you outlive your nest egg. And remember that your benefit will be increased by the Cost of Living adjustment every year, so the gap will get wider as you age.
In 2003, 59 percent of women and 53 percent of men opted to claim their retirement benefits at age 62,and most of the remaining retirees opted to take a reduced benefit before their NRA. Yet, most of those people will live until they’re over 80, and almost one-third will live into their 90′s. Most of them would have benefited by waiting to take their benefit at their NRA or even later. (It’s not often realized that your benefit can be increased by 8 percent for every year you delay starting your benefits beyond your NRA.)
What should you do? Hire a financial planner with the right tools and experience to provide you with a detailed analysis and a recommendation.