Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Jul 25

    One of the most important – and troublesome – decisions you’ll have to make as you move toward retirement is when to claim your social security benefits. For a program that’s been around for more than three-quarters of a century, you’d think the answer would be available right at our fingertips. Not so. Many retirees leave tens of thousands of dollars on the table by claiming their benefits too soon or by not coordinating their benefits with their spouse.

    Retirees cannot rely on conventional wisdom! Simplistic rules such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

    The decision is extremely crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as widowers and the poverty rate for elderly single women is 23% compared to just 5% for retired couples.

    Full retirement age is the age at which a person may first become eligible for full Social Security benefits. That’s 66 for people born between 1943 and 1954, then creeping up to age 67 for those born later than 1959.

     

    Determining Full Retirement Age
    Year of Birth* Full Retirement Age (FRA)
    1943 – 1954 66
    1955 66 and 2 months
    1956 66 and 4 months
    1957 66 and 6 months
    1958 66 and 8 months
    1959 66 and 10 months
    1960 and later 67
    *If you were born on January 1st of any year you should refer to the previous year.
    Source: ssa.gov/retire2/retirechart.htm

     

    You can claim as early as 62, but your benefit will be slashed by 25 percent if your full retirement age is 66. In contrast, your benefits escalate by 8 percent for every year you postpone taking your benefits between 66 and 70.

    It’s a relatively easy case to make for delaying your Social Security benefits until 70. If you choose to work past the normal retirement age and delay receiving benefits while working, the benefits paid later will be higher based on three factors: (a) the additional years of earnings, hopefully replacing lower earnings during the 35-year calculation period; (b) increases in the indexing amounts used to calculate the primary insurance amount (PIA), and (c) the delayed retirement credit.

    Originally, your monthly benefits were adjusted so that you would receive the same amount in total lifetime benefits no matter whether you chose to begin receiving benefits at age 62, full retirement age, age 70, or any age in between. But, things change and it doesn’t really work that way anymore.

    Let’s say your normal retirement age is 66 and your monthly Social Security benefits starting at that age will be $2,000. If you choose to begin benefits at age 62, your monthly benefit will be reduced by 25 percent to $1,500.

    If you postpone your benefits until age 70, the delayed retirement credit would increase your monthly benefits to $2,640. Your benefit amount will be 32 percent more (4 years times 8%) than what you would have received at 66.

    Picture1

     

     

     

     

     

     

     

     

    Is it better to begin receiving Social Security benefits early since it’s “free money” or is it better to delay as long as possible and receive a larger benefit for a shorter period of time. It depends on a number of factors such as your health, family longevity, ability or desire to work in retirement, current cash needs, other sources of income, and of course, the amount of your benefits.

    Unfortunately, studies suggest that those who take early retirement benefits out of financial necessity continue to struggle and often find themselves in tougher times as they struggle to live on their permanently reduced benefits.

    It is clear, however, that those claiming benefits early may be leaving tens of thousands of dollars on the table.