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Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.
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Choose Social Security Options Wisely or it Could Cost You In choosing when to start their Social Security benefits, 95 percent of retirees get it wrong and it’s costing them trillions of dollars in lost benefits. That’s according to an extensive University of Michigan study which ran more than a billion simulations for 2,000 retirees based on 500,000 possible scenarios for each.1 The study concluded that too many retirees choose to claim their benefits earlier than they should primarily out of concern for their financial security when, in fact, it could be making them less secure. The bottom line is, choosing the wrong time to start your Social Security benefits will cost you dearly. Here are some of the key planning considerations when choosing when to take your benefit options: How Your Age Affects Your Benefits If you have done any amount of retirement planning, you probably know that you can take reduced benefits as early as age 62. The benefit available at age 62 is between 70 and 75 percent of your full benefit depending on your actual full retirement age (FRA). For example, if your FRA is 66, your reduction is 25 percent. However, if your FRA is 67, your reduction would be 30 percent because of the wider age gap. When you take that reduced benefit, you lock it in for the rest of your life. What you may also know is that, if you wait to start receiving your benefit, you earn deferral credits which increases your benefit by 8 percent each year up until age 70. That translates to a guaranteed 32 percent increase in the benefit amount for retirees with an FRA of 66. For retirees with an FRA of 67, the maximum increase is 24 percent. Regardless, the increased benefit is locked in for the remainder of your life. In addition, the higher benefit amount is your basis for all future cost-of-living increases. For someone eligible to receive an FRA benefit of $2,500 at age 66, the options would look like this:2
Which Do You Choose? From the Social Security Administration’s perspective, the answer is fairly straightforward. If you live to the average life expectancy, you will ultimately receive about the same lifetime benefits regardless of which option you choose. However, in actual practice, it’s not quite that simple. In choosing when to take your Social Security benefits, several factors come into play, such as your financial and spousal circumstances, health, and family health history. For example, if, based on your health and/or your family’s health history, you don’t expect to reach life expectancy, you may be better off taking benefits early. Conversely, if you expect to live beyond life expectancy, you would benefit from a higher payout for an extended period of time. The bottom line is, if you think you will outlive the average life expectancy, then delaying your benefits for a larger monthly payout can be more beneficial. However, if you think you will have a hard time making ends meet or you have reason to believe you won’t beat the average life expectancy, you may be better off taking early benefits. Spousal Benefits – It’s Complicated The more complicated issue involves planning around spouses – current spouse, past spouse, the Social Security decisions made by your past spouse and whether any spouses qualified for full retirement benefits. Every year $10 billion in spousal benefits go unclaimed. There are at least a dozen different strategies that take advantage of loopholes for married couples, which can add tens of thousands of dollars to their lifetime benefit. With the potential to increase your lifetime income by as much as 25 percent, planning for your Social Security benefits should not be taken lightly. There are no simple rules of thumb to follow. The optimal choice varies widely depending on individual circumstances. Such a critical decision should be based on a comprehensive analysis that includes a projection of your retirement income needs, an evaluation of your retirement portfolio, as well as a detailed spend-down plan. Sources 1UnitedIncome.com. The Retirement Solution Hiding in Plain Sight. June 28, 2019. 2SSA.gov. Benefits Planner: Calculators. Retrieved Oct 21, 2019 |