Investopedia’s recent article entitled “What Every Retiree Should Know About Collecting Social Security Benefits” gives you some valuable things to ponder as you decide when to collect your benefits.
Delay Collecting Benefits. While full retirement age is 66 or 67, depending on your birth year, you can start getting Social Security benefits as early as age 62. While some say there are good reasons for collecting early, in most cases it is better to wait. Those who argue for early collection think that retirees should grab all the money they can, as soon as they’re eligible because Congress may cut retirement benefits to ensure that there’s enough funding for the long haul. However, if Congress actually decreases retirement benefits, there’s a good chance that those who are at least 60 will be able to retain their existing payment models. The Social Security Administration (SSA) calculates the average indexed monthly earnings (AIME), including the final year of indexing, to the National Average Wage Index. Collecting Social Security before full retirement age, will also permanently reduce your monthly benefits. For instance, those who start to collect benefits at 62, will receive 75% as much money each month as they would receive if they waited until the full retirement age of 66. Those who wait even longer (up to age 70), when benefits max out, could receive significantly more each month.
Understand the “Breakeven Age” Theory. Some financial advisers say that 78 is the “break-even age” for starting Social Security, meaning that whether a person starts collecting benefits at age 62, or whether he holds off until reaching his full retirement age, he’d ultimately get the same amount by age 78. After that, those who waited until the traditional retirement age to collect would finally see higher payoffs than those who elected to begin collecting early. However, determining the breakeven age is a guess at best because of the variables behind the calculation, such as the time value of money, inflation rates, and whether the benefit recipient is a worker or a non-working spouse.
Reduced Benefits Will Be Credited Later. When working people collect Social Security, their benefits may be decreased by $1 for every $2 of earned income received above a certain threshold ($18,240 in 2020). This keeps going until the year of retirement. From then, until the month the retiree reaches full retirement age, there’s a reduction of $1 for every $3 earned over another threshold ($48,600 in 2020). After that, you can earn as much as you want without any further reductions.
Some Benefits are Taxable. Social Security benefits can be taxable if income is more than a certain amount. Deciding on the best time to take Social Security requires a thorough overview of an individual’s entire situation, including taxes, longevity and life insurance.
Social Security Benefits Aren’t Decreased by Inflation. The Social Security Administration provides an annual cost of living adjustment (COLA) that ensures that Social Security benefits are annually adjusted for inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The longer a person delays to collect Social Security (up to the age of 70), the greater the COLA will be in dollar terms.
Social Security collection timing can be a difficult issue for those nearing their retirement age, so talk to an experienced professional in this area.
Reference: Investopedia (Nov. 21, 2019) “What Every Retiree Should Know About Collecting Social Security Benefits”