When developing financial plans we naturally receive questions on Social Security benefits. Interestingly enough, regardless of how much investors have saved for retirement, nearly every couple has the same basic question when it comes to Social Security: When should we begin taking benefits? At Henssler Financial, we look at many different factors to determine when the best time might be, but it generally comes back to what your financial plan looks like and when you need the money.
Social Security benefits were designed to provide retired workers age 65 and older a continuing income after retirement. Generally, the earliest a worker can receive benefits is age 62. If you start benefits this early, you will have a 25% reduction in benefits. Full benefits are available at full retirement age, which is 66 for people born between 1943 and 1954, and gradually rises to 67 for those born in 1960 or later. If you delay claiming benefits until after full retirement age, you can earn up to 8% a year, until age 70.
Because of the way benefits are calculated, many investors look at the breakeven point of how long one would have to live past full retirement age, or a delayed retirement age, to receive the same amount in benefits if the investor had taken them at age 62. The breakeven point is an average of eight to 10 years, meaning an investor would have to live until at least age 74 to break even to what he would have received if he had started taking benefits at 62. However, if you delay benefits from full retirement age until age 70, the breakeven point is closer to 12 ½ years, meaning you would have to live until 82 ½ to recoup the money you could have had access to from full retirement age through age 70.
While this calculation can help, it is only one factor that should be considered when deciding when to take Social Security benefits, which is why we like to begin with the question, “When do you need the money?” If you are still working at age 62, you generally do not want to take early benefits because you can only earn up to $16,920 without a reduction in benefits. If your income exceeds that amount, $1 of benefits is withheld for every $2 you earn above the threshold amount. If you have reached full retirement age and you are still working, it may be OK to delay receiving benefits because you have a stream of income coming in. Furthermore, workers who reach full retirement age in 2017 can only earn up to $44,880 before their benefit is reduced by $1 for every $3 earned above this higher limit.
If you are retired and you still have not applied for Social Security benefits that may affect how your investments are allocated—especially if you need the money. You may need more of your wealth in fixed-income investments to cover your spending needs for 10 years. With more money allocated to fixed-income, your overall long-term return on your portfolio may be lower because of our low interest rate environment. Additionally, you will likely owe income tax on withdrawals from tax-deferred accounts, such as an IRA or 401(k), which could defeat the purpose of delaying Social Security to boost your benefit amount.
Additionally, Social Security allows for a spousal benefit to provide for a spouse who does not work outside the home or who has earned significantly less during his or her career. When a worker files for retirement benefits, the worker’s spouse may be eligible to receive up to 50% of the worker’s benefit. Your benefit is not affected if your spouse, a former spouse, or dependent children receive Social Security benefits based on your earnings record.
Overall, there is no rule of thumb for taking Social Security benefits. It all depends on your financial plan. Most investors could benefit from discussing their retirement income with a financial adviser and have Social Security projections run based on their lifestyle and retirement income sources.
If you have questions regarding how Social Security benefits fit in your financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
