Question:
I’m 60 years old and work part-time making about $7,000 a year; however, I am actively looking for full-time employment. My mother recently passed away and left me her house and about $30,000 in CDs and cash. The house is paid for and I estimate it to be worth about $280,000. I currently have the upstairs rented to a family friend, but this is probably short-term income. The rental income and part-time work currently cover my bills. I have no living relatives and this inheritance is the bulk of my assets. I have two questions: I had planned on taking Social Security at age 62. Do you think this is a good idea? How should I invest the cash that my mother left me?
Answer:
If you can find full-time employment that will pay you more than you will receive in Social Security benefits, we would suggest you defer the benefits until your employment ends or you reach full retirement age, which for you is 66. Full retirement age was 65 for those who reached age 62 by 1999. It is increasing by 2-month intervals until the retirement age to collect full benefits is age 67 (for workers reaching age 62 after 2022).
If you elect to take Social Security before full retirement age, you get penalized in the form of reduced benefits. Social Security withholds $1 from your check for every $2 you earn above $14,160. So if you find full-time employment, it probably makes sense to delay taking Social Security. This also has the additional benefit of permanently increasing your future Social Security check.
If you cannot find work, then it makes sense to start receiving your money at 62 based on your current situation. If you find work after you turn 62 and you are earning enough to cover your living expenses, you can always stop taking Social Security benefits and pay back the amount you have received so far. This basically wipes the slate clean and allows you to receive a higher monthly payout when you choose to stop working.
Since you consider your rental income short-term, we would suggest you keep the inherited money in cash or short-term CDs until you get closer to 62 or you find full-time employment. Once you increase your cash flow through Social Security or full-time employment, you may be able to afford to look at more growth oriented assets.
There is no one right answer for when to collect Social Security benefits. For clients, we run complex cash flow projections to determine whether to take or defer benefits. The decision becomes more complex if someone has a spouse who will be able to draw upon your benefits if you should die as spouses can collect on their own account or 50% of your account, whichever is higher, at full retirement age. A spouse could collect 37.5% at age 62. This amount will change as the retirement age moves up. Additionally, a divorced spouse may collect on their prior spouse’s benefit base if they were married to the worker for at least 10 years.
If a worker delays taking benefits until full-retirement age, generally, the breakeven point is about seven years, meaning he would have to live until 73 to break even to what he would receive if he started taking benefits at 62. We base this on a certain set of returns, about 7%. We feel it is often better to have the money now when an investor can use it or save it so then it could be passed on to heirs.
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