The decision about exactly when to claim your Social Security benefits is roiling households of baby boomers across the nation, as they are faced with making a choice that will have lifetime implications.
Ever since the full retirement age (FRA) has gradually increased from the traditional 65 to the current 66 years and 2 months for people born in 1955, (and gradually rising to 67 for those born in 1960 or later), the decision has become more complex.
You can start benefits “early” — at age 62 — with a significant reduction. Or you could wait until age 70 and receive a lot more money. So how do you make that decision?
If you choose to retire and decide to claim benefit at age 62, your check is permanently reduced to 75% of your earned benefit.
Only people who have no other assets or income possibilities or those who have a serious illness and a shortened life expectancy should take benefits early. If possible, most people should use other retirement funds or try to earn some income to bridge the gap until FRA.
Facts won’t convince those who make this decision out of emotion. I know that because of a long-running argument with my own brother, who insisted on taking his Social Security at the earliest date. He thinks he figured out the “break-even” point at which he will come out ahead — unless he lives longer. This despite the fact that our father lived to a ripe age of 94 enjoying his monthly, inflation-adjusted check!
There’s no point arguing now. What’s done is done. It’s practically impossible to reverse your Social Security benefits decision, and the process involves paying back the received benefits, along with a lot of paperwork. But for those still considering the decision, here are the main reasons to delay taking Social Security until full retirement age:
—Early benefits are significantly reduced. As a rough estimate, for those born after 1943, it’s as if you gave up an 8% return on your money for every year you receive early benefits. And with money in the bank earning only 1% these days, that’s a significant haircut.
—Your early benefit level is the base upon which future cost-of-living increases will be calculated. Inflation doesn’t seem like much of an issue today, but if it returns you will receive fewer dollars in an annual boost from the Social Security COLA.
—If you do take Social Security before FRA, and happen to earn other money, you will be penalized. From ages 62 until the year of your FRA, for every dollar you earn over an annual limit of $17,640 ($1,470 per month) in 2019, your benefits are reduced. The reduction is not permanent and applies only to the earnings in pre-FRA earnings. There is a larger allowance for earnings in the year in which you reach FRA.
Yes, the Social Security trust fund exists basically as a pile of IOUs from the U.S. Treasury. And, in the future, wealthy recipients who have income from other sources might find their benefits taxed more than they are today. As well, the FRA will likely be raised, as life expectancies continue to extend.
But the voting power of that huge bloc of seniors who are receiving benefits — and the workers who have been paying into the system in expectation of receiving benefits — makes it unlikely Congress will let the fund “run out of money.” As a last resort, they’ll “print” the money — which would surely lead to inflation — making that future cost-of-living adjustment even more valuable.
If you want the numbers behind this rationale, the SocialSecurity.gov website has a series of calculators that let you securely research your own expected benefit as a result of your covered earnings history — along with a calculator that determines your own “break-even” point. Or go to www.MaximizeMySocialSecurity.com where software created by Social Security expert Laurence Kotlikoff will let you crunch your personal numbers for a fee of $40.
It’s worth spending some time with the real numbers and calculating the hit you’ll take if you start collecting Social Security early. And that’s The Savage Truth.