MONEY TALKS - Choosing when to retire is likely to be one of the most challenging decisions you will make in your lifetime. Although your retirement date and the date you begin collecting Social Security benefits do not have to be one in the same, they are closely correlated. Social Security income, despite only replacing 40% of the average wage earners pre-retirement income, remains a key component for those evaluating when to retire.
You Decide - Conversely the benefit you receive from Social Security can vary greatly depending on when you decide to begin collecting. Your Social Security benefits are calculated based on your full retirement age, which for those born between 1943 and 1954 is 66 years old. Reduced benefits are available starting at age 62 for those who want to begin collecting before their full retirement age. On the other hand a special retirement credit is also available for those who delay collecting their Social Security benefits beyond their full retirement age, up to age 70. The decision then becomes, would you rather begin receiving a smaller benefit earlier in life for a longer period of time or wait for a larger benefit that you will not receive as long?
Importance of Timing - Let’s start by putting some numbers down to help illustrate the importance that timing has on your retirement benefit. Say your full retirement age is 66 years old and your monthly benefit is $1,000. If you elect to begin collecting at age 62, your benefit is reduced to $750, a 25% reduction. However, if you choose to wait until age 70, your benefit grows to $1,320 per month, a 32% increase.
Life Expectancy - When looking at the numbers in isolation one could easily conclude that waiting until age 70 to collect is the more prudent option because your benefit would be 76% larger than your benefit at 62. Yet numbers can be deceiving and often don’t tell the whole story. If you began collecting $1,320 at age 70 you would have to live into your eighties in order to come out ahead of your friend who began collecting at 62. In fact, if you live to the average life expectancy for someone your age, it does not make much of a difference if you begin collecting benefits at age 62, 66, 70, or any age in-between. That being said, approximately one third of 65 year olds today will reach the age of 90, and more than one in seven will reach 95.
No Correct Age - So what exactly does all this mean? Absolutely nothing. Unless you have a crystal ball and can see into the future no one knows when they will be knocking on heaven’s door. There is no correct age to begin collecting social security benefits because everyone’s circumstances are different. There are several key factors such as cash flow, health, and family longevity that should be considered before rushing to judgment.
Educated Decision - The first step towards making an educated decision is to understand the facts as they relate to your specific situation. A good way to start is by checking out your earnings record on your Social Security Statement; to create an account go to www.socialsecurity.gov/mystatement. From there you can access your complete earnings record as well as your estimated monthly benefits at age 62, 66, and 70. Knowing your exact benefit may help you to determine the right time to begin collecting. For someone who is healthy with longevity in their family history, a better option may be to delay collecting until age 70. While someone who is beginning to develop some health problems may be better off taking the benefit at age 62 and traveling while they’re still mobile. Only you can decide the right time. For more information please visit www.ssa.gov or contact your local financial advisor.