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| Social Security: Take The Check Now Or Later? |
By:
Ken Morris |
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Social Security: Take The Check Now Or Later?
When you become eligible for early Social Security benefits at
age 62 you must decide among taking a monthly Social Security
benefit check of, for example, $1,450 at age 62, $1,913 at age
65 and 4 months, or $2,538 at age 70. Let's look at the factors
involved in this decision.
First, consider these Social Security retirement benefit basics.
Qualifying individuals become eligible for early reduced
benefits at age 62. The age to collect full retirement benefits
is currently 65 and 8 months (Full Retirement Age or "FRA") and
it is on a schedule to increase to age 67 for those born after
1960. If you wait to begin your monthly checks until age 70, you
may derive the maximum benefit.
Also, if you have reached your FRA you may have unlimited earned
income without triggering a reduction in Social Security
benefits. If you will be under your FRA throughout 200+, your
benefit will be reduced by $1 for every $2 of earned income over
$12,480. If you will attain your FRA in 2006, your benefit will
be reduced by $1 for every $3 of earned income over $33,240
earned before the first day of the month in which you attain
your FRA.
Those eligible for Social Security retirement benefits may want
to strongly consider taking the money now, rather than waiting.
Although some people in the highest income-tax bracket or with a
family history of longevity may find reasons to wait for the
larger payment, for most retirees the decision is a simple
question of mortality statistics. On average, Americans live
into their early or mid-80s. Calculations show that a
65-year-old who waits five years to begin taking maximum Social
Security payments won't recoup the forgone money until he or she
approaches age 85.
Here's how the math works. Assume you attain age 65 in 2006 and
that you are eligible for the maximum monthly Social Security
check. You are now eligible to receive monthly payments of
$2,053, or $24,636 per year. If you defer taking payments until
you attain age 70, you would earn a retirement benefit credit
that amounts to an increase of 7% a year. So by deferring
payment, your monthly income jumps to about $2,720, or slightly
more than $32,640 a year - roughly a 33% increase.
But deferring payments means you would forgo $123,180 you would
have received before age 70, during the wait. And while monthly
income does increase by $667 at age 70, it would take you nearly
14 years to collect the delayed money. But, around age 83 and
four months, you come out ahead in total benefits received.
The calculations get a bit more complicated when you elect to
take reduced benefits at age 62, especially if you are still
working; because, Social Security will reduce your benefit if
your earned income exceeds $12,480 (for 2006).
For example, if you are a 62-year-old top earner retiring this
year, you will receive monthly income of approximately $1,522,
which is 75% of what you would get by waiting until your FRA to
begin taking payments. Assume your benefits are due to begin in
January and you continue to work part-time and earn $30,000
throughout the year. Your annual benefit will be reduced by
$8,760 ($30,000 - $12,480 ÷ 2). So, your monthly benefit will be
suspended from January through May ($1,522 * 5 months = $7,610)
and your June monthly benefit will be reduced by $1,150 ($8,760
- $7,610) to approximately $372.
Still, if you wait until your FRA to begin taking benefits, you
sacrifice $60,880 over the three year and four month wait, and
it will take until your late 70s before you reach the breakeven
point.
Additionally, if you intend to keep working and want to take
reduced benefits at age 62, you must consider how your benefits
will be taxed. It is possible that as much as 85% of your Social
Security benefit payments could be taxed. Thus, if you are ready
to begin taking benefits now, at age 62, and you are still
working, you will have to deal with (1) a reduced benefit for
taking Social Security prior to reaching your FRA of 65 and 4
months, (2) a reduction of benefits for earned income over
$12,480 and (3) a potential taxation of benefits received. The
suitable decision may be to delay Social Security until your
full retirement age or until actually and completely retired.
And as mentioned before, it may make sense for those with family
histories of longevity to delay benefits and receive a larger
check in the future.
While your situation needs to be looked at individually, in some
cases it may be best to take the money now and enjoy it while
your health is hopefully still good and the money can still be
enjoyed.
This is especially true if you have attained your full
retirement age as you may enjoy unlimited earned income without
triggering a reduction of your Social Security benefit. And, if
you just don't need the income, you may want to take your
benefit payments and invest them instead of letting the
government hold it. Your investment returns may stretch your
breakeven point to an even later station in life.
Should you have any questions about any of these issues, or
assistance in deciding when to begin taking your Social Security
benefits, please contact your local Social Security
Administration office or a Financial Advisor.
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