Social Security payments are important to most American’s retirement plans. After all, a worker has contributed a significant portion of their income to Social Security via payroll taxes; starting at 2.25% in 1950 - steadily increasing to 15.3% 1990 and later. Because retirement could last 30 years or more a retiree must consider how and when to receive their income benefits.
The average 2012 Social Security monthly retirement benefit is about $1,230. The maximum possible benefit for someone retiring in 2012 at full retirement age (66) will be $2,513. The amount of benefit is permanently affected by the age a retiree starts SS income, it is crucial to consider the long term impact of starting benefits prior to reaching full retirement age.
Social Security retirement benefits can be started as early as 62 but the benefit amount will be less than the full retirement benefit amount. If benefits are started early the amount will be permanently reduced based on the number of months benefits are received before full retirement age.
Example for a retiree was born in 1955, full retirement age is 66 and 2 months. If they draw Social Security at age 62 the benefit is reduced by 25.83%.
For those who start SS benefit early and earn more than $15,120 per year they will have their benefits reduced. However, when they reach full retirement age any month in which benefits were reduced will be removed from the early retirement deduction calculation, which may raise the benefit paid.
Delaying benefits beyond full retirement age results in an 8% yearly increase. This annual increase will max out at age 70.
As much as 85% of Social Security benefits may be subject to federal and state income tax.
A surviving spouse’s benefit is based on the deceased spouse’s income amount; a death scenario should be considered when thinking about taking Social Security before full retirement age.
Retirees should be very careful considering any “break even” analysis. There are many variables to consider such as income tax, longevity, survivor’s benefit, etc. Retirees may want to adjust the age when they take retirement income in order to gain maximum lifetime benefit.
Many people take the reduced Social Security benefit before full retirement age. Each situation is different and starting early may be appropriate, in some cases. Keep these issues in mind-
- If life is expected to be longer than average the reduced benefit will stay reduced for a long time. Consider the amount that may be given up over a lifetime.
- If working while drawing Social Security early consider how those earnings will affect Social Security benefits.
- A reduced SS benefit may also reduce the income benefit a spouse receives after the death of their partner.
- If there is a significant difference in spouse ages Social Security benefits are likely to be paid over a greater period of time than when the spouses are closer in age. In situations like this it is more important to understand how different assumptions will affect a retirement income plan. Variables such as the age benefits start, longevity, and survivor’s benefits can combine to produce substantial differences in total benefits received.
There are 81 different Social Security combinations and strategies a retiree should consider rather than just a simple “break even” analysis.
If you would like to explore your Social Security benefit options contact Tim Barton, ChFC for an analysis. List your SS estimated monthly benefit for both spouses and current age in the comment section.