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Social Security offers one of the best forms of retirement income – a tax-advantaged source of income that lasts a beneficiary’s lifetime with inflation protection and survivor benefits.
For most individuals, benefits provide about 30% to 35% of pre-retirement income. In an uncertain world with less pension coverage, declining 401 (k) balances, and perhaps less income earned from forced early retirement and layoffs, the option of collecting Social Security the most. early as possible is attractive.
Often times, people ask when is the optimal time to start taking benefits. Many apply for benefits as soon as they are eligible at age 62. The average age at which people start to touch is just over 63 1/2.
Social security benefits are based on lifetime earnings. Real wages are adjusted for inflation. Then, the average monthly earnings during the highest-paying quarters over the past 35 years are used to determine a basic benefit or “primary insurance amount” called PIA.
The PIA determines how much you receive at full retirement age – 65 or over depending on a person’s date of birth. If one chooses to receive benefits before full retirement age, the monthly benefit is reduced by approximately 6.7% per year. For a person with a full retirement age of 66 who retires at 62, they can expect to receive only 75% of the total benefit. On the other hand, someone who is late in receiving benefits accumulates a credit. So, waiting until age 70 can result in 32% higher monthly payments or 8% per year for the four-year delay in this example.
A number of factors will influence this personal decision. In general, the longer you can wait to collect, the higher the monthly benefit will be. Since women tend to outlive men, women can benefit the most from higher payments later on. So if a single woman can afford to meet her lifestyle needs from other sources, then deferral is a reasonable option. For single men or women, family longevity and personal medical history may be the deciding factors.
For those who are married, benefits are based on the income of each spouse. For spouses who do not have their own income file, the benefit is based on 50% of that of the working spouse. The surviving spouse’s benefit is equal to the monthly benefit of the deceased spouse who earns the most. By delaying, her spouse will be eligible for a potentially higher benefit.
Two little-known strategies can actually increase the benefits for recipients.
Claim and suspend:
This option results from the 2000 Law on Freedom of Work for Older Persons and offers a beneficiary the possibility of changing his mind. This is ideal for those who are eligible to start collecting, but have determined that the full benefit is not needed now.
This strategy offers three ways to increase the personal results of a worker who has reached full retirement age (FRA): o Register with Social Security and allow a spouse to claim a spouse’s benefit now . o Suspend the collection of benefits by the worker who can now continue to work and accumulate deferred retirement credits. By delaying reception by the worker, the amount that worker will be eligible to collect each month continues to grow by 8% per year until the age of 70. o If a beneficiary using this strategy dies, the highest accrued benefit is transferred to the surviving spouse.
Claim Now, Claim Later:
This option works best for married couples who each have their own employment record and have reached the respective full retirement age of each beneficiary.
In this option, a worker can claim a benefit based on 50% of a spouse’s PIA while continuing to work and accumulate deferred retirement benefits at 8% per year on the worker’s file – ideally up to age 70 years old. Later, the spouse can switch from a spousal benefit to claiming a benefit on their own work record, presumably if it is larger.
Deciding to defer benefits really pays off when a beneficiary lives long enough to maximize benefits – at or above actuarial age. For those who are 65 years old, life expectancy is around 19 years longer on average or up to 84 years – a little longer for women and a little less for men.
For women who survive to old age, a spouse with higher incomes who withholds from receiving benefits can make the difference between poverty or not for the surviving spouse.