Retirement planning is complicated, beginning with the decision about when to begin taking your Social Security benefits. On one hand, if you need the money and don't expect to live into your 80s, it is tempting to take Social Security as early as possible — at age 62 — to benefit from the income stream. On the other hand, you can increase your monthly payment considerably by waiting until age 70. Most people underestimate how long they are going to live.
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"I like to frame the Social Security benefits issue discussion with my clients by offering a definition of it as an inflation-protected joint and survivor annuity backed by the U.S. government," says Tim Kober, a Certified Financial Planner with Cedar Financial Advisors in Portland, Ore.
"This provides context for the 'when to claim' question," he says. "The present value of Social Security payments is equal over your expected lifetime, regardless of when you claim it. If, as Clint Eastwood would say, 'You're feeling lucky,' claiming late makes sense."
Differences in Benefits Can be Substantial
As a first step in this retirement planning exercise, find out approximately how much of a monthly benefit you'll get under different scenarios. Use Bankrate's Social Security calculator to get an estimate; actual benefits will depend on your personal work history. For a more accurate idea, the Social Security website offers a secure retirement estimator calculator.
As an example, the table below illustrates the monthly benefit due to a fictitious worker at various ages. If the worker waits until full retirement age, his or her monthly income will be about 63 percent higher than if he or she begins drawing benefits at age 62 -- his or her earliest opportunity. If the worker waits until age 70, his or her monthly income from Social Security will be more than double the amount collected at age 62.
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|67 (full retirement age)||$1,791|
Retirement Savings, Benefits Influence Decision
Social Security benefits are just one piece of the retirement income puzzle. You also need to take into account how much you -- and your spouse, if you're married -- have in retirement savings, whether you have pension benefits and if you have company retirement health benefits. Tally up how much income you expect you'll need, says Michael Kay, CFP, CPA and a financial planner with Financial Focus in Livingston, N.J.
"You have to look at your cash-flow needs," he says. "How important is it to your financial survival or to your cash-flow plans to have that money early in retirement versus several years down the road?
More Complicated for Married Couples
When engaging in retirement planning, married couples have two decisions to make. It makes sense to run the calculators for both spouses, looking at the different scenarios and combinations of income that could result from claiming Social Security benefits at different intervals, says Kay.
"It makes sense to play some 'what if' games to see how it will work on a cash-flow basis and a tax basis," he adds.
In some cases, where, for example, a wife had stayed home with the kids and didn't make as much money as her husband, Social Security benefits may be significantly lower, says Kober. In such cases, a wife can collect the equivalent of half of her husband's benefit if it's higher than the benefit she would receive based on her own earnings record. If the wife begins collecting checks earlier than full retirement age, however, she'll receive less than half of her husband's benefit.
Widowed, Divorced Have Options
Divorced spouses who have not remarried have the option of claiming their own benefits or those based on the record of a former spouse if that would be more beneficial, provided the marriage lasted at least 10 years.
Widows or widowers may claim survivor's benefits even if their spouse dies after they have already started receiving Social Security. Of course, if your deceased spouse's benefit is less than yours, it doesn't make sense to apply for survivor's benefits.
Many financial planners advise men to delay claiming benefits for as long as possible so they can leave a better benefit for their wives, since women generally have a longer life expectancy than men.
According to the Social Security website, these are the typical payouts for survivors:
•A widow or widower, at full retirement age or older, generally receives 100 percent of the worker's basic benefit amount;
•A widow or widower, age 60 or older, but under full retirement age, receives about 71-99 percent of the worker's basic benefit amount; or
•A widow or widower, any age, with a child younger than age 16, receives 75 percent of the worker's benefit amount.
Working Impacts Benefits Due to Taxes
If you continue to work, or go back to work, while claiming Social Security benefits, your benefits could be reduced, depending on how much money you make. These benefits are not lost forever, but deferred until you reach full retirement age.
"For people who are still working, or who may go back to work after claiming benefits, you need to realize that some or most of your benefit will be reduced, depending on how much money you're making," says Kay.
Here's how it works, according to the Social Security Administration:
•If you start receiving benefits before your normal or full retirement age, which depends on when you were born, your monthly benefit is reduced by $1 for each $2 you earn above a certain amount ($14,160 in 2010).
•If you start getting benefits in the year that you reach your full retirement age, your monthly benefit will be reduced by $1 for every $3 you earn above a certain amount ($37,680 in 2010).
•If you wait to collect benefits until after you reach your full retirement age, you can continue to receive your benefits without reduction no matter how much you earn.
In addition, keep in mind that if your income exceeds a certain threshold, your Social Security benefits can be taxed.