When Should I Start My Social Security Benefits #2
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also a best-selling author and TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
Here are some Social Security basics. Typically, you can begin your benefits as early as age 62, you can take them at your Full Retirement Age (FRA), which is most likely 66, or you can defer them to age 70. If you do not start your benefits at age 62, they will increase each year by about 6%. By deferring your benefits past your FRA, your benefits will increase by 8% each year until age 70. By waiting until age 70, your benefits will nearly double in that 8 year period, when factoring in the annual cost of living increases.
Regardless, I find that many people want to know what their “break-even” point would be if they chose to wait until age 70 to begin their benefits. After running countless analyses and reports for clients over the years, I have found that the vast majority of people reach a “break-even” point at age 81. Meaning, if you do not start your benefits prior to age 70, you will actually be receiving more money from Social Security once your reach age 82.
However, most people fall into the trap of only looking at the benefit amounts at various ages and their life expectancy to determine when to start Social Security. This is where most people miss out. For example, let’s imagine that you plan to stop working at age 62 and you need $8,000 a month for income. Unless you have sufficient pension or rental income to provide for your income needs, you will need to spend down some of your other assets if you choose to delay your benefits until a later age. Based on how those funds are invested, you may spend down your investments sooner than if you started your benefits earlier. This could result in having a smaller investment balance in your later years, as well as less earnings over time.
The simple fact is, by waiting to begin your benefits until later, you will receive more from Social Security if you live past 81. But depending on how your assets are invested, delaying your benefits may actually cost you MORE in actual investment dollars over time than the actual increase you will receive from Social Security.
Another important area to consider when determining how to take your Social Security benefits, would be your tax situation. For example, depending on your unique situation, all of your benefits can be income tax-free, or up to 85% of your benefits could be taxed. In addition, based on your specific situation, distributions from retirement accounts such as IRAs and 401Ks can actually create a double taxation – tax on the distributions themselves and tax on your Social Security benefit. So, when planning for retirement, it is prudent to understand the different ways your various income sources can be put together to achieve the ideal tax situation for you.
Our next blog will discuss how your taxes might influence when you should take your Social Security benefits.