As we head into the last stretch of summer, my thoughts go to my favorite part of August — my birthday! This year, I will be one year away from my ability to start drawing my Social Security benefit, albeit reduced since I would be starting at the earliest age of 62. And so I will begin the decision-making process: Should I draw, or do I wait?
Let's start with a quick synopsis of Social Security. If you have earned income, you pay a percentage of that income into the Social Security system. The amount that you contribute over time will dictate what your monthly benefit will be when you begin receiving payments. Your primary insurance amount (PIA) is the benefit you will receive if you begin benefits at your normal retirement date (also known as your full retirement age, or FRA).
- Kathy Williams
Let's pretend I was born in 1960. Currently, if you were born in 1960 or later, your FRA is 67. What if I want to start receiving my benefits as early as possible, which is at the age of 62? Since this is five years prior to my FRA, Social Security will reduce my benefits a little for each month that I begin receiving benefits before age 67. Why? Because they will be paying me a benefit for a longer period of time than if I waited until my full retirement age of 67. A five-year (60-month) reduction is 30 percent of FRA. If my age 67 benefit is $1,000 per month, my age 62 benefit will drop by 30 percent to $700 per month. Except for certain circumstances, this is a permanent reduction in my benefit. Yikes!
What if I want to get a bigger Social Security benefit? Maybe my handsome husband is rich and I don't need to begin taking benefits until later. Well, Social Security has a plan for that, too. For each year that I defer taking my benefit past my FRA of 67 up to age 70, I will get an 8 percent increase in my monthly check, guaranteed! This would amount to a 24 percent bump, which is a fun benefit ... if I live that long. Of course, I can start any time during that three-year period and still get the raise for the months I defer.
Here is the easy math: If I begin my benefit at FRA of 67, I will get $1,000 per month. If I begin my benefit at age 62, I will get $700 per month. And if I begin my benefit at age 70, I will get $1,240 per month. How do I know which door I should choose? The only way I can give you a definitive answer is if I know exactly when I am going to die. That makes the math very easy. Other than that, my life and lifestyle will hopefully give me enough clues to make an educated decision. Here are some things I will consider:
How much money do I have saved?
How much money do I spend?
How much money should I spend?
What other income will I have during retirement?
Am I married?
Am I divorced?
Am I still working?
How's my health?
The answers to these questions will help steer me to the optimal option available for my circumstances. I shouldn't assume that starting at age 62 always makes the most sense "before Social Security runs out of money." Nor should I assume that waiting to the age of 70 will always make the most sense. I would recommend consulting with my personal wealth strategist (me) to help devise my plan, and would advise you to do the same.
Kathy Williams, CFP, CDFA, is Principal and Senior Wealth Strategist at Waddell & Associates. She can be reached at firstname.lastname@example.org.