In 2014, more than 59 million Americans will receive Social Security benefits — totaling nearly $863 billion. These benefits represent about 39 percent of the income of the elderly. Understanding how Social Security works and identifying appropriate claiming strategies can make a significant difference in your lifetime income.
While Social Security benefits probably won’t provide the bulk of your retirement revenue, this reliable addition to your income stream comes with many advantages. Unlike other sources, your Social Security benefits are guaranteed for life, regularly adjusted for cost of living, taxed less than ordinary income and are not exposed to market risks.
Full retirement age is the age at which your full benefit amount becomes available.
It used to be age 65, but is now gradually increasing to 67, depending on your year of birth.
Claiming benefits before you hit full retirement age can come with penalties as high as a 25 percent reduction in benefits for the rest of your life.
Conversely, if you apply for Social Security after full retirement age, your benefit will increase by 8 percent for each year you delay. If your full retirement age is 66 and you apply at 67, your benefit will be 108 percent of your full-retirement-age amount. At 68 it will be 116 percent, and so on, up to age 70.
When should you apply? The answer depends.
On the one hand, starting sooner could mean you’d have more years to collect payments.
On the other hand, if you wait, your benefit will be higher but you may have less time to enjoy it.
It may help to calculate your break-even age — the point at which you would collect the same dollar amount regardless of whether you claim at 62 or 70.
After you know your break-even age, you will want to think about your overall health, your family’s history of longevity and your personal financial situation before you make a decision.
If you do decide to postpone your Social Security benefits, you may find it advantageous to rely more heavily on retirement accounts, personal savings and investments for the first few years of retirement. You can then decrease your withdrawals from personal savings when you add Social Security benefits to your income stream.
You may also consider working a few more years. In addition to raising your Social Security benefit, a few more years of earnings could allow you to pay down debt.
You’d also be able to add to your retirement savings while reducing your retirement drawdown period at the same time.
A spouse may also be eligible to receive benefits based on your earnings record, as long as you are taking your own benefits. Spousal benefits are half of your benefits, if taken at full retirement age. Divorced spouses can apply for benefits based on your work record if you were married for 10 years or longer — without affecting your own benefits in any way. Widows and widowers are also eligible for survivor benefits, which equal the benefits the deceased would have received if still living.
Many enjoy 30 years of retirement or more, and the decisions you make in your 60s can determine the amount of income you’ll have in your 70s, 80s and 90s.
It is important to work with a financial adviser to identify your strategy for claiming Social Security benefits prior to implementing your retirement income strategy.
Erin Eddins is a chartered financial consultant, a member of the Financial Planning Association and is a certified financial planner with StanCorp Investment Advisers Inc. She can be reached at erin.eddins@standard.com or 425-212-5986.
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