From getting a driver’s license to running for elected office, age has always served as a threshold for major life moments. Social security is no different. More Baby Boomers are reaching the magical time when they can qualify for Social Security. But what is the right age to stop paying into the system and begin collecting Social Security?
Determining the right age to begin receiving Social Security payments is one of the most crucial financial decisions many families will ever make. It is also one of the most misunderstood opportunities.
“Full retirement age” (FRA) varies. For some people, the FRA is 66 and a few months. For all of us born in 1960 or later, the FRA is 67. Currently, we may all begin collecting payments at age 62. However, earlier payments come with reduced payments. Every year you collect Social Security before FRA, you lose 6% of the payment. That reduction applies to Social Security payments and cost of living allowances (COLAs) received for the rest of your life! This can add up to a substantial reduction over a normal life expectancy.
We all have the option to delay receiving Social Security payments until age 70. Individuals who select this option actually receive a benefit increase of 8% per year, from their FRA to age 70. As the benefit never increases after age 70 (with the exception of COLAs), it makes sense to begin taking the benefit at age 70.
Considering two scenarios, we find that a person who delays receiving Social Security payments until age 70 would receive a 76% higher annual payout compared to a person who started receiving benefits at 62. That is a substantial difference!
Our guidance is to know your numbers and your needs. You can find this information at socialsecurity.gov. When meeting with a family who has not retired, we always request two critical pieces of data: their 1040 and their Social Security snapshot. This data helps calculate an informed decision.
A few changes will trigger slight increases in Social Security payments this year. The 2% COLA is the largest increase since 2012. According to the Social Security Administration, this increase translates to just $27 per month for the average Social Security recipient. The average monthly payout will increase from $1,377 in 2017, to $1,404 in 2018. Additionally, the maximum benefit in 2018 will increase $101 per month to $2,788. Much of the difference comes from families who started collecting Social Security at age 62.
Another factor to consider: If you collect Social Security before your FRA and earn income above $17,040 in 2018, you will lose $1 for every $2 earned. That’s another reason to refrain from early enrollment. Things change the year you reach your FRA. Upon reaching FRA, you can earn up to $45,360 without penalty.
The key is to know your numbers. If you haven’t made a decision about when to collect Social Security payments, please work with a qualified professional to discuss tax and long-term financial considerations.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.