For those of you approaching Social Security age, deciding when to take it is a key decision in planning for your retirement. While you’ve probably read some rules of thumb about applying for your benefits, the truth is that the best time to take Social Security depends on your particular situation.
Here are four things we look at when helping our clients get the most “return on life” from Social Security.
1. How long can you afford to wait?
“Wait as long as you can” is probably the most common advice regarding Social Security benefits. Indeed, if you can start benefiting from Social Security at age 62, you will receive a reduced amount of your benefit calculated at the age of your full pension. This age is based on your date of birth; if you delay your Social Security until full retirement, your monthly benefit will continue to increase until you reach age 70.
But what if you’re dealing with a chronic health condition that could impact your longevity? Or, what if taking your benefits early is the difference between making ends meet comfortably and having to downsize to a smaller home?
Of course, the longer you wait to take Social Security, the greater your benefits will be. But there may be situations where a more modest benefit will be more beneficial earlier in your retirement.
2. What is your marital status?
Married couples must consider several factors before either person takes Social Security.
First, compare your individual benefit estimates. If one spouse’s projected benefits are significantly higher, it may make sense for only the lower-income spouse to claim benefits and let the higher benefits continue to rise.
However, if one person’s benefit is more than double their spouse’s benefit, the lower-earning spouse can take a spousal benefit equal to 50% of the spouse’s benefit.
Divorced people over age 62 who have been married for at least 10 years may also be eligible to receive Social Security benefits based on their ex-spouse’s income, if they have not remarried.
If you are widowed or widowed of the spouse who earned benefits, you may receive reduced benefits from age 60 or age 50 if you are disabled. You can then move on to your own benefits. Just because you CAN take it doesn’t mean you should. The timing will depend on the other factors discussed and your particular situation.
3. What will be the tax implications?
Your Social Security benefits may be subject to taxation based on your combined income, which is the sum of your adjusted gross income, your non-taxable interest payments and half of your Social Security benefits.
People earning between $25,000 and $34,000 in combined retirement income may have to pay taxes on up to 50% of their Social Security benefits. People who earn more than $34,000 may have to pay taxes on up to 85% of their benefits. The 50% threshold for married couples filing jointly is between $32,000 and $44,000, and the 85% threshold is above $44,000.
An increasingly common situation where these numbers come into play is that of retirees working part-time. Many seniors who want to keep cashing those paychecks would be better off delaying their Social Security benefits so their combined income doesn’t get too high. Once these retirees stop working for good, they can claim higher benefits without increasing the tax burden.
4. What is your risk tolerance?
Each time you decide to take your benefits, your monthly Social Security check will be an inflation-adjusted risk-free payment each year. For some people who are a little nervous about investing in the market, knowing that the check is waiting for them gives them a bit more stability and peace of mind around their overall portfolio.
However, people with a significantly lower risk tolerance might be tempted to grab their Social Security benefits as soon as they qualify. They might be so worried about dying before they get their benefits or so hesitant about taking distributions from their retirement accounts that they don’t consider all the consequences.
We suggest that you work with a licensed financial planning professional to consider your unique circumstances when making this important decision.
Joni Lindquist, MBA, CFP is a CERTIFIED FINANCIAL PLANNING professional and member of the Financial Planning Association of Greater Kansas City. A former business executive, she is a director, financial planner and executive coach at Aspyre Wealth Partners. Aspyre uses a life-centered planning approach; in partnership with customers to use their human and financial resources to live their best life.
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