What you don’t know about Social Security benefits can hurt
you and your spouse for the rest of your lives. Here are three traps to avoid
when taking your benefits.
The Key Takeaways
·
The longer you can postpone taking your Social
Security benefits, the larger the amount you and your spouse will receive over
your lifetimes.
·
Continuing to work after you start receiving
benefits early can temporarily reduce the amount of your benefits.
·
It is important to seek the advice of a retirement
specialist who can help you navigate the rules of Social Security to your best
benefit.
Three Traps to Avoid
1.
Taking
Money Too Early. It can be tempting to start taking your benefits as soon
as you become eligible at age 62. But the longer you can wait, the higher your
monthly benefit will be—and the more you will receive over your lifetime. Also,
cost of living adjustments (COLA) are calculated on the amount of your monthly
benefit, so if you take benefits at age 62, your COLA adjustments will be
calculated on a lower amount.
2.
Working
Income. If you elect to take benefits early and you keep working, the
amount of your benefit can be reduced. This reduction will continue until the
year you reach full retirement age (66). In 2014, Social Security reduces
benefits by $1 for every $2 of earned income above $15,480. For example, say
you start benefits at 62 and you have earned income of $30,000. You are $14,520
over the annual limit, so you will receive $7,260 less in benefits (50% of the
difference). However, the benefit reductions are not lost; they are deferred and
credited to your benefits record when you reach full retirement age.
3.
Spousal
Benefits. Your decision when to start taking your benefit affects your
spouse too. After you die, your spouse is eligible to receive your monthly
benefit if his/her own benefit is less than yours. If you elect to receive your
benefit earlier rather than later, your spouse’s benefit will also be lower. If
you wait until you reach full retirement age (66), you can claim your Social
Security benefits but delay taking them. This lets your spouse draw spousal
benefits immediately, while you continue working and increasing the value of
your future benefits.
What You Need to Know
Ideally, you will want to evaluate when to take your benefits based on your retirement savings and other sources of retirement income, your and your spouse’s health, your family’s history of longevity, and if you plan to continue working. While most people would benefit from waiting until a later age to start their retirement benefits, some may risk running out of money and will need to take their benefits as soon as they are eligible. A retirement planning specialist can help you decide what is best for you.
Actions to Consider
·
If you are concerned about the future of Social
Security, you could take your benefits at 62 and invest them. By the time you
need to start taking the money, you may be able to make up any loss you incur
by taking them early. But, of course, this is dependent on your portfolio
allocation and market performance.
·
If you keep working beyond age 62, your Social
Security benefit will increase each year up to age 70.
·
While you are eligible for Social Security at
age 62, you are not eligible for Medicare until age 65. If you stop working,
you will have to pay for private insurance with your own money.
·
If you wait until your full retirement age (66),
another spousal benefit option is available. If you both want to retire at the
same time and your spouse will receive a lower benefit, you can claim spousal
benefits now from your spouse, let your benefits continue to grow and then
switch to your (higher) benefit later.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.
