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When Should I Take Social Security? (Part 3)

This is the last part of the series! Here are just a couple more things to think about and the bottom line.

Changing your mind
If you previously elected to receive early Social Security benefits at a reduced rate, you have the option of paying back to the government what you’ve already received. You could then restart benefits at a later date to take advantage of a higher payout. As of December 8, 2010, the SSA announced that this option would henceforth be limited to one year’s worth of benefits, effective immediately.

For example, let’s say you elected to receive early benefits at age 62 and you’re now 63 and thinking of going back to work. You could stop receiving Social Security, pay back the one year’s worth of benefits you received, go back to work, and then wait until a later age to restart your benefit checks at a higher level.

Whether it makes sense to take advantage of this option depends on your tax situation, age and life expectancy. Of course, you also have to come up with the repayment money. You might want to enlist the help of a CPA or another financial professional to help you crunch the numbers.

What about the future of Social Security? 
If you’re skeptical (or downright cynical) about the future of Social Security, you may be inclined to take benefits as early as you can under the assumption that a bird in the hand is better than nothing. Healthy skepticism is understandable.

Early in 2010, the Congressional Budget Office announced that according to its own projections, Social Security would be running a negative cash flow as early as 2010—a full six years earlier than expected. That projection was confirmed in the annual Social Security Trustees report, released in August of 2010. The SSA also projects that beginning in 2037, Social Security benefits could be reduced by 22% and could continue to be reduced annually.

If you’re really worried about the future prospects for Social Security, that’s all the more reason to save more for your own retirement—even if it means spending a little less now.

The bottom line 
If you have a choice and are in good health, it’s probably best to wait as long as you can to take your benefits (but no later than age 70). There are many factors to consider, and deciding when to take Social Security can be complex. Get some help from your financial planner or tax professional if you need it.

For more information, you can check out Social Security Administration’s website.

Also, if you would like to view the unabridged version of this article, click here:

http://www.schwab.com/public/schwab/research_strategies/market_insight/retirement_strategies/planning/when_should_you_take_social_security.html

When Should I Take Social Security? (Part 2)

Now that you have a general understanding of how Social Security works, here are some factors to consider as you decide when to take the money.

1. Your cash needs. If you’re contemplating early retirement and you have sufficient resources (adequate investments, a traditional pension, other sources of income, etc.), you can be flexible about when you take Social Security benefits. However, if you can’t make ends meet without electing for an early, reduced benefit, you may want to consider postponing retirement for a few years until you reach your normal retirement age, or even longer.

2. Your life expectancy and break-even age. Taking Social Security early reduces your benefits, but it also means you’ll receive monthly checks for a longer time. Taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.

Clearly, how long you expect to live will greatly influence your decision. If you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you’re in poor health or have reason to believe you won’t beat the average life expectancy, you might decide to take what you can get while you can.

3. Your spouse. Don’t forget to take your spouse’s age and health into account as you consider when to begin receiving Social Security, particularly if you’re the higher-earning spouse. The amount of survivor benefits for a spouse who hasn’t earned much during his or her working years could depend on the deceased, higher-earning spouse’s benefit—the bigger the higher-earning spouse’s benefit, the better for the surviving spouse.

4. Whether you’re still working. If you take Social Security before your normal retirement age, earning a wage (or even self-employed income) could reduce your benefit.

Starting the month you hit your normal retirement age, your benefits are no longer reduced no matter how much you earn. Keep in mind, any reduction in benefits due to the earnings test is only temporary, analogous to “withholding.” You will get the money back in the form of a higher benefit at full retirement age, so you shouldn’t cut back on working or worry about earning too much.

That said, keep in mind that Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), more of your benefit is subject to income tax, up to a maximum of 85%.
In any case, if you’re still working, you may want to postpone Social Security either until you reach your normal retirement age or until your earned income is less than the annual limit. However, in no case should you postpone benefits past age 70. (You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.)

5. The amount on your Social Security statement isn’t what you actually get. Besides the potential for taxes to eat into your benefit, your Medicare Part B (and Part D, if applicable) premium will also be deducted from the gross amount.

If SSA projections hold true, Medicare premiums will likely take an increasing share of your Social Security check. According to the Social Security Trustee’s Report, by 2037, Medicare Part B and D premiums and co-pays on Medicare covered services will take 70% of the average Social Security benefit.

All the more reason to hold out for the largest gross benefit you’re entitled to if you have other sources of income and expect to live a long life.

To be continued…

When Should I Take Social Security? (Part 1)

I read the following from Charles Schwab (schwab.com). There’s a lot of information so I’ve decided to break it up into 3 parts. This first part is general information about social security and the rules that govern it. The next installment will be about factors you should consider when determining what age to take your benefits. The last section will be extra things to consider and the bottom line.

When it comes to Social Security, you’ve got three alternatives:

• Take it early
• Wait until your normal retirement age
• Wait even longer

You can still elect to take benefits early at age 62, or wait as late as age 70. Before you consider whether it makes sense to take Social Security benefits earlier or later, let’s take a look at some of the rules.

What’s the “normal” retirement age?
Normal retirement age (abbreviated as NRA, but sometimes called full retirement age) is when you’re eligible to receive full Social Security benefits. The normal retirement age used to be 65 for everyone.

However, under current law, 2002 was the last year anyone age 65 could receive full benefits. If you were born in 1938 or later, your normal retirement age is some point after age 65—all the way up to age 67 for those born after 1959.

When can you get your full Social Security benefit?

You’ll get a penalty for starting too early … 
If you choose to start receiving your Social Security check before your normal retirement age, your benefit is reduced by five-ninths of 1% for each month before that age, up to 36 months. If you start more than 36 months before your normal retirement age, the benefit is further reduced by five-twelfths of 1% per month.

For example, if your normal retirement age is 66 and you elect to start benefits at age 62, there are 48 months of reduced benefits. The reduction for the first 36 months is five-ninths of 36%, or 20%. The reduction for the remaining 12 months is five-twelfths of 12%, or 5%. So, in this example, the total benefit reduction is 25%.

… and you’ll get credit for delaying 
If you delay retirement until after your normal retirement age (prior to age 70), you typically get a credit. For example, say you were born in 1944. Your normal retirement age is 66, but you intend to take your benefits at age 68.

By waiting the extra two years, you get a credit of 8% per year, which means your benefit is 16% higher than the amount you would have received at age 66.

If waiting seems hard to do, you’re not alone. Even though most people would probably be better off delaying benefits,  more than two-thirds of eligible workers take early Social Security.

To be continued…