When Should I Take Social Security? (Part 2)

October 5, 2011 at 7:00 am | Posted in Uncategorized | Leave a comment

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…

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