You’ve worked hard to save and make smart investment choices. Your goal is a smooth transition into retirement with peace of mind about your financial future. But those years of preparation can still leave you questioning exactly how to pull it off.
Knowing when to begin collecting social security, cash in an investment, begin to withdraw from a retirement account, or say goodbye to the 40-hour work week are all factors to consider.
First on the list is social security. Gaining a full understanding of the program is important for deciding when to start collecting. Let’s dig into the ins and outs of social security deferral and why waiting may be in your best interest.
When should I begin taking social security?
Americans can begin collecting social security benefits at the age of 62. Maximizing the number of monthly payments during your lifetime may look like the best strategy. So, why wait? Before making the decision, make sure you have a clear understanding of how deferral affects your monthly payment. This knowledge may steer you down a better path.
The government rewards retirees for pushing back their first deposit in exchange for a larger monthly payment. While a few months won’t make a noticeable difference, if you have the option to wait, a year or more will make a sizable difference.
Here’s how. The U.S. Government will increase your monthly payout by a set percentage each month you defer, up to the age of 70. The Social Security Administration has stated those born after 1943 will receive an 8% annual credit for each year they push back cashing in their benefit.
If you can wait until age 70, you will receive a substantially higher social security monthly payment compared to drawing your benefit at the age of 62. Like any retirement decision, it pays to know your options.
Factors affecting your payout
A Primary Insurance Amount (PIA) is the calculated monthly benefit each individual receives if they begin withdrawing social security at the government-determined normal retirement age, which is currently 67 for those born in or after 1960.
Your personal PIA is based on your average indexed monthly earnings, meaning it varies from person to person depending on how much you’ve contributed during your working years. One other factor affecting your PIA is a cost of living adjustment (COLA), calculated by economists each year.
However, a little-known fact is that there is no COLA in your first year if you collect at age 62. For those who defer, the COLA from each passing year is factored into your PIA. Simply put, if the cost of living rises during your deferral period, so will your monthly social security payment.
Crunching the numbers of your financial future
Let’s look at an example. Say you were born in 1960. You would reach your normal retirement age of 67 in 2027.
However, if you begin taking your social security benefit early, when you’re 62, you could receive your first check in 2022. But, because you have not reached your full retirement age of 67, your monthly benefit will be reduced to 70% of your primary insurance amount (PIA). This doesn’t sound like such a good deal.
Now, if you can wait until age 70, the year will be 2030, and you will have reached the maximum payout tier. Your reward for waiting is a monthly benefit that is 124% of your PIA each month. So what do you think? Is the reward worth the wait?
Of course, you have the option of picking a year in-between. This example is intended to show how time can significantly impact your monthly social security benefit payments. We realize each person’s circumstance is different. Having the proper planning tools and knowledge is necessary to make an educated decision.
Will deferral affect Medicare?
There are a lot of numbers to keep straight when mapping out your retirement journey. Age 65 is another important milestone, and often the year American’s associate with leaving the work world.
At 65-years-old you become eligible for Medicare. Receiving Medicare benefits is completely separate from social security. No matter when you choose to start taking your social security benefits, this decision will not affect your Medicare eligibility. If you choose to push out your first social security payment, rest assured you’re still eligible for Medicare at 65.
Consider your work life
As long as you are still working, there is likely no need to claim social security benefits on top of your income. While everyone’s personal scenario is different, remaining employed past age 62 is a good reason to defer your benefit.
If you decide to retire early, it’s best to consider using other income streams. This will look different for everyone — but the goal is to bridge the gap between when you leave your career and when you receive your first social security check while maximizing your monthly cash flow.
So how do you decide?
While we’ve dug into the benefits of deferring social security, we’ve only skimmed the surface of retirement planning. Those who gain the proper knowledge, implement a smart strategy, and have a bit of patience are likely to come out ahead in the long run.
Determining the appropriate time to collect social security is a personal decision. But having a trusted resource at your side can make the decision much easier. Whether you have a plan in mind or need a hand in sorting out the details, we’re here to take the journey with you.