Some points to consider before collecting social security
If you are near or at the age of retirement, you may be forward to collecting those social security benefits that you spent decades accumulating. But when is the right time and what are the consequences of your decision?
Online tools can help you decide
The Consumer Financial Protection Bureau (CFPB) released an online tool recently that will help you determine the best time to start collecting your social security benefits. By plugging in your birthdate and highest annual salary received, the tool takes you to a page that identifies what is your full benefits claiming age. By calculating your average life span based on your date of birth, the tool will tell you the total expected social security earnings over your retirement lifetime. You can play around with the tool and discover what will be the results if you delay claiming benefits, showing you estimated monthly income up to the age of 70. It is obvious that even though you can begin receiving social security benefits at age 62, you increase your monthly social security income by delaying for as long as you can.
The CFPB reports that even though the monthly social security check increases the longer one waits, 1.7 million, more than 60 percent, of eligible Americans tapped into their social security in 2013 before their full retirement age. Perhaps the decision addresses short-term needs, but over the long-term, you will lose money.
For example, let’s say you were born in 1954 and your highest annual salary was $60,000. If you start collecting social security at full retirement age of 66, according to the CFPB tool, your monthly social security check will be $1,716 and total social security earnings will be a little more than $390,000. If you wait until age 67, your total social security earnings increases to a little more than $400,000 (with a monthly check of $1,853). While the decision of when to start collecting social security benefits is personal, the benefits of waiting longer are obvious.
Penalties vs credits
If you begin collecting social security benefits as much as 36 months before your retirement age (calculated depending upon the year of your birth), the federal government assesses a penalty that results in a permanent reduction in your social security benefits. The exact amount of the penalty percentage depends upon when during this window you tap into your social security benefits. If you delay collecting your social security, the federal government gives you a credit. Again, the amount of credit percentage depends upon when you were born and the number of years that you wait, but it can be as much as 8 percent.
Bottom line considerations
- Financial needs: If you have adequate retirement savings, such as investments, IRAs, pension or other funds, then delaying is advisable. However, if you need your social security check to makes ends meet, then by all means you should begin collecting social security at the earliest time. However, if your cash crunch is related to debt, it might be better to look at debt-reduction alternatives, such as debt consolidation loans, rather than tapping into your social security. If you are physically fit, consider delaying retirement until you reach your full retirement age, or even beyond it, and maximize your total social security benefits.
- Life expectancy: According to the CDC, the average life span for Americans is close to 80 years of age. This means that if you begin collecting social security at age 62, the earliest age allowable, you seal a permanent reduction of as much as 25 percent for the duration of your life. If you are healthy and have no reason to believe that you will not reach the predicted life expectancy, it makes sense to delay collecting social security.
- There are other factors as well, such as tax considerations and whether you are single or married.
Seeking out an experienced and reputable financial advisor is the key to making the best decision regarding when to collect your social security.