Tuesday, January 7, 2014

Social Security (Not an Easy Question)

When and how should you take Social Security? This question will be even more important for the Baby Boomers than previous generations since ours will be the first generation that will lose money on Social Security. Making this calculation requires one huge assumption, your age at death, as well as a through and rational analysis of your particular situation.

Too many people are forced by unemployment to take early Social Security at age 62.

If you love your job, why retire? If you are no longer having any fun at your job and you can afford to retire, it is time to retire. 62 is the earliest age at which you can collect Social Security benefits. Although it is against my religion not to take free money whenever it is offered, your full retirement (age 66) benefits are cut by about 25% if you elect to collect at age 62. That number would drop to 20% at age 63. Waiting to collect between the ages of 66 until the latest age possible, 70, adds about 8% per year. It is easy to see how estimating your age at death will drive the results of your analysis.

If it were only that simple; unfortunately, Social Security calculations also involve spousal benefits, divorcee benefits, survivor benefits, as well as the dreaded pension offset that affects Government employees who had a job that did not withhold Social Security taxes. Understanding the explanation for this last question provided by the Social Security Administration proved to be beyond the abilities of two research engineers (I was one of them). Fortunately there are Social Security calculators available on the web that will answer all of these questions for a fee.

Here are three well know examples. Before you pay for any of them, make certain they have the features you will need to make your individual calculation.

Maximize My Social Security

Social Security Solutions

Social Security Income Planner

In my case, my wife and I decided start drawing her Social Security at age 62 to supplement my pension. Given that we will be able to continue living on our current renewable income, I will delay collecting my benefits until I reach full retirement age at 66. Then my wife will increase her benefit by collecting a spousal benefit off of my much higher Social Security income rather than her current benefit. Since the laws covering these strategies change on a pretty regular basis, you need to use the latest, up to date information before you pull the trigger.

There are several ways to flip between benefits and spousal benefits that are permitted and some that are not permitted. For example the lower earning spouse can collect Social Security starting age 62. Then the higher earner can collect a spousal income off the lower earning spouse’s benefit at age 66. Finally, the higher earner can then flip to his maximum possible benefit at age 70. Making the correct decision can increase this couple’s lifetime Social Security by as much as $400,000!

The correct decision on what strategy to follow is not easy to make. It totally depends on your age, your spouse’s age, your lifetime earnings, your spouse’s lifetime earnings, your current and projected needs, and your estimated age at death.

Good luck and, “Let’s be careful out there.”

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