Retirement Planning Part 4: Social Security

One of the most important decisions that a retiree will make is when to elect to take social security benefits.  The decision is irrevocable so adequate research and planning into your options, and how the program works can greatly help make an election that is best for your situation.

While you do have the ability to sit down with a representative at your local social security office, you may be provided little guidance over and above learning your benefit amounts at different ages.  This is where a financial professional can sit down with you and help guide you through all of your options for the program.

Instead of a commentary about the program as a whole, I thought it more informative to bullet point important aspects of the program and electing benefits.  These are in no particular order, but hopefully will help expand your knowledge of the how the program works.

  • You are assigned a “Full Retirement Age.”
    • Born between 1943 & 1954 Full Retirement Age is 66.
    • Born between 1954 & 1960 Full Retirement Age is 66 plus several months.
    • Born after 1960 Full Retirement Age is 67.
  • You can elect to receive your benefit as early as age 62.
    • If your Full Retirement Age is 66, your monthly benefit would be reduced by about 25%.
    • If your Full Retirement Age is 67, your monthly benefit would be reduced by about 30%.
  • If you do elect benefits early and continue working, your benefits will be reduced once you earn over $17,040 (for 2018).
    • This threshold is for earned income, not pensions or distributions from retirement accounts.
    • Once you are of Full Retirement Age, you can earn as much as you would like with no benefit reductions.
    • If you are subject to benefit reductions, social security calculates those back into your benefit when you reach Full Retirement Age so technically you should not lose them.
  • The latest that you can take your benefit is age 70.
    • Your benefit could actually increase by about 8% per year from your Full Retirement Age until your age of 70.
  • Once elected, your benefit could receive a cost of living adjustment each year based on inflation as measured by the Consumer Price Index.
  • Once a spouse elects to take their benefit, the other spouse can take the higher of their own benefit, or 50% of their spouse’s benefit at the appropriate age.
  • If both spouses are receiving their benefit and one dies, the living spouse can elect to receive the higher of the two benefits but only 1 social security benefit would continue.
  • A divorced spouse can receive benefits on their ex-spouse if they were married for more than 10 years, are unmarried, age 62 or older, and the benefit is higher than what they would receive based on their own earnings.
  • Your social security benefit is calculated based on your highest 35 years of earnings. Those 35 years are multiplied by the appropriate time factor and divided by 420 (number of months in 35 years) to come up with your average indexed monthly earnings.
    • You then receive 90% of the first $835 of those monthly indexed earnings, 32% of the next $4,502, and 15% of any amount over $5,397.
    • Higher earning years later in your career can replace lower earning years earlier in your career helping to increase your average indexed monthly earnings.

While it is impossible to look into the future, project our health, and know the exact perfect timing of taking social security, having a working knowledge of the above details of the program can be a great starting point to begin to plan.  Partnering with a Financial Professional can also help to guide you on your decision.

Additionally, there are cost effective softwares available that allow you to plug in your earnings record, marital situation, and age to help find the optimal social security timing based on differing longevity.

Retirement Planning Part 1: Partnering with a Financial Planner

Retirement Planning Part 2: Asset Consolidation

Retirement Planning Part 3: Portfolio Management







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