Lynn Brenner
wrote an article on Monday, May 10, 2010 in which she collected some
thoughtful scenarios which I think are worth repeating. The whole
article is here.
When to start collecting your
benefits is an important decision. This post is an excerpt from Ms.
Brenner's article which I think nicely
illustrates how waiting can sometimes help your long term financial
situation.
There are other techniques that have been discussed on this blog. Search under Social Security if you are interested!
Todd
Doubling Social Security: The Case for Waiting
To
see the long-term benefits of waiting [to start Social Security], consider
this example from T.
Rowe Price senior financial planner Christine Fahlund. A man born on
January 2, 1948, who earns $80,200, he can expect a $2,157 a month from
Social Security at his normal full retirement age of 66. But if he
retires this year, at 62, he'll receive just $1,458 a month, about a
third less. Using Social Security's assumptions, by waiting until 70,
his checks will start at $3,303 — more than double what he'd get at 62.
True,
he must pass up eight years' worth of checks — in this example, that's
a total of $149,517 in inflation-adjusted benefits from age 62 through
69. But if he starts taking benefits at age 70, the bigger checks will
let him make up that $149,517 in a little over six years, or by the
time he's 77. From then on, he'll be ahead of the game.Through age 85,
he'll have collected $786,450, or$219,462 more than if he had started
benefits at 62. Postponing meant eight years of tax-free, government
guaranteed growth.
Postponing your benefits can also help you
avoid the Social Security earnings penalty if you work in retirement.
In 2010, if you receive Social Security checks before the full
retirement age, you must temporarily forfeit $1 of your benefits for
each $2 you earn over $14,160 (you can't collect any benefits if you
earn more than $42,960). If you reach your full retirement age in 2010,
Social Security holds back one dollar for every $3 earned over $37,680.
After you've reached full retirement age, the earnings penalty
disappears.
Weighing the Numbers
To determine when you should tell Social Security to start sending the checks, run some what-if scenarios.
Start
by finding out how much Social Security is likely to pay you. The
agency's web site has a table listing the normal retirement age based
on the year you were born and the penalty for collecting benefits
early. If you start at age 62, you'll get 25 percent to 30 percent less
than at your full retirement age.
For a pretty good idea what
your actual benefits will look like based on what you've earned (your
checks are based on the average of your 35 highest-paying years), use
Social Security's retirement estimator calculator.
Also, consider these three factors before you start the clock on Social Security:
Your health. If
you have a serious illness or family history of short life
expectancies, taking benefits as soon as you can makes sense. "But for
most people, delaying benefits until their normal retirement age or
later is best," says Vernon, "because, on average, Americans in their
50s and 60s will live until their mid-80s." You can use the calculators
at livingto100.com and bluezones.com to estimate your life expectancy
based on your health, family history and lifestyle.
Your marital status. If
you're married, delaying your checks will not only boost your benefit,
it will mean a larger survivor benefit for your spouse — extra money
that will last for the rest of his or her life. There's an 81 percent
chance that one or both members of a 65-year-old couple will live to
85, a 58 percent chance that one or both will make it to 90.
Your plans.
Of course advice here can't take into account your personal needs: You
may want to start taking Social Security late because you plan to keep
working into your late 60s and don't need the government checks.
Conversely, you may want to receive the money early so you can write
the Great American Novel.
The Math for Marriage
If
you're married, running the numbers is, as Meryl Streep might say,
complicated. MoneyWatch blogger Larry Swedroe wrote a helpful four-part
series on Social Security strategies for couples that demystifies the
math. Here are the four basic rules:
1.You can claim a Social
Security benefit based on your work record or your spouse's work
record. The maximum spousal benefit is 50 percent of what your husband
or wife will receive.
2. A widow or widower who starts collecting
survivor benefits at the normal retirement age or older generally earns
100 percent of the deceased spouse's benefit. But the amount shrinks to
71 to 99 percent if you begin getting survivor benefits between 60 and
your normal retirement age.
3. You can never collect your benefit
and your spousal (or survivor's) benefit at the same time. If you're
entitled to both benefits and are under the full retirement age, you
will always receive the larger of the two.
4. You can't apply for a spousal benefit until your husband or wife has filed for Social Security.
How Couples Can Collect Early
Married
couples who can't afford postponing Social Security altogether can use
a technique known as the "62/70 Strategy" to maximize benefits over the
long term. With this system, the lower-earning spouse files for Social
Security at age 62 and the higher earner delays until age 70. "No
matter which spouse dies first, the smaller benefit will die off too,"
says James Mahaney, vice president of Prudential Retirement and
co-author of a report on how to maximize Social Security benefits.
Here's
how T. Rowe Price's Fahlund says 62/70 could work: Assume John's full
benefit will be $2,157 a month. His wife Jane's full retirement benefit
will be $1,081 a month; at 62, she'd receive $721 a month. Jane applies
for her $721 benefit at 62, and John delays claiming his checks until
70, when he'll collect $3,303. If John dies at 82, his monthly benefit
will have grown to $4,601 because he had waited until 70 to start
collecting. That $4,601 then becomes Jane's survivor benefit, and it
will be 88 percent more than Jane would have received if John had begun
collecting at age 62.
Couples should also take advantage of the little-known rules to boost retirement income.
Let's
go back to John and Jane. Although John is waiting until 70 to start
receiving his benefits, at 66 he can apply for a spousal benefit based
on Jane's work record while his own benefit keeps growing. (If he was
younger than 66, he couldn't do that.) Because he has reached his full
retirement age, John qualifies for the maximum spousal benefit: $541 a
month, or 50 percent of Jane's $1,081 benefit. When John hits 70, he'll
drop the spousal benefit and start collecting his own larger benefit.
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