Financial face-off: When is the best time to claim pension benefits from social security – sooner or later?
Financial face-off: When is the best time to claim pension benefits from social security – sooner or later?

Financial face-off: When is the best time to claim pension benefits from social security – sooner or later?

Hello and welcome to the Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will deliver his verdict. Tell us in the comments if you think she’s right, and thank you submit proposals for future Financial Face-off columns.

Almost everyone who is had a paid job in the United States are eligible to receive social benefits when they retire. What some people may not be aware of is that they have to decide when to start receiving the monthly payments. You can be entitled to pension benefits from social security already as a 62-year-old or 60-year-old if you are a widow or widower. The question is: Should you claim your Social Security pension benefits sooner or later?

What’s at stake?

The longer you wait to receive your benefits, the more money you will get until you reach the highest possible benefit at 70. Your benefit increases every single month, you wait between 62 and 70 years, around 7% or 8% per year.

At age 70, your benefit is about 76% higher than it would have been at age 62, said Martha Shedden, a retired civil engineer who became so passionate about the need to educate people about social security that she was co-founded the National Association of Registered Social Security Analysts, a group that trains people as social security advisers.

Before deciding when to start collecting, find out the difference between what your advantage would be in the past vs. later, Shedden said. Seeing that number helps people understand that the timing issue is “a very, very serious financial decision,” Shedden said.

This practical calculator will estimate your personal benefits and tell you how much you would get if you started claiming at the age of 62, 67 or 70. A person born in 1960 and having an average annual income of $ 50,000 would get $ 1,338 a month at age 62; $ 1,911 at their full retirement age (67); or $ 2,370 at age 70, acc an AARP calculator. You should too create an account on the Danish Social Insurance Agency’s website, which will give you an estimate of your benefit at different intervals.

The average social security payment is currently $ 1,660. The earlier you start, the longer you will receive these benefits. But you will receive the permanently reduced amount (plus modest living cost adjustments) for the rest of your life. If you are waiting for your full retirement age (which is set by the government and depends on your year of birth), you can receive the full social security benefit.

At full retirement age, you can earn extra income, for example from a part-time job, and your social benefits will not be reduced. (Before full retirement age, benefits shrink if you earn above a certain amount of income from other sources.) At age 70, the benefits everything you have.

In previous generations, people tended to start collecting social security at age 62 because they assumed that was what they were supposed to do, Shedden said. But in recent years there has been a growing awareness of the value of waiting.

A key question to ask yourself: How long do you want to work? Some people love their jobs; others can not wait to get out of the workplace. If you continue to work while receiving social security, you risk earning too much income, which can reduce your advantages. (However, you will get your money back in the form of larger monthly payments when you reach full retirement age.)

Once you have claimed social benefits, you have a 12-month window where you are allowed to change your mind and stop receiving benefits – but you must pay back the amount you have received so far.

You also need to consider your health, both physically and financially. People who do not have enough retirement savings often have no choice but to take social security as soon as they can. (About half of the population aged 65+ get at least half of their family income from Social Security; 25% of older households are dependent on it for at least 90% of their income.)

If your family history suggests you are going to live up to the 90s, try waiting to collect if possible so you can make the most money. But there is also a balance. If you were to start claiming social security at your full retirement age, you would receive the full amount of benefits you owe. Anyone making claims before their FRA receives a permanent reduction of this amount, but can also balance these benefit checks with lower payouts from their retirement savings, allowing these accounts to continue to grow over time.

People should think in terms of how long they could live with maximum, not average life expectancy, Shedden said. “We generally underestimate how long we are going to live, and by doing so we may have a ‘long life risk’, which is the risk of running out of money later in life,” Shedden said.

It is also important to think about the other players in the equation. Divorced spouses, deceased spouses, current spouses, young children and adult children with disabilities can all contribute to your social security benefits. “It’s a family decision,” Shedden said.

Another issue that comes up in conversations about social security: Some people think they need to start collecting as soon as possible because they are worried that the government will “run out of money.” That’s not going to happen, and that’s not a reason to claim in the past, financial advisers said in an interview with MarketWatch.

It can be an emotional discussion for people to decide when to demand social security because it affects the core fear of the end of our lives and whether we have enough money to take care of ourselves. But once people decide, they are so relieved, Shedden said. It is a key decision, and once it is made, other retirement planning can more easily proceed.

My verdict

Wait – if you’re lucky enough to be among Americans with adequate retirement savings and good health. (About 26% of Americans still working have no retirement savings, according to the latest Federal Reserve report on the economic well-being of American households. Of those who have savings, only 36% think that their pension savings are “on the way”.)

My reasons

The huge difference between what your monthly payment will be at age 62 compared to age 70, convinced me. I would also like to think that if you are planning a long and healthy life, you will increase your chances of getting one, but it may be the optimist in me who is speaking.

On the other hand

An argument for claiming your social benefits earlier: you may lose your chance to enjoy the extra money if you wait too long to claim your benefits. If you’ll have to save and save to support yourself while you wait until the full benefits begin at 70, your quality of life and satisfaction may suffer, says Grant Meyer, a certified financial planner and founder of GTS Financial in Bloomington, Minn.

At 62 or 65, even if your social security benefit would be less, the extra money could still help you take a vacation, spend time with your grandchildren, or get out of a job you hate, Meyer said. By the time you are eligible for the full benefit, you may be less mobile and less healthy.

“You have to understand your whole financial picture, but some people forget quality of life and satisfaction,” Meyer said. “It’s easy to forget them because they are not numbers that appear on a spreadsheet, but they are something to think about when you go through Social Security.”

Another argument for taking social security money in the past is that it can help people avoid spending their pension investments on daily expenses, enabling pension savings to keep growing, said Joseph Favorito, managing partner at Landmark Wealth Management in Melville, NY. Favorito generally prefers to collect Social Security earlier. But know his calculationsa 5% compound return on investment would surpass the annual 8% simple social security rate hike.

“If I take the dollar amount that I did not do use because I had my social security benefit of 62 years and I kept it and invested it and I live to 95 or 100, although I may have collected less from the social security, the amount that accumulated that was invested over that time, far exceeds by a large number what I would otherwise have gotten from Social Security with the higher payments, “said Favorito.” But this strategy only works for people who are disciplined investors who do not panic during periods of volatility, he said.

Tell us in the comments what opportunity to win in this financial face-off and Let us know your questions for future Financial Face-off columns.

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