If you are nearing retirement or are retired, congratulations on your accomplishment! It’s an exciting time as you prepare for the next stage of your life without the daily pressure of commuting to work.
Assuming you are 65, you should consider when to take your Social Security benefits as you consider and plan for retirement. However, this start date is far more complex and personal than you may realize. Even if you have substantial income from other sources, Social Security can extend the life of that income by reducing the need for distributions.
This blog will describe the financial impact of your retirement decisions.
As retirement planning professionals in Roseville, we help individuals create comprehensive retirement plans that include a complete analysis of when they should begin taking their Social Security benefits. Critical to your overall retirement plan, this decision demands a clear understanding of the implications of starting early, waiting until full retirement age, or even delaying benefits until you have to take them.
Understand Full Retirement Age (FRA)
Your Full Retirement Age (FRA) plays a significant role in determining your Social Security strategy. FRA refers to the age when you are eligible to receive your full Social Security retirement benefits without any reduction due to early retirement.
This age varies depending on the year of your birth:
- If you were born in 1937 or earlier, the FRA is 65
- If you were born between 1938 and 1959, the FRA increases from 65 to 67
- If you were born in 1960 or later, the FRA is still set at 67
While you can start receiving Social Security benefits as early as 62, this would permanently reduce your monthly benefits. On the flip side, you can delay taking your Social Security benefits until you reach 70 years old. Each year you delay your benefits, your monthly benefit payment increases by 8% (risk-free).
For example, let’s say you’re 62 and 6 months old, and your current benefit would be $2600. Your full benefit amount at age 67 would be $3600, and if you opted to delay your benefits until 70, the monthly amount would be $4400 (a 69% increase in benefits).
You can see how the FRA comes into play and how it can impact your short and long-term benefits, so making an informed decision about when you begin taking your benefits is in your best interest.
Consider Your Financial Needs and Health
Your current financial situation and health should also be factored into your decision about when you begin taking Social Security benefits.
If you’re in good health and have sufficient income or savings, delaying your benefits can result in a larger monthly payment. Conversely, starting earlier might be more beneficial if you need immediate income or have health concerns that could impact your lifespan.
Your financial situation can significantly influence the best time to start receiving benefits. For example, delaying Social Security may make sense if you’ve done a good job building your retirement nest egg and/or plan on having other income sources like passive income from real estate investments.
Longer life expectancies can justify waiting to claim benefits because, as shown, the delay can increase your monthly payments. If longevity runs in your family, waiting longer to start your benefits could result in more total payments over your lifetime. Conducting a break-even analysis can help you understand the age at which the total benefits received become greater if you delay your benefits.
Don’t forget, due to rising longevity, you may be retired for 30 or more years.
If you have underlying health issues, it may be more appropriate to begin claiming your benefits earlier to offset any healthcare expenses you may incur so you don’t have to withdraw principal from your retirement savings.
Listen to our newest podcast: “Aim to Protect Your Retirement From Inflation.”
Evaluate the Impact on Spousal Benefits
If you’re married, your decision can also affect your spouse’s benefits, especially if they’re eligible for spousal benefits based on your work record.
Spousal benefits allow a spouse to receive up to 50% of the higher earner’s benefit at full retirement age, which is affected when each spouse begins to collect their own Social Security benefits.
Starting your benefits early can reduce your benefits and lower the spousal benefits. This can have long-term financial consequences for you and your spouse, especially in retirement when your sources of income may be more limited.
Social Security Benefits and Taxes
If you’re still working while drawing Social Security benefits, your earnings can affect the taxation of your benefits, depending on your age and income level. Social Security benefits are taxed based on your “combined income,” which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. It’s advisable to consult with a tax professional to understand the specific tax implications for your situation.
Your Social Security benefits might be reduced if you have yet to reach FRA and earn above certain thresholds. For every $2 over the limit, $1 is withheld from your benefits. Additionally, up to 50% of your benefits might be taxable if your combined income exceeds a base amount set by the IRS.
Once you reach FRA, there’s no benefit reduction, no matter how much you earn from work. However, taxation still applies. Up to 85% of your Social Security benefits could be taxable if your combined income exceeds certain thresholds.
Examples:
- Suppose you are under FRA, earn $30,000 from part-time work, and receive $18,000 in Social Security benefits. In that case, part of your benefits may be reduced due to exceeding the income limit, and you might owe taxes on up to 50% of your benefits, depending on your combined income.
- At or Above FRA: There’s no benefit reduction if you earn the same amount. However, if your combined income exceeds the IRS thresholds, up to 85% of your benefits might be taxable.
Get to Know Bulman Wealth Advisors
We get it. Retirement planning can seem complex, but we break it down into components that are easy to understand. As retirement planners in Roseville, CA, we have developed a proprietary approach to retirement planning that we believe simplifies the process while addressing the five key areas that are critical to a successful retirement that may last 30 or more years:
- Income Needs Assessment: We determine your desired retirement lifestyle and estimate the income required.
- Investment Strategy: We develop an investment plan that balances growth potential with risk exposure to pursue your retirement goals.
- Tax Considerations: We explore tax-advantaged retirement accounts and strategies that may help minimize your tax burden throughout retirement.
- Healthcare Planning: We understand the potential healthcare costs in the mid to late retirement years and develop a plan to cover them.
- Legacy Planning: We consider how you want to distribute your assets after your lifetime and explore strategies to maximize your legacy for loved ones and the organizations you may want to support.
Ready to learn more about our retirement planning services? Let’s connect for an introductory call.
