Morgan Stanley private wealth adviser Mary Deatherage joins Barron’s Roundtable to discuss what retirement savings options will help generate income in a low-income environment.
As of June, the average retired worker earned $ 1,514 a month from Social Security. This works out to almost $ 18,200 per year. All things considered, this is not very much – but for 62% of retired workers who receive a Social Security benefit, their monthly payment will earn at least half of their income.
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The critical role Social Security plays in retirement for so many older Americans proves just how important your liability decision can be.
Requiring age plays a big role in determining your Payout for Social Security
While there are more than half a dozen factors that can affect how much you will receive and receive to maintain your Social Security retirement benefit, there can be a difference of up to 76% in your monthly payout, all things being equal , either claim your benefit as early as possible (age 62), or wait until age 70. This is because benefits increase by as much as 8% each year for each year a worker stops paying until age 70.
Statistically speaking, a majority of seniors would be better served by waiting until age 70 to begin their retirement benefits for Social Security. But this does not apply to everyone.
In some cases, an early claim can make a lot of sense. For example, a person with one or more chronic health conditions may not be living to see the average life expectancy in the US of nearly 79 years. Thus, an early claim – even at a rate reduced by as much as 30% per month – can still lead to a retired worker maximizing what they receive over their entire life from Social Security.
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But there are also many scenarios where paying Social Security benefits early on would be a terrible move. Here are five such cases.
1. You are in debt and want the extra income stream
With an increasing number of seniors dealing with debt, it can be tempting to try to double down on debt to pay off or eliminate debt. You may think that paying benefits early and combining this added income with your salary or salary is a smart move, but you will almost certainly be in for an unusual surprise.
You see, Social Security has built a rule for early filers (that is, those who claim benefits before they reach their full retirement age), known as the Retirement Earnings Test. Without getting too deep into the weeds, the retirement benefits tests the Social Security Administration can recall some or all of your Social Security benefits if you earn too much money. For beneficiaries who do not reach their full retirement age by 2020, $ 1 in benefits for every $ 2 in earned income above $ 18,240 will be withheld. For Social Security supervisors who will reach full retirement age by 2020, $ 1 in benefits will be withheld for every $ 3 in income above $ 48,600.
Why this is the right age to take social security
The point is that if you claim early benefits to pay off debt, there is a good chance that some or all of your benefits may be withheld while you are still working, thereby defeating the purpose.
2. You are rich
Taking an early lead is also usually a bad move if you are rich and will not in any way rely on Social Security.
While an argument could be made that an early claim would allow the rich to use their Social Security income on travel and hobbies, there are two good reasons to do well to wait to receive their payout.
First, the wait could mean a lower tax rate. Social security benefits are indeed taxable at the federal level if recipients cross certain thresholds. If the good keeps doing with taking their paycheck, they don’t have to worry about added federal taxes in those years.
Second, the rich survive low-income workers. Because the rich have little or no financial constraints when it comes to access to preventive care or prescription drugs, they tend to exceed the average life expectancy in the United States. A later claim (ie, age 70) would allow long-term beneficiaries to collect the most from Social Security.
3. You are in excellent health
You might have seen this coming because of the example I provided earlier, but if you are in excellent health, an early claim may not make much sense.
To some degree, health-based social security benefits come with an asterisk. None of us (fortunately) know our own expiration date. But without this knowledge, choosing the optimal claiming age is a bit of a crapshoot. We use the information we have, such as our own health history and that of our immediate family, and we make an informed decision about when we should start receiving benefits.
That said, the longing has increased for a while. The average life expectancy of a modern-day American is more than 16 years longer than when the first workers’ pension was paid in January 1940. With the average 65-year-old beneficiary still living two decades, it normally pays for people who are good to have excellent health to take advantage of it.
4. You are a higher deserved couple
Much more often than not, it would also be a mistake for a couple with higher incomes to claim their benefits early. While there is an obvious desire to generate household income, waiting makes sense for two important reasons.
Waiting will have a greater impact on future payouts for a high-earning couple. Perhaps waiting for benefits at age 70 is not in the cards, but accepting a reduction of up to 30% before making a payment at age 62 could increase the monthly potential for months and lives for a married couple substantially reduce.
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The other reason is that applying for Social Security before reaching full retirement age could reduce the benefit of survival for a minor couple, should the higher earner die first. A survivor has the opportunity to maximize their benefit for survivors, but only if the deceased couple waited until their full retirement year to begin their payout.
In sum, waiting for Social Security applications can help build a financial base for your significant other.
5. You do not believe that Social Security will last much longer
Finally, paying benefits early, because you believe the Social Security program will no longer last, is an absolutely terrible idea.
There is no denying that Social Security has its problems. The latest report from the Social Security Board of Trustees estimates that the program is facing a cash deficit of $ 16.8 trillion between 2035 and 2094, which could lead to sweeping benefit cuts of up to 24% for retired workers if left untreated.
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However, social security is in principle incapable of going bankrupt. Two of the program’s three sources of revenue – the 12.4% tax on earned income and the tax on benefits – are returning. As long as the U.S. public continues to work, money will continue to flow into Social Security for payout to eligible counselors. Translation: Social security will be there for you in one form or another, not when you retire.
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