OCEAN CITY – Deciding when and how to begin receiving your checks involves more strategy than you might think. These questions and answers can help you get the maximum benefit from your benefits.
Q. Social Security is such a small part of my retirement plan. Why not just claim my benefits as soon as I can?
A. Most Americans would agree. According to the Center for Retirement Research at Boston College, 52% of all men and 56% of women start receiving their Social Security checks at the earliest opportunity (age 62). But you’d be surprised at how much better off you may be by waiting. "By delaying benefits for a few years, many people could increase lifetime income by tens of thousands of dollars," says Katherine Roy, Director of Personal Retirement Innovation for Bank of America Merrill Lynch.
Q. How can waiting get me more?
A. The Social Security retirement schedule is designed to be actuarially neutral. That is, people who collect later (age 70) receive larger monthly checks than those who sign up earlier. For each year a recipient waits to collect, the monthly Social Security payment increases by about 7-8%, not including cost-of-living adjustments. For example, someone who is eligible for $1,000 a month at 62 would get $1,333 by waiting till age 66 and $1,760 at 70.
Q. What if I want to continue working?
A. If you keep working and start taking Social Security benefits at 62, Social Security will withhold $1 from your benefit checks for every $2 you earn from work above $14,160 annually. This restriction stays in place until normal retirement age, at which you can earn as much as you want without any withholding. Still, for most people who continue to work, says Roy, "delaying Social Security is the best strategy."
You just need to run the numbers on the opportunity costs. If you have another investment that yields a greater return after accounting for your tax situation, it may make sense to take Social Security and reinvest the money. Another circumstance would be if delaying Social Security forces you to dip into your IRA or other retirement accounts to cover living expenses. In that case, starting early not only protects your nest egg but also postpones taxes on IRA withdrawals.
Q. Should my spouse follow the same advice?
A. Actually, some married couples opt for a split decision, with one spouse taking benefits at age 62 and the other postponing payments till 70. This can be especially effective if one partner is older and the younger spouse had a relatively low income during his or her working years. That’s because by delaying, the older spouse locks in a heftier lifetime income, while the younger spouse’s payments can be used to cover living expenses. And if the older spouse dies first, the surviving spouse can then end the early payments and switch to survivor’s benefits, which could equal 100% of the deceased spouse’s higher payments.
Q. What if Social Security disappears? Shouldn’t I take it while I can?
A. The news reports of Social Security’s imminent demise are likely overblown. To be sure, Boston College researchers still think the system needs fixing — they are among those arguing most strenuously for benefit cuts and tax increases to shore up its health over the long term. But for the moment, Social Security remains sound, and those who manage their payments carefully can rely on it to provide a surprisingly important source of retirement income.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)