Utilizing Social Security as a Retirement Strategy to Maximize Income
As we look to our resources available from Social Security to contribute to our retirement income needs, there is much more to consider than when we should begin our receiving our benefits. There are many critical issues that must be considered before making an educated decision on when to take your Social Security benefits.
Most retirees simply take Social Security as soon as they are eligible. In fact, 75% of all Social Security recipients collect their benefits early. Is this decision simply a matter of needing the monthly income, or is there more to the story?
So, continue reading as we look at this issue along with other portions of Social Security that you should consider prior to making your decision on benefits.
To begin with, what does Social Security offer?
- Guaranteed lifetime income backed by the Federal government
- Annual increases that are indexed to inflation, for future benefit increases
- Survivor benefits in the event a recipient dies
- Preferential tax treatment as only portions of benefits are taxable
Although this article will not address each area, there are filing rules for different situations that may play a major role in determining when to receive benefits:
- Surviving spouses
- Divorced spouses
- Dependent children
- Disabled individuals
One of the most critical aspects of your Social Security decision centers around life expectancies.
If you have serious health-related issues that will probably adversely impact your life expectancy, this is essentially the most important aspect of your decision process.
If you have a multi-generational family history of either living longer than average or shorter, this, along with retirement cash flow issues (i.e., will your Social Security benefits be your only or most of your retirement resources) is probably the second most important aspect of your decision process.
To put life expectancy in perspective, a combined 70% of retirees and pre-retirees (within 10 years of retirement) underestimate their life expectancy by at least five years. As the chart below highlights, once an individual reaches age 65, a male has a 50% chance of living to age 87, and a 25% chance of living to age 93.
For a female who reaches age 65, the statistics are even better: she has a 50% chance of living to age 89, and a 25% chance of living to age 96.
Couples fare even better on the life expectancy scale: for couples that both reach age 65, at least one partner has a 50% chance of living to age 93, and at least one partner has a 25% chance of living to age 98.
So, an individual or couple that has a high probability of a long-life expectancy, but begins receiving Social Security at their earliest age of 62, will leave a large amount of benefits on the table. Believe it or not, this can add up $100,000s in non-received (lost) benefits.
Before we look at the impact of collecting early benefits, let’s first understand some basics on Social Security. The first is “How do you qualify for benefits?”
You need to work to earn Social Security “credits.” You can earn a maximum of four (4) credits per year. For 2017, each $1,300 in earnings will give you one (1) credit, and you must earn at least $5,200 to earn the maximum of four credits. It does not matter when your earnings take place during the year (could all be December 31st as an example), it just has to reach the thresholds above. The earnings credit amounts may change each year based on average wages.
To qualify for a retirement benefit, you must earn forty (40) credits, which is the equivalent to ten years of working.
Primary Insurance Amount (PIA) – this represents the amount you will receive each month if benefits start at Full Retirement Age (FRA) as shown in the following chart:
Your PIA is based on your lifetime Social Security earnings adjusted for inflation. The calculation of your benefit is based on your average indexed monthly earnings (AIME) over your highest 35 years of earnings. Your highest earnings years do not have to be consecutive, only your highest.
The maximum PIA for 2017 is $2,687 for your Full Retirement Age (between age 66 and age 67 depending on your date of birth).
Let’s take a look at the cost of collecting your Social Security benefits earlier than your Full Retirement Age (FRA).
If your FRA is age 66, the following chart shows the reduction you will receive in benefits. At the extreme, if you start collecting Social Security benefits at age 62, you will receive only 75% of your FRA benefit. Another way to put this in perspective is, collecting early will result in a 25% decrease in your monthly income streams. To make this a worse proposition, since annual increases are based on your current benefits, you will begin with a lower base for the remainder of your life.
The result is tens of thousands of “lost” benefits over normal life expectancies. These “lost” benefits are even greater for longer life expectancies.