Social Security...And When to Collect?
When planning for retirement, identifying the sources of income that may be available to you in retirement, as well as a strategy for how you wish to draw from those resources is, we believe, critical to a secure and comfortable retirement. While some may generate income from the wealth they’ve accumulated in their 401k plans, others may benefit from the income that can be derived from a pension plan or annuity. While we believe that supplemental retirement savings and income strategies are necessary for a more satisfying retirement, Social Security continues to provide a basic source of income for those in their retirement years.
Designed to provide old age benefits for workers, as well as other benefits including assistance to victims of industrial accidents, unemployment insurance, and aid to dependent mothers and children, among others, the system we know as Social Security was created by the Social Security Act of 1935.1
While Social Security was created to provide a variety of benefits, most of us think of the retirement benefits associated with the program. To be eligible for retirement benefits, you must be, or have been, in the workforce and paid Social Security taxes on your earnings. Each year you work, you earn credits up to a maximum of four credits per year. In 2013, workers must earn $1,160 of income to receive one credit, so in order to earn all four credits for the year, you must earn a minimum of $4,640. To be eligible to receive benefits, you must have worked for at least ten years, earned at least 40 credits, and be at least 62 years of age. The amount of monthly benefit you’ll receive, however, is based on your earnings history as well as your age when you begin collecting.
While you may be eligible to begin receiving Social Security benefits at age 62, your monthly benefit payment will be less than if you chose to delay collecting benefits until your full retirement age – age 66 or 67 depending on the year you were born – or even until age 70 when you would receive the maximum monthly benefit.
For example, if your full retirement age were 66 with a monthly benefit of $1,000, choosing to begin receiving benefits at 62 will decrease your monthly benefit by 25% to $750 due to the longer period of time that you will likely receive the payments. If, however, you chose to delay payments until age 70, your monthly benefit would increase to $1,320.
According to the Social Security Administration, “If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you chose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.”
So while everyone should, in theory, receive the same amount in benefits if they live to an average life expectancy, should you begin receiving payments earlier, or delay payments in exchange for greater monthly income later on? Unfortunately, the answer isn’t that clear-cut as there are many factors to consider including your health, your family’s history of longevity, as well as any additional sources of income you’ll have available to you in retirement.
If, for example, you believe that your life expectancy is shorter than average, or you need the income currently to make ends meet, you may wish to begin receiving payments sooner rather than later. If, on the other hand, you feel you have longevity on your side and you have adequate alternative sources of income, you may choose to delay receiving payments until your full retirement age or after. Delaying your payments will not only give you a larger income check while you are living, but it may actually benefit your surviving spouse if you were to pass away. By waiting until full retirement age or later, your surviving spouse would receive the same payment that you received provided he or she is of full retirement age. If, however, you chose to take payments early, your surviving spouse would likely receive a reduced monthly benefit.
Still another consideration is the opportunity cost associated with delaying your benefits rather than accepting the smaller monthly payments sooner and investing them for a potentially higher return. If you believe you have the time horizon and risk tolerance required to invest for greater returns, by investing the payments in the financial markets, you may be able to build greater wealth for your future, or to leave as a legacy for your beneficiaries. It’s important to keep in mind, however, that investing in the financial markets involves risk, including the total loss of the principal amount invested.
And what if you wish to continue working while collecting benefits? At full retirement age, you are eligible to earn unlimited income and still receive your full benefit payment, whereas those who begin collecting prior to full retirement age may see their benefits reduced if they exceed certain income limits; for 2013, that limit stands at $15,120. If your benefits are decreased due to employment, however, the Social Security Administration will recalculate your benefit amount once you reach full retirement age to give you credit for any months in which your benefits were reduced because of employment earnings.
Deciding when to begin receiving Social Security retirement benefits can be complicated as there are many variables to consider. As you near retirement, or age 62 when you become eligible for benefits, please contact us and we’ll be happy to assist you in determining a time and age that may be appropriate for you to begin receiving your benefits. Together, we can explore your current and future income needs, your sources of retirement income, as well as the pros and cons associated with beginning your payments at various ages.
1 http://www.archives.gov/historical-docs/document.html?doc=14&title.raw=Social Security Act
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Joshua Farmer is a Registered Representative with, and securities are offered through LPL Financial member FINRA/SIPC. Neither Brookstone Wealth Management nor LPL Financial provide tax or legal advice. Securities and financial planning services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.