When planning for retirement, we believe that identifying the sources of income that may be available to you in retirement is critical to a secure and comfortable retirement. While some may generate income from the wealth they’ve accumulated in their 401(k) plans, others may benefit from the income provided by 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 many 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 2017, workers must earn $1,300 of income to receive one credit, so in order to earn all four credits for the year, you must earn a minimum of $5,200. 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 and two months with a monthly benefit of $1,300, choosing to begin receiving benefits at 62 will decrease your monthly benefit by 25.8% to $964 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 $1,698.
According to the Social Security Administration, whether one chooses to retire early or later, everyone should, in theory, receive about the same amount in benefits over time if they live to an average life expectancy. So, should you begin receiving payments earlier, or delay those 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 and your family’s history of longevity, as well as any additional sources of income you may 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 also of full retirement age. If, however, you choose to take payments early, your surviving spouse will 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 markets involves risk, including the 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 2017, that limit stands at $16,920.
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 best for you to begin receiving your monthly income.
Apella Capital, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, product, or non-investment related content made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Apella Capital or your advisor. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.