How does Social Security fit into your retirement plan?
Posted on 07.26.17
By Jennifer Murphy, CPA, Tax Senior Associate | Family, Executive & Entrepreneur Advisory Services Team
As the number of baby boomers joining the retirement ranks continues to increase, the question of when to begin receiving Social Security becomes more commonly asked of CPAs and investment advisors. This primer covers some of the basic information you should know to help you make an informed decision.
Social Security benefits (benefits) are calculated mainly by reference to the Primary Insurance Amount (PIA) and whether the wage earner is fully insured, but also consider many other factors. In terms of Social Security, the full retirement age is between 66 and 67, depending on when you were born. For those born after 1942 and before 1955, full retirement age is 66. For those born after 1959, full retirement age is 67. For anyone born after 1954 but before 1960 full retirement age falls somewhere between ages 66 and 67.
You may begin taking benefits as early as 62, as late as age 70, or any time in between. Benefits taken before full retirement age will be permanently reduced by a certain percentage of what they would have been had you waited until full retirement age. In 2017, this amounted to a 25 percent reduction. However, anyone born in 1943 or later will receive an 8 percent credit (increase) for each year benefits are delayed after full retirement up until age 70.
Married individuals have additional provisions that allow an otherwise ineligible or uninsured spouse to receive up to 50 percent of the fully insured spouse’s PIA if the insured spouse is receiving benefits. Even if the insured spouse is taking reduced benefits, the uninsured spouse’s benefits will still be 50 percent of the worker’s PIA. If the uninsured spouse is taking early benefits, they will be reduced until reaching full retirement age. If both spouses are insured, then each person may receive a benefit based on their own PIA or 50 percent of the spouse’s - whichever is higher.
When should you begin taking Social Security?
It could be an additional source of cashflow that enables you to retire earlier rather than wait for full retirement age. Perhaps you find yourself underemployed or all together unemployed, in which you case you may not have a choice. Conversely, because medicare does not start until age 65, employer provided health insurance could keep you working longer and allow you to delay benefits. However, if you find you do have a choice as to when to begin taking Social Security, there are some things to consider before making the decision.
Social Security Benefit Scenario 1
If you were to begin taking Social Security at age 62, though you would be permanently receiving a reduced benefit, you would get additional checks for roughly 4 years that you would not have if you waited until full retirement. If you were to wait until full retirement (and receive full benefits) it would take about 11 years to make up for those 4 years of payments that were not received. So, those with shorter life expectancies, might benefit from taking Social Security early. Health considerations notwithstanding, taking Social Security early could provide enough cash flow so that individuals do not need to draw on their other tax-deferred retirement funds, allowing for continued tax-free growth.
Keep in mind though, taking early benefits puts you at a lower starting base for annual inflation adjustments. This means the difference between the early retirement payout and the delayed full retirement payout that would have been received at that time gets larger as each year passes.
Additionally, you will want to take into consideration that if you take early retirement, earnings in excess of $16,920 will reduce benefits by $1 for every $2 earned in the years before full retirement age. The good news is that any benefits withheld in earlier years are not permanently lost. Upon reaching full retirement age, your monthly benefit will increase permanently to account for the months in which benefits were withheld.
Social Security Benefit Scenario 2
For some, delaying retirement until age 66 or 67 will be more beneficial. Waiting until full retirement could give you more time to replace some of your earlier lower earning years with higher wage years as benefit calculations are based on an individual’s highest 35 years of indexed earnings. Replacing the older lower wages with higher near retirement wages can increase not only retirement benefits, but disability and survivor benefits as well.
Social Security Benefit Scenario 3
Finally, delaying Social Security until age 70 might be the best option for some. If you do not need the cash flow, and you have a long life expectancy, you might want to wait and receive the increased benefits that are given to those who delay retirement.
As you can see, there are many factors that go into determining when to begin taking Social Security and there is no one right answer. This article touches upon many of the decision factors, but there are also additional considerations you will want to weigh (particularly for married couples), so we encourage you to speak with your trusted advisor and with the Social Security Administration directly before making any decisions.
Questions on retirement planning? Our Family, Executive & Entrepreneur Advisory Services team will partner with you and your advisors to develop and implement strategies that meet your retirement goals. Contact us. We can help. Email | 804.747.0000
Jennifer Murphy is a Senior Tax Associate with over 18 years of experience in both the public and private accounting sector. Her experience includes audit, tax, and accounting services for business entities and individuals with an emphasis on taxation. She currently serves as a member of the Family, Executive & Entrepreneur Advisory Services Team, a segment of our Taxation Specialty Business Services.