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Planning When to Take Social Security is Not So Simple

by on April 13, 2014 6:15 AM

Retirement is something people worry about, look forward to and plan for.

In 1965, people lived only 13 years in retirement. In 2013, the average time in retirement was 21 years. Given the life expectancy of women (81 years) and men (76 years), people on average will spend almost 27% of their lives in retirement.

Social Security plays a major role in income for many people during these years. For one in five retirees, Social Security is their only source of income. For one in three retirees, Social Security is 90% of their retirement income and for two out of three retirees Social Security is more than 50% of their retirement income.

Social Security has a higher replacement ratio (replaces more pre-retirement income) for lower income workers. Planning when and how to take Social Security can be an important part of retirement planning. Knowing your options and the long-term effects of claiming benefits at different ages is vital to financial security in retirement.

Let's start with the eligibility and basics of Social Security. To be eligible for Social Security a worker must earn 40 coverage credits. If a worker earns a minimal amount each year ($4,800 in 2014), they earn four quarters of coverage. Thus, a worker who earns at least the minimal amount for ten years will be eligible for worker benefits through Social Security.

Be careful with this ten year period -- this only qualifies someone for Social Security. When figuring a worker's Primary Insurance Amount (PIA, a worker's Social Security Benefit at full retirement) that amount is based on 35 years of highest salary history. If someone has not worked for 35 years (maybe only 20), the years with no income history would add $0 salary into the calculation, thereby lowering the Social Security benefits. Thus working longer and waiting to claim benefits later would be beneficial in this scenario.

There are three key ages that are important to Social Security recipients. At age 62, social security is first available to participants at a reduced rate. At full retirement, claimants get their full PIA amount. This age is determined by the year of birth.

Those born from 1943-1954 can get full retirement at age 66. For birth years from 1955-1959, the full retirement age increases annually by two months. For instance, a person born in 1955 has a full retirement age of 66 and 2 months. Finally, for anyone born in 1960 or later, the full retirement is age 67. The third key age is age 70. At age 70, increases in benefits for social security stop so everyone should claim social security by that age.

When deciding the best age to begin taking Social Security, there are many factors that come into play. The most important thing to remember is that your decision should be made as part of an overall retirement income plan. Taking Social Security as soon as possible or when you retire may not be the best course of action.

Social Security can continue to grow until age 70. Taking Social Security at age 62 reduces the benefit by 25% to 30% for the rest of your life. Waiting to claim Social Security after full retirement up until seventy years of age increases the benefit by about 7% a year.

There are other benefits available for retirees through Social Security. If a couple is married for at least ten years, your mate is eligible for spousal benefits. This can be useful even if both spouses work. I recently worked through a retirement scenario with a client and suggested the spouse claim their spousal benefits at full retirement and wait to take their worker's benefit at 70, thus allowing their benefit to grow for the next four years.

Participants only have this choice at their full retirement age. If a person claims their Social Security before full retirement, they will receive the higher of their two benefits (spousal or worker) at the discounted rate from their full PIA. If a spouse wants spousal benefits but the worker spouse would prefer to wait, the worker can, at full retirement, 'file and suspend' and their spouse can claim their benefits while the worker's benefits continue to grow.

Other benefits that can be used in retirement are the survivors benefit and the dependent benefit. Given the numerous benefits, details involved and how they can be used in tandem takes planning and knowledge so definitely talk to an expert to better plan for your specific situation. The Social Security earnings test and taxes also need to be understood to create the best outcome.

Of course, Social Security is not static and given the underfunding worries that exist, changes in the options and earnings tests are expected at some point. However, if you are close to retirement or the opportunity to take your Social Security benefits, it's a good idea to plan the best course of action.

Taking your Social Security at the optimal time has been proven as the best longevity 'insurance'. Which means if you live longer than average, it is beneficial to have waited to take your Social Security later.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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