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Know When to Say "When"!

Know When to Say "When"!

People turn to financial advisors for a variety of reasons, but the leading reason is to answer their most pressing question: “when can I retire?”.

Federal Retirement

The answer can be determined by completing a financial plan. Using modest assumptions, a plan and the cash flow study it generates can help clarify that vague question. While savings, pensions and qualified plans such as 401(k), TSP & 403(b)’s are good sources of income, Social Security (SS) benefits provide an important retirement income foundation.

Social Security benefits:

Social Security is unique in the planning process in that they increase with a Cost of Living Adjustment (COLA) annually, can be accessed as early as age 62, and can be deferred to as late as 70 years of age. According to a Center for Retirement Research at Boston College analysis of Social Security Administration data, 48 percent of women and 42 percent of men signed up for Social Security at age 62 in 2013. While the reasons vary for taking Social Security early, the ramifications are significant and permanent. For example, if you apply for SS at age 62 and your Full Retirement Age (FRA) is 66, your benefit is reduced by 25%, permanently. I find percentages lack impact, so let’s run some numbers: If your benefit is $2,000 per month at FRA, taking SS at age 62 results in a monthly benefit of $1,500. Each year you delay taking SS, the reduction declines (20% at age 63, 13.3% at age 64, and 6.7% at age 65). An on the flip side, if you defer SS past your FRA, you receive an 8% increase each year to age 70. Let’s do the math again: if your monthly benefit at FRA is $2,000 and you defer to age 70, the multiplier is 132%, increasing the SS benefit to $2,640. Regardless of when you begin taking your SS benefit, it is guaranteed by the U.S. Government and has a Cost of Living Adjustment (COLA). This is a big deal over time! Assuming the historical COLA of 2.6%, the $2,000 monthly benefit example rises to $2,585 in 10 years, $3,342 in 20 years, and $4,320 in 30 years.

Annual Earnings Test: 

In the event you wish to continue working and receiving SS benefits before your FRA, earnings above $17,040 (2018 limit) will have $1 for every $2 earned withheld. This withheld money is not “lost” but included in your benefit beginning at FRA. Therefore, if you will have significant earnings, it may be best to wait until FRA to collect SS benefits.     

Social Security Survivor Benefits:

  • Must be married at least 9 months, except in the case of accidental death
  • To begin survivor benefits, the survivor must be at least 60 years of age, or age 50 if disabled. Survivor benefits taken before FRA will be reduced, as it is for regular retirement benefits.
  • Divorced survivors can claim a benefit providing they were married for at least 10 years and have not re-married before reaching age 60. The exception to the re-marriage rule is if the ensuing marriage has ended.

I encourage you to work with an advisor to help determine when to begin Social Security benefits as it will influence the answer to “When can I retire?”