Social Security Planning: Distributions for an unmarried person
Social Security planning is an often overlooked part of financial planning. This is a potentially costly mistake. Depending on your income level prior to retirement, Social Security retirement benefits will replace as much as 26-56% of your pre-retirement income. Even more startling, for nearly a quarter of married retirees and half of unmarried retirees, Social Security represents 90% or more of their income. The lack of planning is unfortunate, as proper planning could mean a substantial difference in lifetime benefits.
Social Security benefits planning for an unmarried person is less complicated than planning for married couples. However, additional complexity arises in the event that you were previously married (widowed or divorced) or have minor children. We are not considering those factors in this post.
Your options are pretty straightforward. You can take benefits early, starting at age 62. You can begin at Full Retirement Age (known as FRA), which is age 66 if you were born between 1943-1954, age 67 if you were born after 1960 and a sliding scale if you were born between 1955-1959. Last, you can wait until your maximum benefit amount at age 70.
For example, let’s say you were born in 1952. Your full retirement age, which is the age at which you are eligible for full, unreduced benefits, is 66. You’re approaching 62, the earliest age at which you qualify to begin Social Security retirement benefits.
First question: should you begin to take Social Security at age 62?
In most cases, the short answer is no. By taking your retirement benefits early, there are several negative consequences:
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Reduce payout: Your benefits will be approximately 25% less than if you waited until Full Retirement Age. In this example, you would receive $1,500 per month, or $500 less per month than you would if you waited until age 66.
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Working restriction: If you are still working you can earn up to $15,120 without restriction. However for every two dollars that you earn above that amount, $1 will be deducted from your benefits.
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Inflation adjustments: All future inflation adjustments will be based on your initial (lower) benefit amount.
So, considering all the downsides, who should consider starting starting Social Security at age 62? There are three reasons that someone should consider taking Social Security at the earliest possible age:
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You really need the money. All the calculations in the world showing the long term benefit of waiting don’t help you if you really need the money today. Sometimes, circumstances demand that you take benefits early if it’s needed to make ends meet.
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You don’t expect to live very long. The longer you live, the more you benefit by waiting for the higher benefit. However, if you have a shorter life expectancy due to health or other issues, then you should consider taking Social Security early.
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You have a deep distrust of the government. I’m not talking about an ordinary distrust of the government and politicians. I think just about all of us have that in this day and age. I’m talking tin foil hat, black helicopter stuff. If you believe that the government will either just fully renege on the whole Social Security deal or just shut down entirely (not temporarily like we experienced recently), then you should take whatever they’ll give you now before it all goes away.
Question #2: Should you wait until age 70 to begin Social Security?
This easiest way to think about this question is as the reverse of whether or not you begin at age 62. If you don’t need the money at age 66, don’t have any reason to believe that your life expectancy is shorter than average and don’t have extreme views about the government’s sustainability, then you should generally wait until age 70 for the maximum possible payout.
Data:
replacement rates paper: http://www.ssa.gov/policy/docs/ssb/v68n2/v68n2p1.html