Last Week’s Question of the Week: How much debt does the average American between the ages of 65-74 have? ANSWER: 65–74: $66,000.
HOST: A big decision a lot of retirees have when they are considering retirement is the WHEN they should begin their Social Security benefit. Today you are going to discuss perhaps the WHY some people may want to WAIT?
KLAAS FINANCIAL: Yes, we always come back to this topic because for many people planning for retirement, this likely will be an important part of their future income.
- WONDERFUL resource for people regarding social security is ssa.gov – Can set up a login to view your own account at any time.
- Most people understand that the earlier they take Social Security, the less they’ll get. But the mechanics of how your full retirement age PIA (PRIMARY INSURANCE AMOUNT) interacts with provisions that reduce early benefits, but increase monthly checks if you take them later, aren’t entirely clear to everyone.
- First of all, the earliest that anyone who qualifies for a social security benefit can begin taking their benefit is the age of 62. If you do decide to collect earlier than your full retirement age, then you will have a reduced amount.
- Born between 1943-1954 – YOUR full retirement age is age 66. Born between 1955-1959, full retirement age is 66 plus some months. Born after 1960, it is age 67.
- Of course, you can choose to take your benefit as early as 62, but you need to remember that your benefit will be reduced. Example: if you assume that your full retirement age is 66 and you start receiving retirement benefits at age 62, you will only receive 75% of the monthly benefit because you will be getting benefits for an additional 48 months. At age 65, you will get 93.3% of the monthly benefit because you will be getting benefits for an additional 12 months.
HOST: When is the right time to collect? How can I get the highest benefit?
KLAAS FINANCIAL: The first question is, how long can I afford to wait? You will need to determine how much income your other investments and retirement accounts (IRAs, pensions, after tax accounts) may bring you on a yearly basis, and whether you have any part-time working income, and then you can figure out the best time for you to begin taking your social security benefit.
If you want to get the biggest possible monthly benefits from Social Security, you can take advantage of Delayed Retirement Credits. DRC’s come into place when you choose to delay your social security benefit past your full retirement age, benefits are increased up to 8% per year, until you start taking benefits, or until you reach age 70. Therefore, almost NO reason to NOT pull once reach age 70.
An interesting fact to note is that based on a study from 2013 (Center for Retirement Research at Boston College), at least 60% of retirees sign up for benefits before reaching their full retirement age.
HOST: So how can I determine what amount I would receive if I wait till 70?
KLAAS FINANCIAL: In order to figure out how big your delayed retirement credit will be, you’ll need to follow this four-step process:
- Figure out how much your primary insurance amount would be. That’s the amount you would receive if you took your Social Security benefits right at your full retirement age.
- Look up what your full retirement age is.
- Decide how many months after your full retirement age you intend to start taking Social Security.
- For each month that you wait after full retirement age, increase your primary insurance amount by two-thirds of a percent.
An example can help you see how this works:
Say your full retirement age is 66 and your earnings history would produce a $1,500 primary insurance amount. If you take Social Security right at 66, you’ll get $1,500 monthly.
But say you want to wait until you turn 68. In that case, you’d take the number of months after your full retirement age, which is 24 months. Multiply 24 by two-thirds of a percent, and you’ll get 16%.
Doing the math, 16% of $1,500 is $240, so your delayed retirement credit will be $240, and you’ll get a total of $1,740 per month — valued in today’s dollars and subject to future inflation — if you wait two years before claiming your benefits. Wait until the maximum age of 70 — beyond which no further delayed retirement credits are available — and you’d get a 32% bump, to $1,980 per month.
HOST: What else do I need to know about DRC’s?
KLAAS FINANCIAL: IMPORTANT NOTE: Delayed retirement credits are available only to worker benefits under Social Security. Spousal benefits don’t qualify, so there’s no reason for a spouse intending to receive only spousal benefits to wait beyond full retirement age before making a claim and getting those monthly payments started. However, if a spouse could claim either spousal benefits or work benefits on the spouse’s own earnings history, then there could be reasons to hold off filing beyond full retirement age under current law.
There will be fewer delayed retirement credits will be available in the future. Because the largest number of delayed retirement credits for those who are reaching full retirement age now is 48 months, or a 32% increase to benefit amounts. That’s because the age beyond which new delayed retirement credits are no longer available is set at 70, regardless of what the full retirement age is.
If your full retirement age is 67, then the largest number of credits you can get is 36 months, because that’s the length of time between full retirement age and reaching age 70. That makes the maximum boost to your benefits 24% instead of 32%,
So, what’s the right thing to do? Retirees generally still should think about the ideal time to claim their benefits and consider waiting if they can. The net impact still makes it smart to wait if you want your monthly check to be as big as it can be.
Figuring out when to take Social Security has personal aspects to it, but you’ll also want to consider the financial implications. Understanding the ins and outs of delayed retirement credits will help you make a smarter choice.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.
