SHOW NOTES: 2019-06-20 MiM

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Last Week’s Question of the Week: In retirement, are most distributions from pensions federally taxable? Yes or No…

ANSWER: Yes, most are federally taxable. On a state level this can vary.

HOST: When we discuss our future retirement income, obviously Social Security for most people will be an important component of that, so how much does it really matter as to when we begin taking our benefit?

KLAAS FINANCIAL: Well that is a great question, and we like to ask a few more questions:

  • How likely are you to live and enjoy a long retirement? FACT: The average length of retirement in the United States is 18 years.
  • How long are you or your spouse probably going to live? FACT: Life expectancy for men in the US is currently around 76, and women is around 81. Those number increase if you are already 65 years old, 84 for men, 86 for women.
  • What if your retirement begins sooner and lasts longer and what if you or your spouse live longer than you planned? Will your savings be enough to support a 30-year retirement?

So, the bottom line is if you have any worries about your own financial security for your retirement, you probably need to consider thinking about age 70 as the new 65 when talking about Social Security.

You need to shift the way you think about your future benefit, and remember it is not about when is the earliest that you can take your benefit, but when is the best time financially to be collecting your benefit.
Bottom line, financially speaking, you should hardly ever begin taking your Social Security at age 62, which is the earliest you can first elect to receive it.

This is especially true if you’re single or the higher earner in your marriage. If you start taking it at 62, your monthly payout will be 25 to 30 percent less than what you would get by waiting until your full retirement age (66 or 67, depending on the year you were born). Plus, if you take Social Security early and you die before your spouse, his or her survivors’ benefit will be lower, too.

A better plan is if you wait until age 70. Every year that you wait between your normal retirement age and 70, Social Security will add a guaranteed 8 percent to your eventual monthly payout. That’s right, 8% which is guaranteed. Today it is hard to find a bank account that pays 2 percent annually. If you wait, the deal from Social Security is one of the best risk-free ways to help with increasing your future income. Waiting to claim benefits can be a way of gaining a measure of protection against your risk of longevity.

HOST: What does Social Security mean when they are telling us when our full retirement age is? And how does our full retirement age play into the 8% increase?

KLAAS FINANCIAL: If you haven’t gone to the website at yet, please do so. It is a WONDERFUL resource for people regarding social security. You can set up a login to view your own account at any time and figure out what your full retirement age is, and what benefit will be applicable to you. Full Retirement Age (FRA) is not the same age for everyone, as it is determined by your day and year of birth. It is the age at which you are eligible to receive your “full” amount of Social Security benefits.

Trying to keep this simple, an example would be that if you were born between 1943 and 1954, according to Social Security your full retirement age is 66. (If you were born between 1955 and 1959, full retirement age is 66 plus some months. After 1960, age 67.)

If you start receiving benefits at age 66 you will get 100 percent of your monthly benefit. If you delay receiving retirement benefits until after your full retirement age, your monthly benefit continues to increase. These are called Delayed Retirement Credits (DRCs).

The increase is based on your date of birth and the number of months you delay the start of your retirement benefits. If you start receiving retirement benefits at:

  • Age 67 — you’ll get 108% of the monthly benefit because you delayed getting benefits for 12 months.
  • Age 70 — you’ll get 132% of the monthly benefit because you delayed getting benefits for 48 months.

When you reach age 70, your monthly benefit stops increasing even if you continue to delay taking benefits. Therefore, there’s almost NO reason to not start taking SS benefits once you reach age 70. Of course, you can choose to take your benefit as early as 62, but you need to remember that your benefit will be reduced.

HOST: When is the right time to collect my social security? Is waiting always the right answer?

KLAAS FINANCIAL: The first question is, how long can you 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 from your or a spouse.

If you want to get the biggest possible monthly benefits from Social Security, you can take advantage of Delayed Retirement Credits which is the 8% credit we just spoke about. Waiting longer can increase the amount you receive over your lifetime, but what’s right for you may be very different from what’s right for me. You’ve got to consider your health and your family history — how long do people in your family tend to live, for instance? If your parents and grandparents didn’t live past 75, it could make sense to claim your benefits as early as age 62.

Also think about your goals and the kind of lifestyle you want in retirement, as well as your immediate financial needs. A family caregiving situation could arise that requires your attention and financial support. If, after you’ve considered all the factors, you feel that claiming your benefits before age 70 makes sense for you, you shouldn’t feel bad about not waiting. Social Security was conceived as a safety net. And it’s only useful if you use it when you need it.

HOST: Should women think of Social Security benefits differently?

KLAAS FINANCIAL: Perhaps, because we know that women typically live longer than men, and those extra years can make it especially important to find ways to boost income. Waiting longer to claim Social Security benefits is one strategy that can help do that.

An example would be a single woman who, instead of claiming benefits at 62, waits until 70 by waiting those extra eight years increases the amount she’ll get in her lifetime by 18%, on average, according to research completed by a Stanford economist. For a high-income earner, this means about $70,000 of additional lifetime income.

HOST: So, what is the reality: at what age are most Americans retiring today and when are they collecting their social security?

KLAAS FINANCIAL: Reality check time! Yes, there are expectations versus what is reality. While many working Americans today, EXPECT to retire at age 66, up from 63 in 2002, according to a 2018 Gallup poll, most retirees don’t stay on the job nearly that long.

A plan to work longer isn’t the same as being able to remain on the job into your mid- or late-60s. The average retirement age has been 61 since 2011, Gallup found. The lower actual age could be based on positive developments – that people end up having more money and more wherewithal to retire than they expected, or negative developments – that people are laid off, lose their jobs or have worse health than anticipated.

The average retirement age in the United States among currently living retirees was 59.88 years old. 63% of these retirees retired between the ages of 57 and 66. The most common age to retire is 62 years old.

With regards to Social Security benefits, despite the prospects of getting larger payments from Social Security, 62 is still by far the most popular age for people to claim their Social Security, according to the government’s most recent data.

  • FACT: 34% of people claim SS at 62.
  • FACT: 57% of people claim SS before their full retirement age.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.