Last Week’s Question of the Week: If you separate from service from your company at age 55 and take money from your 401k/403b account, you will be able to avoid the 10% early withdrawal penalty. True or False?
HOST: Obviously when you begin discussing future retirement income, I assume Social Security is probably at the top of the list. Today you are discussing whether it makes sense to take your Social Security benefit early or to wait till a later age. What do we need to know?
KLAAS FINANCIAL: Yes, Social Security tends to be at the top of the list as we look at retirement planning since it will likely be part of everyone’s future income, and for some perhaps their only income.
There are currently 70 million people receiving Social Security benefits! Of those, over 56 million are retirees.
Please go to www.ssa.gov to look at your future Social Security benefit if you haven’t already done so. Set up a login to view your own account.
How Soon Should You Take Your Benefit? There is a difference between when you can first take your benefit and when you take it at your full retirement age:
- Full Retirement Age= FRA: Born between 1943-1954, your full retirement age is 66 yrs., for those born between 1955 and 1959 your full retirement age is 66 plus some months. After 1960, it is age 67.
- Taking Benefits Early: You can choose to collect your own benefit starting at age 62 or anytime up until you’re 70. Those who collect early get a smaller monthly payout because they usually collect benefits over a longer period than those who wait.
- Best Time to Collect: It’s generally advisable to wait at least until you’ve reached full retirement age to start collecting Social Security because the monthly benefit is so much higher. For example, if you were born in 1955, your full retirement age is 66 years and 2 months. That would be the age at which you can collect 100% of your benefit! If you wait to collect your Social Security benefit until your Full Retirement Age, your benefit will be higher than if you collected early at age 62.
- Another Choice: Delay your retirement past your full retirement age: Social Security benefits are increased a certain percentage (depending on your date of birth) if you delay receiving benefits until after your full retirement age. Delayed Retirement Credits (DRC) can allow your benefit to increase up to 8% per year until you start taking benefits, or until you reach age 70. Therefore, there’s almost no reason to not pull once you reach age 70.
HOST: How will my Social Security benefit be determined? And can it ever increase?
KLAAS FINANCIAL: Excellent question. Your Social Security payment is figured using a complex calculation based on a 35-year average of your covered wages of your highest years. Each year’s wages are adjusted for inflation before being averaged.
You are eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70. Cost-of-living increases to your benefit beginning with the year you reach 62, and up to the year you start receiving benefits. The cost of living adjustment for Social Security for 2021 is 1.3%. Federal benefit rates increase when the cost-of-living rises, as measured by the Department of Labor’s Consumer Price Index (CPI-W). If you’re a government worker with a pension, a different formula is applied to your average indexed monthly earnings.
HOST: So how do you know what age is right for yourself? And can our full retirement age change in the future?
KLAAS FINANCIAL: It depends. We need to look at one’s other sources of income, including spousal benefits at the same time. It is a little bit of a gamble either way. And yes, it is likely that over time the full retirement age will be adjusted.
Break-even Point: For example, the break-even point for someone who earned the inflation-adjusted equivalent of $70,000 per year for 35 years is about age 80. If this person waits until 70 to claim Social Security and lives until at least age 90, he’ll accumulate almost $162,000 more in benefits than he would if he had claimed at 62. But there’s a possibility of losing the bet and getting nothing.
What is the actual reduction in benefits by taking your benefit early?
If your full retirement age is 66 years and 2 months, and you start receiving retirement benefits at:
62; you will get only 74.2% of the monthly benefit.
65; you will get 92.2% of the benefit.
Even though we understand that your benefit will go up if you wait: 62 yrs. is still by far the most popular age for people to claim their Social Security, according to the government’s most recent data.
HOST: How many credits do you need to qualify for even getting Social Security benefits?
KLAAS FINANCIAL: Credits are the “building blocks” Social Security uses to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefit. For most people, the minimum number is 40 credits. If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record. If you return to work later on, more credits will be added. No benefits can be paid if you do not have enough credits.
If you do not have at least 40 credits, you are not currently entitled to a retirement benefit, but you may become entitled with additional work. Go to the www.ssa.gov website and read their publication, “How You Earn Credits,” for more information. Also, if you are not entitled to retirement benefits based on your own work record, you may still be entitled to benefits on the work record of a current or divorced spouse. For more information on this you can read a Survivors Benefits or Spouse Benefits page on their website. They also have a variety of calculators you can use to help you plan better.
To qualify for spouse’s benefits, you must be:
- At least 62 years of age; or any age if you are caring for a child who is entitled to receive benefits on your spouse’s record who is younger than age 16 or disabled.
- If you start receiving benefits as a spouse at your full retirement age, you will get 50% of the monthly benefit your spouse would receive if their benefits started at full retirement age.
- Your benefit will be permanently reduced, if you start receiving benefits at an earlier age.
Widow or Widower Benefits:
- A widow or widower can start collecting Social Security benefits based on their own earnings record, then switch later to survivors’ benefits. Or, they can begin with survivors’ benefits and later switch to benefits based on their own earnings record — even if they are filing before full retirement age.
- If an ex-spouse dies, you may be able to receive benefits similar to a widow or widower. If you are at least 60, the marriage lasted at least 10 years and you didn’t remarry before age 60, you’ll most likely be able to collect your late spouse’s benefit.
HOST: Mark from our Money in Motion Listener Corner asks: How often can I add money into my Roth IRA? Is it only once per year?
KLAAS FINANCIAL: Mark, assuming you have earned income, you can add money to a Roth IRA any time during the year, but remember that you are limited to a maximum contribution amount for every tax year. Currently that limit for both 2020 and 2021 sits at $6000 if you are under 50, or $7000 if you are over 50. You have until April 15th of this year to add money in for the 2020 tax year.
This Week’s Question of the Week: If you wait to collect your Social Security benefit until your Full Retirement Age, will your benefit be higher or lower than if you collected at age 62?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.