It’s a story that’s played out hundreds of thousands of times every year. Retirees, eager to begin collecting their monthly Social Security check, start collecting it as soon as they possibly can after retiring. The problem; doing that can be a big mistake that’s extremely costly.
The simple fact is that, even though it’s possible to begin claiming Social Security at the age of 62, not claiming your checks for a few years longer can actually add up to thousands of dollars of extra income, money that will be lost if a person begins collecting right away at 62.
The reason is that a person won’t qualify for all of their earned benefits until they actually reach what’s called their ‘full retirement age’. That’s 66 years old for the average baby boomer and 67 years old for people who were born in 1960 or afterwards.
Checks claimed when a person is just 62 years old are actually 25% less than what they would get if they waited until they reached their full retirement age. Even more, if a person waits longer their annual benefits will increase by 8% for each and every year that they wait up until the time they reach the age of 70.
As an example let’s take Tom. Tom is currently earning $55,000 a year and, if he retires and start collecting Social Security at 62, he’ll receive approximately $15,400 per year. If Tom waits until he reaches 66 however, he would receive approximately $20,500 per year and, if he’s able to hold off until the age of 70, his yearly benefits would jump to $27,000 a year!
That’s a very large difference that can really add up over a person’s lifetime. For example, if Tom reaches the ripe old age of 95 his cumulative Social Security benefits (assuming that he started collecting at age 70) would be roughly $677,000. If, on the other hand, he opted to begin taking his benefits at age 62 he would only receive about $500,000, a difference of $277,000!
Of course waiting until you are 70 years old, or even 66, is not possible for everyone. Realistically, some people may just not live long enough to reap the benefits of waiting and others, due to either health issues, unemployment or other factors, may not be able to actually work and may also not have enough savings to get them through until the benefits increase. Simply put, some people may just not be able to maximize their Social Security benefits by waiting.
For married couples as well as divorced couples who were married for at least a period of 10 years, there are a number of other strategies that should be considered. The fact is, each partner is normally eligible, depending on their circumstances, 43 different kinds of benefits.
- Retired worker benefits. These are benefits that a person accrues during their own working years.
- Spousal benefits. This benefit entitles you to receive half of your spouse’s benefits while they are still alive.
- Survivor benefits. Once you reach your full retirement age these benefits entitle you to your deceased spouses full Social Security benefits.
A great way to increase their annual benefits would be for a couple to coordinate when and how they actually start collecting Social Security. In the majority of cases it makes sense for the spouse who earns less to file first, letting the spouse who earns more money weight as long as possible and accrue more benefits.
Using this strategy results in larger annual benefit checks as well as locking in a higher survivor benefit for the spouse who earns less. Some experts believe that the survivor benefit is important enough that even a spouse who is suffering from health problems should hold off on claiming their benefits until they are the higher earner.
Another strategy is called “file and suspend” and what this does is allow one spouse to receive their spousal benefits while the other spouse delays their Social Security benefits longer in order to get a bigger amount.
A number of online tools are available from the Social Security Administrations Retirement Planner as well as the AARP’s Social Security calculator and a Social Security Benefits Evaluator tool from T Rowe Price. It is highly suggested that you use one of these retirement planners so that you have a very clear idea of where you are and what you need to do to reach your retirement goals.
Retirement planning is something vitally important for all people and, if you have any questions or need help with solutions, please let us know and we’ll get back to you with answers and options ASAP.