As the baby boomers become eligible for Social Security benefits, many are trying to decide if it is best to take the benefit immediately or to wait and let it continue to grow. There are many factors to consider, some of which are current cash flow needs, maybe the potential for payback of benefits, as well as the tax effects. Click the orange circle to listen in to this podcast episode.

WHEN ARE PEOPLE ELIGIBLE TO TAKE SOCIAL SECURITY?

  • People can begin to take Social Security at age 62
  • Can delay it until age 70
  • Each year that the benefit is delayed the monthly amount increases
  • If you take it at age 62 the benefit is only 75% of the benefit at age 70
    • Monthly benefit of $2,000 at age 70 – worth $1,500 at age 62
    • Lifetime decision
  • Breakeven for 70 vs 62 is about 80 years old

In summary, I believe this is pretty common knowledge, but people are eligible to begin taking Social Security at age 62, but they can delay it until age 70. Each year that a person delays taking social security, that monthly amount increases. For example, if you take Social Security at age 62 your benefit is only 75% of what you would get if you were to wait until age 70. Therefore, if you were allowed a $1,500 benefit at age 62, if you would have waited until the age of 70 that monthly benefit would have actually been $2,000/month. So what you are doing now between the ages of 62-70 is you are making lifetime decisions. Let’s say you decide to take it out at 62 rather than wait until you are 70. You say – what is my break-even? Your break-even is about 80 years old, and that break-even means that the amount you missed by not taking it from age 62-70, and the greater benefit that you received at 70, you are going to get that cash back by about the time you turn 80. Therefore, any time after 80 it would benefit you to take it out later.

WHAT ARE THE DRAWBACKS OF TAKING SOCIAL SECURITY AT AGE 62?

We talked about it a little bit, but it’s that lower lifetime benefit. You can get a 25% cut on your benefits just by taking it out early. The other potential is payback. Most people are aware of when their full retirement age is. Full retirement is when you can earn as much as you want and your Social Security is not effected. For 2018 that amount is 66 years old, but it goes up to 67 in future years. If you take Social Security at 62, between the age of 62 and 66, you can only earn $17,040 or so per year ($1,420 per month) before your Social Security benefits get effected, and that is based off of wages and business income. That is what is considered earned income. Not IRA’s, pensions, rental income, or investment income, etc. If you earn during that period of time more than $17,000/year, your benefits are actually reduced $1 for every $2 that you are over that limit.

HOW DO PEOPLE MAKE THE CHOICE?

To be perfectly honest, most people make it based on their cash flow. If they need it at 62 they are going to take it at 62. My suggestion is to try not to fall into that trap of saying that you absolutely need to take it at age 62. If you decide not to take it at 62 you can still take it at 63, 64, 65, etc. I’ve seen it where people have taken it at 62, and then they have to limit their income. Therefore, even though they may want to work more, they’ve kind of painted themselves into a box and now they can’t work anymore or they will have to pay back some of their benefits. Taking Social Security or delaying it is a very complicated decision. Making an educated decision based on the facts and circumstances is critical. That’s why I suggest that you talk to your local Social Security office or your accountant.

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Corenne Gutierrez
I joined Hawkins Ash CPAs in 2011. As the Firm's marketing manager, I develop and deploy strategic marketing and communications plans to fulfill the marketing goals of the Firm as a whole, each office and business line.

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