This is the second post about three important retirement-age questions: When should I apply for Medicare? When should I start drawing Social Security retirement benefits? Should I give my spouse a survivor benefit when I apply for my pension?
Full retirement age (FRA) is the age at which a person is eligible to draw his or her full retirement benefit (FRB). FRB is 100% of what the Social Security Administration considers a wage earner’s entitlement based on Social Security wages. Sixty five was the magic age for many years, but for retirees born after January 2, 1938, FRA for Social Security has been increasing in stages. Wage earners retiring now were born between 1943 and 1954 and have an FRA of 66.
Wage earners may draw an early benefit at age 62 and widows and widowers may begin at age 60. However, the benefits are significantly reduced. Furthermore, persons who begin drawing before FRA may have their benefits reduced if they have substantial earnings. Some people cannot afford to wait to draw a benefit, but it is usually better for full-time employees to put off applying for Social Security retirement benefits until they reach FRA. After than age, Social Security benefits are not reduced for earnings.
The FRB is not the largest check a retiree could get from Social Security, however. By waiting past age 66 to draw the benefit, the FRB is increased by 8% per year of delay. Waiting to age 70 will increase the FRB by 32%. After age 70, there is no further increase based on delay.
Some attorneys and financial planners recommend waiting past FRA to draw Social Security. They argue that drawing later is warranted if the wage earner and spouse are healthy and come from families with greater than average longevity.
That is generally not good advice. It is possible to construct a hypothetical situation in which it is financially beneficial to wait beyond FRA if there are high and increasing wages and spousal benefits are factored in. However, when the household income from employment is stagnant or decreasing, it is better for you to start taking benefits at FRA. After that point, you are just betting that you will live significantly past your actuarial life expectancy. Anything less and you lose money. For example, if you wait a year past FRT, you will need to beat the actuarial life expectancy by several years just to break even.
Assume that a male wage earner at 66 has a 16-year life expectancy. SSA uses actuarial assumptions that will give the wage earner the same total benefit over his life expectancy whether he begins to take the benefit at 66 or 70. If the wage earner has an FRB of $18,000 per year, by waiting to age 70 he puts himself $72,000 plus cost-of-living adjustments in the hole! He will not break even for the next 12 years and will not come out ahead for several more years. If he does not greatly exceed his actuarial life expectancy, he has lost money.
Even if you do not need the funds and your health is good, take the money. It does not pay to wait beyond full retirement age.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com ©2014 John B. Payne, Attorney