When you should take Social Security
By Harriet Edleson
January 15, 2014 5:25 PM
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Knowing when to claim
Social Security benefits can be an integral part of retirement planning.
Though it may be just one source of income, it can be the most
important one, partly because it can continue to grow larger until you
reach age 70. It's also generally taxed at a lower rate than other
sources of retirement income, says Virginia P. Reno, vice president for
income security policy at the National Academy of Social Insurance, a
Washington, D.C.-based research organization.
"Social
Security is unique among pensions because it continues to have a larger
payout for every year that you delay taking it," she says, adding that
when it comes to nest eggs, most Americans ages 55 to 64 have a
relatively small one, so will rely mostly on Social Security during
retirement. The large majority of seniors count on Social Security for
most of their income after age 65, and that has been the case for 30
years, she says.
Of households
ages 55 to 64, 60 percent had retirement accounts with a median value
of $100,000, according to the Federal Reserve Board's Survey of Consumer
Finances. That means half of the accounts have more and half have less.
In addition, 40 percent of 55-to-64-year-olds don't have retirement
accounts. So 70 percent of those ages 55 to 64 had less than $100,000 in
their accounts, Reno says. The most recent data available is from the
2010 Survey of Consumer Finances, and the data was flat between 2007 and
2010; the Federal Reserve Board is working on the 2013 survey now.
If
you are one of the baby boomers who hasn't prepared so well for
retirement, here's how to get the most out of Social Security benefits,
depending on your situation:
If you're married:
If you're married, as you calculate when to claim your Social Security
benefits, think about the future, when one spouse will most likely die
before the other. If both spouses have worked enough to qualify for
their own benefits, it's important to coordinate when each will claim
their benefits. For married couples, it's particularly important for the
higher earner to delay because that amount becomes the survivor benefit
for whoever lives longer, Reno says.
If you are single:
It's critical to max out your benefit by waiting until 70 if you can,
because this may be the only - or major - source of income you'll have
unless you have a pension, a significant amount of money in your 401(k)
plan or you have socked away in excess of $400,000 in retirement savings
in case you live 20 years in retirement, says Mary Hunt, author of "The
Smart Woman's Guide to Planning for Retirement." If you wait until 70
to take your Social Security, and live another 20 years, you'll have a
running start at having enough funds. "Keep in mind that these seriously
rough figures do not allow for inflation or make any attempt to figure
out what taxes will look like years or decades from now," Hunt adds.
If you have an IRA or a 401(k) plan:
Making the transition to retirement - whether you phase out of working
full-time or stop working completely after many years of employment --
isn't necessarily easy. "People have been working and saving all their
lives and can't conceive of taking out money from their IRA," says
Sharon Lacy, financial planning manager for Bedrock Capital Management,
Inc. She cites a 59-year-old man who is still working but can't imagine
contributing to an IRA for years and then withdrawing from it. When
people stop working, they often don't have a plan. In this case,
postpone taking Social Security until 70, and withdraw funds from your
IRA, Lacy says. In this way, "your total taxes for your lifetime are
going to be lower," according to Lacy's calculations. "An IRA is 100
percent taxable but only up to 85 percent of Social Security is
taxable," she adds. If you take Social Security at 70, "you'll have more
money available for your retirement years."
The
key point is Social Security income is not taxed in the same way as IRA
income, says James Mahaney, vice president of strategic initiatives for
Prudential Financial, Inc., and author of the paper, "Innovative
Strategies to Help Maximize Social Security Benefits." You can reduce
your taxes by choosing to collect higher Social Security income and
lower IRA withdrawals when you decide your strategy for taking
retirement income. To do this, claim your Social Security later. If you
take IRA withdrawals first, and delay the start of your Social Security
benefits, you'll take higher lifetime Social Security and lower IRA
withdrawals, Mahaney says.
The
combined income formula determines the taxation of Social Security.
"Social Security income itself is treated on a much more favorable basis
in this formula than income from a regular IRA, 401(k) or pension,"
Mahaney says. "As a result, many retirees will pay lower taxes in
retirement by generating higher amounts of income from Social Security
than from these other types of accounts."
Depending
on your total income, you may not have to pay taxes on your Social
Security income. However, once certain income thresholds are met --
$25,000 for single people and $32,000 for married couples -- up to 50
percent of every Social Security dollar you receive is taxed. If Social
Security pushes your total combined income (as measured by a formula)
above $34,000 for single people and $44,000 for couples, then up to 85
percent of every Social Security dollar you earn can be taxed, Mahaney
says. "The thresholds were set in 1983 and are not indexed for
inflation. As a result, more retirees will face the taxation of benefits
and some retirees, who are not being taxed now, will be down the road,"
he adds.
If you're still working:
If you claim worker, spousal or survivor benefits before your full
retirement age - at 66 or between 66 and 67 for most baby boomers - you
are likely to be subject to the earnings test, says Mahaney. With the
earnings test, if you start your Social Security benefits prior to age
66, during every year leading up to your full retirement age, $1 of your
benefits will be withheld for every $2 you earn above the limit for
that year, which is $15,480 for 2014, Mahaney says. During the year you
reach your full retirement age - 66 for those born between 1943 and 1954
- your benefits are reduced $1 for every $3 you earn above a higher
limit - $41,400 - until the month you reach your full retirement age.
Then, the earnings test disappears.
For
those who have a variety of income sources, it's best to find a
financial advisor or financial planner you can trust to help you make
decisions, Lacy says. Unless you have to take your Social Security early
because you can no longer work and have no other source of income, it's
best to delay taking it as long as you can, she adds. "We think of
Social Security as 'longevity insurance,'" Lacy says.
