Investing for your retirement can require decades of planning, but perhaps no question is more important to your financial well-being in your golden years than when you choose to begin taking your Social Security benefits.
The maximum benefit a full-retirement-age retiree can receive from Social Security as of 2014 is $2,642 per month, or $31,700 per year, and while that may not sound like a lot on the surface, the Social Security Administration estimates that Social Security benefits represent 38% of the annual income of the elderly. In other words, Social Security income tends to provide a substantial chunk of Americans' income later in life, so making the right call on when to take your benefits is crucial to being comfortable in your golden years.
The conundrum: Take your benefits now or later?
The reason this isn't such a cut-and-dried decision is that no two people are on identical financial paths, and there are pros and cons to both taking your distributions early and waiting as long as possible.
For example, eligible Americans can begin taking Social Security income as early as age 62 (or earlier if they qualify for disability benefits, survivor benefits, or retired worker benefits based on someone else's income), but they'll receive a lower monthly payment than they would if they waited. According to the SSA, with each year eligible citizens wait to take their benefits up until age 70, their benefit increases by about 8%. The benefit difference between claiming your benefit at age 62 and waiting until age 70 can be a mammoth 76%!
Of course, taking your benefits early as opposed to waiting can give retirees access to their benefits much sooner. For those without a large amount of retirement savings, this income can be a lifesaver.
Conversely, waiting until age 70 would give eligible retirees a much larger payout that, if they lived to be 100 years old, could result in a lifetime Social Security income boost of nearly 40% compared to taking benefits at age 62. Additionally, people are living longer than ever, so as life expectancies grow, the allure of the beefier payout that comes with waiting continues to look more attractive.
On the flip side, waiting until age 70 to take your Social Security income simply isn't possible for low-income individuals. Besides -- and I'm playing devil's advocate, here -- unless you feel confident you'll live past 80 years old, waiting until age 70 to take your benefits doesn't make sense.
The Social Security decision you might regret
With this conundrum in mind, Harris Interactive, on behalf of Nationwide, recently polled more than 900 retirees and persons who were within 10 years of retirement and discovered that a good many retirees regretted their decision to take their disbursement early.
According to the statistics, respondents who took their Social Security benefits early received an average of $1,190 per month, those who began at full retirement age received an average of $1,506 per month, and those who waited until about age 70 received an average of $1,924 per month. Cumulatively, 38% of respondents told Harris Interactive that they regretted not waiting longer to take their disbursement.
The primary income concern these respondents cited was growing healthcare costs. Based on the data from this study, a healthy middle-income couple retiring at full retirement age in 2015 will see 69% of their benefits disappear because of rising healthcare costs. Projections show that in a decade, healthcare costs will engulf 98% of this couple's annual Social Security benefits, and in 20 years, healthcare counts will amount to 127% of their annual Social Security benefits. And yet three-quarters of Americans expect Social Security income to be their primary source of funding for out-of-pocket healthcare costs.
Breaking the cycle
How can Americans avoid this regret? Nationwide's survey would suggest that the answer involves seeking financial assistance. Based on its study, a third of retirees who noted that healthcare costs kept them from living the retirement they wanted didn't have a financial advisor, compared to just 13% who said they did have a financial advisor.
Furthermore, retirees without a financial advisor were more than twice as likely to be disappointed with their monthly Social Security payment than those who did have an advisor.
While I couldn't agree more that seeking out multiple perspectives is a great idea, I also firmly believe that you can remain in control of your financial future by following a few basic steps.
First, you need to be smart with your money now and have a monthly budget. With a better understanding of how much money comes in and goes out on a monthly basis, you'll better be able to save for your retirement, and you'll likely be able to wait until full retirement age, or perhaps even age 70, to claim Social Security benefits.
Secondly, it pays to start thinking about investing early. There is no wrong time to start investing for your retirement, though the earlier, the better: Time is your ally, and the longer you can allow time to work in your favor and compound your gains, the better position you'll be in when you do retire. If you can comfortably live off of your IRA, 401(k), or other retirement plan funds through age 70, then waiting to take your Social Security benefits could prove to be a smart move.
Lastly, remember that your financial future comes first. This past summer, we looked at one of the most common money mistakes made by retirees, which is financially supporting family and friends when they don't have the spare funds to do so. This doesn't mean giving the people you love the cold shoulder, but it does mean putting your own financial future in the foreground so things like medical costs don't become a problem once you hit age 62.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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