free for everyone). Withdrawals from (non-Roth) Individual Retirement Accounts will surely have tax implications. But some research has shown that withdrawing more up front may reduce the tax bite later. Check your situation with an expert.
Family income: Is your spouse eligible for Social Security based on his or her work record? This increases your options. Just know that your total income may affect whether your Social Security benefits are subject to income tax, how much, and whether it makes sense to delay claiming. (See Chapter 13 for a discussion of income tax rules and Social Security, including provisional income.)
Your investments: Consider reasonable rates of return, including your appetite for risk, in weighing the pros and cons of delaying a claim for Social Security. It’s extremely difficult to beat Social Security’s guaranteed returns.
Finally, a note of caution (and common sense): If your nest egg is modest, the strategy of withdrawing savings to delay Social Security may be unwise, because it’s important to have a cushion. Be realistic when calculating how much of a cushion you need.
Looking at Life Expectancy When You Claim Benefits
When figuring out how much to reduce people’s benefits if they take the benefits early, the SSA considered average longevity. But you could live a lot longer than average — and that makes your decision on when to claim benefits that much more important.
No one can predict exactly how long you’ll live. You should also consider how old your parents lived to be and your personal health, including chronic conditions that may shorten your life span.
www.livingto100.com and click on “Take the Calculator” or take the Longevity Test at www.bluezones.com, and you’ll be given an estimate. The Longevity Illustrator, developed by the American Academy of Actuaries and the Society of Actuaries, highlights how long you might live at different ages of retirement; visit www.longevityillustrator.org.
In the following sections, I cover two topics related to longevity and Social Security: completing a break-even analysis and handling the possibility of exceeding your projected life expectancy. Neither is as complicated as it sounds.
Doing a break-even analysis: The payoff from different retirement dates
A break-even analysis compares what you get in your lifetime if you pick different dates to collect Social Security. It’s a way to estimate your total payoff from retiring at an earlier date (with reduced monthly payments) and retiring at a later date (with higher monthly payments). This approach gets some criticism, because it can lead to a costly decision if you end up living longer than expected. Factors such as your health and other financial resources also should be weighed in deciding when it makes the most sense to claim retirement benefits.
But I also know that many people care — understandably! — how much Social Security they may get in a lifetime. In general, if you die before reaching the break-even age, and you started collecting benefits at the earlier date, you come out ahead. If you live beyond your break-even age but started benefits at the later date, you also come out ahead, because those bigger payments add up over time. Where you lose out is if you die before reaching the break-even age (and you started collecting larger benefits at the later date) or if you die after your break-even age (and you started smaller benefits at the earlier date).
The break-even approach is a common tool recommended by financial planners, and it can provide perspective. But it’s just one consideration. The more you care about how your benefits add up over a lifetime, the greater weight you may give a break-even calculation. The more you care about ending up with the biggest monthly benefit, the greater weight you may give to delaying your claim for Social Security.
1 Determine your full retirement age (refer to Table 3-1).For example, say your full retirement age is 66.
2 Determine your full retirement benefit at that retirement age by going to www.ssa.gov/estimator.For example, say your full retirement benefit at 66 is $1,500 per month. (Note: The estimator assumes you keep working until age 66.)
3 Determine your benefit at 62 by going to www.ssa.gov/estimator.In this example, if you claim benefits at 62, your monthly payment is $1,125.
4 Figure out how much you would take home in the 48 months between age 62 and your full retirement age (66) if you start collecting at age 62.In this example, you’re taking home $1,125 per month, and you’re doing that for 48 months, so multiplying $1,125 by 48 months gives you $54,000.
5 Now figure out how many months you would have to survive beyond age 66 in order to break even.In this example, the difference in monthly payments taken at age 62 ($1,125 per month) and 66 ($1,500 per month) is $375. So, divide the amount from Step 4 ($54,000, in this example) by the difference in monthly payments ($375, in this example), and you get the number of months you’d have to survive beyond age 66 in order to break even (in this case, 144 months, or 12 years). So, in this example, if you live past age 78, you come out ahead by starting your benefits at the full retirement age of 66.
If you’re comparing retirement at 62 with full retirement at 66, your break-even age is typically around 77 or 78. In other words, if you die earlier, you could end up with more money by claiming early retirement benefits. If you live longer, you could be better off taking your benefits at 66.
If you’re comparing full retirement at 66 with delayed retirement at 70, your break-even age is typically several months after your 82nd birthday. In other words, if you die before 82 or so, you could end up with more money by beginning benefits at 66. If you live past 82, you could be better off delaying your retirement benefits until you turn 70.
Considering what’ll happen if you live longer than you expect
Half the people in any given age group will exceed their life expectancy, in some cases by a lot. Does longevity run in your
