* Based on a $1,000 primary insurance amount
Recognizing the Potential Payoff of Working Later in Life
Suppose you’re approaching 62, so you’re still years away from full retirement age. You’re still on the job, and you like it that way. Maybe your employer’s health plan is cheaper than any healthcare coverage you could get on your own, because you’re still too young for Medicare. Maybe you’re making good money. If so, you may be increasing your future Social Security benefit, if your current earnings are higher than some of the earlier years on your record.
At 62, you could face a decision on whether to work and start to collect retirement benefits. You already know that Social Security pays less each month for early retirement. But there’s another consideration: You’re likely to smack right into the earnings limit.
The earnings limit is a potential issue for individuals who claim retirement benefits before their full retirement age (see Chapter 13 for a more complete discussion). What it means is that if you begin Social Security while still earning money and you haven’t reached full retirement age, the SSA will withhold part, or even all, of your benefit if you earn above a certain amount per year. At full retirement age, though, you can say goodbye to the earnings limit. The SSA will raise your payment to give back the money it withheld.
For early retirees, the SSA holds back $1 for every $2 earned above a certain amount ($18,240 in 2020). The limit changes for the year in which you reach full retirement age. For individuals in this category, the SSA withholds $1 for every $3 earned above a certain limit ($48,600 in 2020). The withholding stops during the month that you reach full retirement age. The earnings limit rises each year to keep up with rising wages.
Putting It All Together: The Right Time to Begin Collecting Benefits
Make sure that you know when you qualify for full benefits, but remember you have broad discretion about when to claim. Refer to Table 3-1.
Know your benefit. By using the Social Security retirement calculators (see “Estimating how much you’ll get each month based on when you retire,” earlier in this chapter), you can quickly get an idea of the benefit you’d receive before, at, and after your full retirement age. Each year you wait to collect beyond your full retirement age will add 8 percent to your benefit. Each year you begin collecting before your full retirement age will reduce it between 5 percent and 7 percent. In other words, the earlier you retire, the less Social Security you get each month. For many people, that’s a powerful argument to hold off claiming benefits.
Be realistic about your life expectancy. If you don’t like to think about how long you’ll live, get over it. Your life expectancy, and the possibility that you may exceed it, should be factors when you make plans for Social Security and retirement in general. Of course, no one knows how long you’ll live. But there’s plenty to consider:Do people in your family tend to live long?How would you grade your own lifestyle in terms of fitness, exercise, diet, and other personal habits that affect health?How healthy are you? Do you suffer from a chronic condition that is likely to shorten your life?Do you have a lot of stress? If so, do you have ways of managing that stress that make you feel better?Do you lug around a lot of anger and worry? If so, can you do anything about it?
Think about all your sources of income and your expenses. Consider your savings, including pensions, 401(k)s, IRAs, and any other investments. Make realistic calculations about how much money you need. Look at several months of statements from your checking account and credit cards to review what you spend on and look for waste, while you’re at it. Ask yourself: Do you have the option to keep on working? Are you physically up to it?
Think about your spouse. If you die first, it could determine how much your spouse gets for the rest of his or her life. Consider your spouse’s life expectancy and financial resources. Does he or she have a chance of living for many more years? If so, what are the household finances (beyond Social Security) to support a long life? Does the spouse have health issues that could cost a lot of money in the future? Husbands should bear in mind that wives typically outlast them by several years, because wives are typically a few years younger and because women have a longer life expectancy than men. Is that the case in your marriage?SOCIAL SECURITY BECOMES MORE IMPORTANT THE OLDER YOU GETYou can’t make the stock market go up or control whether someone will give you a job. You can’t make your house jump in value if the whole neighborhood is sinking. You can’t go back in time and start an early nest egg if you spent like crazy when you were younger. You can’t make your employer keep a pension plan. And you can’t prevent the cost of living from rising.But you do have some influence over the size of your Social Security benefit, based on when you claim it. This matters for a little-recognized reason: The older you become, the more likely you are to depend on Social Security.The more years pass, the more you need Social Security’s protection against inflation, known as the cost-of-living adjustment. This provision is a big deal (even if the adjustment is small some years) because the effect of inflation over time can be drastic. At a rate of 3 percent inflation, the buying power of unprotected income plunges by half over a 20-year period. Even if you’re fortunate enough to get a private pension, it’s probably not shielded against inflation, and rising prices erode it over time.Other resources can boost your retirement security but are far from a sure thing. Earnings from even part-time work may go a long way. But work may become undesirable or physically difficult in later years.
