Social Security is something that you may not start thinking about until later on in life, but whatever age you are, the more you know about Social Security benefits, the better off you will be when it comes time to retire and start making withdrawals. The earliest age these benefits can start is 62, so if you are nearing this age, it’s time to really start researching options and what will be the best course of action for you and your family. For information and guidance that you can rely on, call a financial advisor to talk through your options.
Myth One: It’s a good idea to start receiving Social Security benefits at age 62.
There are two reasons why people believe that this is good advice.
- If you receive the money right away, you will be able to invest it, and if done successfully, you will have more money down the road.
- The current level may not remain as it is so it’s safer to begin receiving benefits to ensure that you will get as much money as possible.
The truth is that this decision should be made on an individual basis and there is no standard rule for when to begin receiving benefits. Factors that can determine when to start Social Security is if you plan on continuing to work, longevity, and inflation. Essentially, the longer you wait to begin receiving Social Security, the more money you will have until you pass.
Myth Two: You have to wait a certain number of years to break even if you don’t start receiving Social Security early.
“Break even” is an age at which a Social Security income will be same whether you start receiving as early as possible or waiting until a certain age. The myth is that the break even age is 77, however, there is no rule regarding when a break even age is. There are several factors that can determine your break even age:
- Discount rate or time value of money
- Inflation rate
- If the recipient is a working or non-working spouse
Ultimately, the break even age isn’t the best way to determine when to begin receiving Social Security. Typically, if you don’t need the income to support yourself and family, it’s beneficial to wait. Consult with a financial consultant to better understand the break even age and how it relates to you.
Myth Three: By working after receiving Social Security early, you could lose part or all of your benefits.
When you continue to work after receiving benefits early and you earn more than $15,000, your benefits are reduced by $1 for every $2 of income above that amount. Yes, your benefits will be reduced if you are earning an income over a certain amount, but you will still receive benefits. For example, if you earn $20,000 with a difference of $5,000 and your monthly benefits are $9,000, you would still receive $6,500 in benefits ($9,000 – $2,500). In addition, these reductions are deferred and will be credited your account when you reach full retirement age.
Myth Four: You will still contribute to FICA but won’t earn additional Social Security benefits by working after full retirement age.
Workers do contribute to FICA regardless of age, but this will continue to increase your benefits. With every year you work, Social Security recalculates your primary insurance amount.
Myth Five: There isn’t a big enough loss from taxes of benefits to worry about.
Currently, seniors pay taxes on up to 85 percent of benefits. At a 25 percent tax rate on 85 percent of benefits, a benefit of $20,000 a year would be reduced by $4,250 due to taxes. This already sounds like a large amount, but there’s a chance that taxable benefits could move up to 100 percent. Benefits are also paid monthly so it is challenging to plan and leaves little room for flexibility.
Myth Six: Benefits don’t offset inflation
Few people truly understand how the Cost of Living Adjustment (COLA) works. Each year, Social Security makes adjustments to offset inflation based on the Consumer Price Index. This allows an 85-year-old who has been receiving benefits for 20 years to earn more than they had when they first began receiving. Inflation, for those who can’t rely on pensions, is the best way to make the most of retirement income and maximize Social Security benefits.
The Social Security system can be incredibly overwhelming and is best understood when looked at on a personal basis. From the break even age to taxes, it’s important to understand the details of your benefits, including when the best age to begin receiving, how working after retirement can affect benefits and more. For a personal approach to retirement planning, contact a financial advisor who knows the ins and outs of the Social Security system. At KNR, we take a different approach to financial planning. Call us today to learn more.