Wednesday, November 17, 2010

Q&A Series - When Should I Start Drawing Social Security Retirement Benefits? - Follow Up

This week's question is in response to several questions from several readers regarding our post on November 2nd titled - Q&A Series - When Should I Start Drawing Social Security Retirement Benefits?

Q: I read your post on November 2 with great interest, and as I approach age 62, should I start taking my Social Security (SSA) benefits immediately?

This is a very good question, but unlike the previous answer Joe Rollins gave when it came to your Full Retirement Age (FRA), it is much more complicated than a simple yes or no. The first piece of information is that the FRA benefit is reduced by 25 - 30% depending on when you were born. If your FRA is age 66 (1943-1954), then it is reduced by 25%. If your FRA is age 67 (1960 and later), then it is reduced by 30%.

As in Joe’s previous post, your personal situation is what will determine the best and most effective route to take. There are still the questions of:
  • What are your current cash flow needs?
  • How much do you anticipate needing in retirement?
  • Are you in good health?
  • Do you have other forms of retirement income?
  • How much would you receive in the form of a Social Security benefit?
  • Do you plan to continue working in retirement?
Part 1

One of the very important differences between taking SSA benefits at age 62 versus FRA is the earned income limitation that the SSA implements. In 2010, if you are receiving benefits prior to your FRA, the SSA has put an earned income limit of $14,160. For every $2 you earn in excess of $14,160, you lose one dollar in benefits.

For example, if you work and make $35,000 in 2010, your benefit would be reduced by $10,420.

$35,000 - $14,160 = $20,840

$20,840 / 2 = $10,420

There are two large issues that you now face. First, you must now repay SSA $10,420 or they will simply withhold it from future monthly payments until you have repaid the funds. Second and most importantly, you are penalized as if you received the entire benefit thus your benefit for future years is reduced even though you didn’t receive all of the funds.

If we look at the example Joe used before for “Jane” which was: “My most recent Social Security statement indicates that I’ll be drawing $2,356 per month at full retirement age...” The numbers are substantially different at age 62 versus FRA (we will use 66). The benefit at age 62 for Jane is only $1,767 per month or $21,204 annually.

If Jane worked and made $35,000 as we discussed above, Jane’s actual benefit from SSA would be reduced from $21,204 to $10,784. Plus, Jane is now pegged with starting her distributions at age 62 and receiving a reduced amount for the rest of her life.

Part 2

The answer to this question is much like the answer that Joe used in his previous post. If Jane waits until her FRA, she would receive a benefit that was $569 higher than at age 62. The risk is still if she dies before taking her benefits, then she received nothing and her beneficiaries would receive nothing.

In a similar scenario provided by the Social Security Administration, they indicate that if a person retires at age 62 (FRA is age 66 in this scenario), the accrued benefits after four years would be $84,816 ($1,767 x 48 months). If you divide $84,816 by the additional $569 per month you would receive by waiting to collect benefits until age 66 (FRA), then it would take 144 months (12 years or until age 78) to reach the breakeven point (not considering the time value of money) between collecting benefits beginning at 62 or waiting until a person reaches FRA.

Therefore, at age 78, a person’s accrued additional payments for waiting until FRA to start drawing benefits is exactly equal to the first four years of total payments received by a person who begins collecting at age 62. By this illustration, it appears that if you live beyond age 78, you would be better off starting retirement benefits at FRA (age 66).

There is an alternative that could warrant some consideration. If you save 100% of your Social Security retirement benefits from age 62 through age 66 (FRA) while you have other forms of retirement income (and less that $14,160 in earned income) and earn 5% per annum, you would have an accumulated balance at age 66 of $94,062 ($1,767 x 48 months = $84,816 + $9,246 interest). Then, at age 66, if you start withdrawing the $569 difference from this account on a monthly basis but still earn 5% on the remaining balance, it would take 23 years to get to the breakeven level using the FRA monthly benefit amount. With this method, if you were to die early, then you would still have a nest egg to pass on to your beneficiaries.

As you can see, by using this method you could live to age 89 (11 years longer) before it would have been better to wait until FRA to start drawing Social Security retirement rather than starting benefits at age 62. While we hope all of our clients live at least that long, it’s highly likely that many will not.

While this is a possible scenario, each and every personal situation should be fully examined before starting down this road. Full Retirement Age calculations are somewhat easier in that you do not need to worry about the earned income of a person drawing benefits. They can make $5,000 or $5 million and the benefit does not change, but in early retirement withdrawals these calculations can become quite complex and usually need some additional savings as a safeguard. Whatever road you look down, it is always best to discuss the various options to insure that you are correct.

I hope my explanation above has helped to show why it is necessary to research every scenario and situation before individuals start drawing Social Security retirement benefits. It’s always best to thoroughly evaluate your particular situation to determine the best way to maximize your own benefits, and in that regard, Rollins Financial is here to help. Navigating Social Security benefit options can be tricky, but we can help you make the best decisions to positively impact your retirement years.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Robby Schultz

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