Generally speaking, Social Security benefits make up one-third of a retiree’s income. Therefore, the decision about when to begin these benefits is a vital one and will have a crucial impact on your quality of life during retirement.
What is “full retirement”? Full retirement used to mean age 65. That is still the case if you were born prior to 1938. However, if you were born in 1938 or later, “full retirement age” gradually increases to age 67. It all depends on the year in which you were born, and you’ll have to go to the Social Security website (www.SSA.gov/) to be certain.
Early Retirement equals Reduced Benefits. Age 62 is generally the youngest age at which you can receive Social Security benefits. Depending on your birth-year, your benefits will be reduced accordingly. For example, if your full retirement age is 65 and you take Social Security at age 62, your benefits will be reduced to 80% of what they would have been if you had waited until age 65. Note: you may encounter the term “Primary Insurance Amount (PIA),” which is simply your full Social Security Benefit at your normal retirement age. In our example, at 62 year old retiree with a full retirement age of 65 will receive 80% of his or her PIA.
Delayed Retirement equals Increased Benefits. What happens if you delay retirement past your normal retirement age? You get paid for waiting! You receive a progressively higher benefit for each year you wait up to the age of 70. The amount of the increase will vary and depends on your year of birth. For example, if you were born in 1943 or later, your PIA will increase by 8% per year for each year you wait beyond your normal retirement age up to age 70.
Which is Better: Earlier or Later? Great question. This depends on a number of factors such as longevity in your family. Obviously, if your parents passed away in their sixties, you might want to take your Social Security the minute you turn 62. Also, you’ll want to consider what the rest of your cash flow will look like in retirement. Will you have other guaranteed income sources such as annuities or pensions? Put together a simple “Cash In / Cash Out” spreadsheet, and be as specific as possible with your income sources. Add 20% to the “Cash Out” column.
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