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Once you’ve reached the age of 62, you can take Social Security. But when you start, it can have a huge bearing on your monthly income and how much you draw from the system over your lifetime.
There are a number of considerations that play into when is best for you — including your need. But if you have flexibility in the choice, these two things will help you maximize this benefit.
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1. Your life expectancy
You receive your standard benefit if you take Social Security at your Full Retirement Age (FRA), which depending on when you were born is 66, 67, or somewhere in between. If you start it early, it gets reduced and if you delay, it will be increased.
If your FRA is 66 and the benefit you will receive at that age is $2,000, taking it at age 62 will decrease it by 25% to $1,500. Delaying it to age 70 will increase it by 32% to $2,640. If you live to the age of 75, you will get total payments over your lifetime of $234,000 if you take it at age 62, $216,000 if you take it at age 66, and $158,400 if you take it at age 70.
If your life expectancy increases to age 80, you receive $324,000 in income from taking it at age 62, $336,000 if you take it at age 66, and $316,800 at age 70. If you make it to age 85, you will get $414,000 in lifetime income if you start it early at age 62, $456,000 if you wait until you are 66, and $475,200 if you begin payments when you are 70.
The shorter your life expectancy, the more sense turning on this income stream early makes. The average life expectancy in the United States is 77.8 years and if you end up living this long, waiting until your FRA could yield you the most income. But if you have a longer life expectancy, delaying your benefit may work out in your favor. Unfortunately, there is no perfect way that you can determine how long you will live. But there are certain factors that give you a higher probability of a long life, like your family history of longevity and being in good health.
2. Other assets and income sources
If you decide that delaying Social Security is best but plan to stop working sooner and take your benefits later, you would need your bills funded by some other income source. If you are fortunate, you may have a pension and this could help you accomplish this goal, though pensions aren’t as common as they used to be and in 2019 only 12% of American workers had access to one. If you don’t fall into this category, maybe you will have a spouse that continues working and can pay all of your bills, which would make waiting for the higher payment more feasible.
If you’ve saved a lot and can generate enough from your accounts, your retirement assets may also be a viable option. But if you go this route, studies have shown that keeping your withdrawal rate at 4% or under will be your best bet for making this asset last through your entire retirement — especially if you think you will be using it for many years.
The higher the rate of return that you receive from your investments, the better the chances are that they can continue growing beyond your 4% withdrawal. For example, if you only earn 3% on your investment assets and on average every year take out 4%, your withdrawals will exceed your rate of return and your money will be depleted over time. But if you earn 7%, you will have 3% growth on average after taking out your distribution.
But a higher rate of return usually means that you are invested in more aggressive holdings. Investments like stocks have more growth potential than safer investments like bonds but they also have more risk. And in retirement, you may want less volatility to lessen losses if a bear market happens. Finding your appropriate mix of stocks and bonds that can also cover your withdrawals and outpace inflation will involve examining your risk tolerances. And if you can’t get a high enough rate, you may need Social Security earlier so that you have enough income.
For the average American, Social Security will cover about 40% of their retirement expenses. But if you can maximize this benefit and get your highest possible payment, it could make up a higher percentage. Some things you don’t have control over, like how long you will live. But the more you learn about life expectancy, the more educated of a guess you can make. And with enough time, you can plan on creating alternate income sources in retirement that could make delaying Social Security easier.
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