Saturday, May 13, 2006

Postponing Social Security Payments

Postponing Social Security Payments

Ah retirement, a source of happiness and anxiety for people nearing retirement. The big questions to ask your self range from have I saved enough in my 401K, will I get any benefit from social security, how can I retire without a 401K, to should I start a Roth IRA? Another big concern for a lot of people is to determine when you should take your social security benefits. You have a choice and it could dramatically affect the payout.

The Wall Street Journal had an interesting article about when you should take your social security payments. By waiting until later in your life the benefit that you receive can increase fairly dramatically in terms of percentage. For example, if you were born between 1943 and 1954 and lets say you are eligible for $750/month in social security benefits at age 62. Waiting just 4 more years will boost the payout to $1000/month which is a 33 percent increase in your social security benefit. If you wait until age 70 the benefit almost doubles to $1320/month. The increases do not take into account the annual inflation adjustment from social security.

Even with these increases in social security benefits most people do not wait to take their payments from social security. Recent surveys indicate that 70% of women under age 65 took the benefit early and 67% of the men did as well. There are many reasons why people decided to take the payments early vs. late including concerns about their life expectancy, financial viability of the social security system, etc.

Things to consider: Before you decide when you will take your social security benefits consider the following.

  1. Life expectancy: First of all, if you don't think you will live very long, if you are married you need to consider you spouse's life expectancy. The fact is your social security benefit could far out last you if you have a spouse the out lives you for an extended period. So if you are the main bread winner your spouse's benefit will be based on your benefit. Therefore by waiting to get the larger payment your spouse will benefit from this as your survivor. What is interesting is the Journal says that half of all retirees will live beyond their life expectancy.
  2. Taxes: You also need to consider the tax implications. Remember you need to start taking withdrawals from your retirement accounts at age 70.5. If a combination of your other income plus 50% of your social security is above $25,000 and your single or $32,000 filing jointly then up to 85% of the social security benefit could be taxable. Therefore, if you live off of the 401K and IRAs in your early 60s and delay the social security benefit until age 70 you could reduce your tax bill.

Tags: investing, retirement, get rich, debt

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