By one estimate, 10,000 Americans a day turn 65, a trend that will continue for more than a decade to come. So what is the best age to claim Social Security?
For many of them, the decision of when to take Social Security will be relatively simple: They will claim the first year they are eligible, at age 62.
The simple fact is that most people leave full-time work earlier than 65 and most of them need Social Security to make their household budgets work.
So far, so good. The purpose of Social Security, after all, is to provide a minimum income to retired Americans. Without it, elder poverty would be a far more widespread problem.
For those who manage to keep working past 62 and even 65 or older, however, the best age to claim Social Security is a real concern.
The federal government and 13 states tax Social Security income.
In concrete terms, a single filer will pay federal taxes on 50% of benefits paid if his or her combined income is more than $25,000 and up to $34,000. After the $34,000 threshold the tax is on 85% of the benefit.
For married couples filing together, the tax on 50% falls between $32,000 and $44,000. Above that range the tax is on 85%.
What often happens is that one person in a couple retires and decides to take Social Security. The other keeps working.
Pretty quickly, the first person is facing maximum taxes his or her benefit, just because the other person earns a lot.
It’s generally not a good idea to make a financial decision based solely on taxes, but this two-income trap surprises many people. Many file for benefits and a year later, after realizing the tax cost, wish they had delayed taking the benefit.
But there’s also a good reason to put off taking Social Security. For one, you get a raise for every year you wait.
Technically, claiming later means the government is giving you the same money for less time rather than less money for a longer period. But the effect of this on your Social Security check is just like getting a raise.
In fact, your payout from Social Security reduced if you take it before your full retirement age. (For most people, this is age 65 or 67, depending on what year you were born.)
For instance, a person with a full retirement age of 67 who takes the benefits at 62 would get a check that’s a full 30% smaller.
If that person were to choose age 63, it would be 25% smaller, and so on. Remember, you get smaller checks but you’ll likely get more checks since you started earlier.
However, if you wait to age 70, the reverse happens. You get more money.
It works out to an 8% raise per year that you wait. The effect is the same as getting a 24% total increase if you wait till the full 70 to claim the benefits.
The government knows your statistical chance of living many more years, so the point is to attempt to give you as much of your benefit in the fewer checks you are likely to receive in life.
So what’s the best age to claim Social Security? That has a lot to do with other income you might receive in retirement, such as a pension, IRA or 401(k) savings or other investments.
You will want to estimate the impact of taxes on your Social Security payout, as well as taxes on required minimum distributions from tax-deferred plans.
Generally, though, every year you wait to claim Social Security means more money in your pocket later in life, when you might need it for, say, healthcare expenses.
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