Fascinating data from the Center for Retirement Research at Boston College shows that most people — both men and women — take Social Security benefits at 62.
That’s the earliest you can begin taking your monthly check from Uncle Sam, but claiming early can be a big mistake. Waiting even a few years can dramatically increase the size of your payout.
The data show that 48% of women and 42% of men claim at age 62. The next most popular age is what the government calls “full retirement age.”
That varies by your birth year but falls between 65 and 67. The least popular claiming age was 70 — the maximum age at which you can begin to take benefits.
Why wait? Because the government will give you more money for waiting, the equivalent of 8% extra per year you wait. If you expect $1,500 a month, waiting a year means an extra $120 a month.
Keep waiting and your payments keep climbing. A person expecting $2,142 at age 62 could expect $3,794 by age 70. The amounts are adjusted for inflation, so unless you absolutely need the money, wait.
Another mistake is claiming at 62 but continuing to work. The government withholds benefits from you if you have work income above the poverty level, as much as 50% of your check.
You get the money back in higher payouts in retirement, of course. Yet many people fail to take this witholding into account and end up with smaller checks than they expected at retirement.
Finally, consider that you likely will pay federal taxes on some of your benefit and might be on the hook for state taxes as well. This hits anyone who makes more than $25,000 as a single filer or $32,000 as a couple on “provisional income,” which is any money you make privately, half of your Social Security income plus interest from tax-free municipal bonds.
It’s tricky, so you need a tax professional or good software to understand the risk. Make even more and the tax falls on 85% of your income. The proceeds are then put into the nationwide Medicare fund.
As it stands now, 13 states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
What’s the best strategy? That is a highly personal and difficult calculation to make. Broadly speaking, however, if you can keep working, do so.
If you can keep money in your retirement accounts invested a few more years, it should compound into a larger balance. Focus on getting out of debt and paying down your mortgage if possible so that you enter retirement with nothing hanging over your head.
Finally, consider in your planning that you are likely to spend more in the first few years after quitting work, then spending will slow as you age. Only when you are much older will spending pick up again, as health costs begin to take hold.
How much you pay in taxes is important, since you can only spend the money you have left over month to month. Tax management puts more in your pocket later on.
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