In this blog post find out more about the best age to apply for Social Security benefits after the Death of the Stretch IRA.
Last week, I talked briefly about the best age to apply for Social Security benefits. It’s a more important question than many people realize, unfortunately. The prestigious Center for Retirement Research at Boston College estimates that 90% of all Social Security recipients apply at the wrong age. Social Security is one area where you could very well be better off if you do not go along with the majority, and I want to explain why.
What is Full Retirement Age?
First, let’s start with Social Security’s official definition of the term Full Retirement Age. I am admittedly sloppy on that point; I generally define it as being “Age 66” but it is really not that simple. Social Security defines Full Retirement Age as the age at which a person may first become entitled to full or unreduced retirement benefits. That’s the key – if you wait until your Full Retirement Age, your benefits will not be reduced.
But what age is Full Retirement Age? Years ago, the answer was simple – age 65. But as an influx of baby boomers entered the work force, the government looked at the Social Security system and projected what they called “a funding gap”. I think it was their polite way of saying “we’d better do something now, or else we won’t have enough money to pay all these people.” Raising taxes is never a popular option, especially with a presidential election right around the corner. So in 1983 Congress just decided to make it harder for workers to collect when they applied for benefits decades into the future, and hope that nobody noticed. And nobody noticed – until now – that the age of which you will be paid full benefits is going up.
Individuals who are retiring within the next decade are subject to a changing Full Retirement Age that, depending on your year of birth, is somewhere between age 66 and age 67. The video that is attached shows exactly how it is calculated. But it seems likely to me that, as our population ages and more people apply for benefits, they could raise the Full Retirement Age again. Is it possible that your children and grandchildren won’t be able to collect full benefits until age 68 or 69?
Applying for Social Security at Age 62
If you were born after 1937, Social Security currently allows you to apply for benefits as early as age 62 – but should you do so? Last week, I talked about the Social Security breakeven point, and whether or not it makes sense to apply for Social Security at age 62. Most of you know that, if you do so, your benefits will be reduced. What you may not know is that, if you do so, the reduction in your benefit amount will be greater than it is for people who were born before 1938!
Let’s look at just how much your Social Security benefit will be reduced if you sign up at age 62. If your Full Retirement Age is 67, your benefit will be reduced by about 30 percent. So if your full benefit amount is $2000/month and you apply at 62, your check will be reduced by 30 percent to about $1400. If you apply at 63, the reduction is only 25 percent. So there is a benefit to waiting until age 66 or 67 to apply for benefits.
Benefit of Waiting to Apply for Social Security
There’s an even greater benefit to waiting beyond your Full Retirement Age to apply for Social Security. You get an eight percent raise for every year you hold off! If your Full Retirement Age is 66 and you wait until 70 to apply, you’ll get 132% (plus Cost of Living Adjustments) every year. So let’s go back to the previous example, where your benefit at Full Retirement Age is estimated at $2000. If you wait until you are 70 to apply, your monthly benefit will go up to $2640 – and that doesn’t even include Cost of Living Adjustments.
The government offers a great resource where you can see the options that are available to you specifically. You can access it by clicking here: www.ssa.gov/estimateyourbenefit
Remember, the timing of your Social Security application and any Roth conversions that you might want to do are synergistic. Ultimately, both could benefit your long-term retirement planning, especially after the Death of the Stretch IRA.
Stop back soon for more Social Security talk!
For more information on this topic, please visit our Death of the Stretch IRA resource.
P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.