Avoid this big mistake in retirement.
Many people think that Medicare and Social Security (SS) benefits coincide as far as when you should enroll. However, that isn’t the case at all. In fact, there are different rules and variables within the two programs that make it easy to confuse the two.
While the age requirement to receive Medicare is 65, you can sign up to receive your SS benefits as early as 62. However, beginning your SS benefits sooner than your full retirement age could cost you thousands over the years.
If you were born before 1960, your full retirement age is 66 years old. If you were born in 1960 or anytime after that, your full retirement age is 67. With the average retirement age being 63, according to the U.S. Census Bureau, many people choose to receive their SS benefits sooner than their full retirement age. But this could be a big mistake in retirement, and here’s why:
How Your Social Security Benefits are Calculated
Leading up to your 62nd birthday, the SS Administration (SSA) will send you a SS Benefits Statement that explains to you how much you will make each month in SS benefits depending on which age you start taking your benefits.
If you get this statement when you are 62, but don’t start taking your benefits until your full retirement age, the monthly benefits can be skewed. This is because the SSA takes your average indexed monthly earnings (AIME) from the 35 years with the highest income, which usually are the most recent 35 years of your working life.
Therefore, the benefits they calculate when you’re 62 can be different if you work until your 65. Basically, if you retired at 65 rather than 62, your SS benefits have the potential to grow.
Taking Social Security Benefits Sooner Rather Than Later
Let’s say you retire and start taking your SS benefits at age 62. By starting your SS benefits early, you are losing out on your full retirement benefit. Instead of earning 100% of your benefits, you’d only earn 70% of your monthly SS benefits.
The longer you wait, the more you’ll receive. For instance, if you start taking out your SS benefits when you’re 64, you’ll receive 80% of your benefits. In order to receive 100% of your benefits, you would have to wait to start them until you reach your full retirement age.
However, you have the potential to earn over 100% of your benefits. If you wait to start your SS benefits until after your full retirement age, then the percentage of benefits you will earn grows. If you wait until you’re 70-years-old, you could receive 124% of your SS benefits, which is the maximum.
Going Back to Work After Starting Your SS Benefits
Let’s look at an example. Tom retired and started his SS benefits at 63, and later returned to work at 65. The SSA has limits on how much you can earn each year while receiving your SS benefits if you are under your full retirement age.
The maximum allowed income for 2019 before you are penalized is $17,640. If Tom earned anything over $17,640 while he was 65, the SSA would deduct a certain amount from his benefits for a certain amount of time.
For example, if he made $50,000 ($32,360 over the limit), then the SSA would deduct $1 for every $2 he makes over the limit, totaling in $16,180 worth of deductions. If Tom’s monthly SS check is $1,000, then the SSA would take that $1,000 check until they paid off the $16,180 deductions. That means that Tom would be without his SS check for about 16 months.
On the bright side, Tom would start earning that $16,180 back in small increments once he reaches his full retirement age the following year. All the same, you’ll want to think carefully about starting your SS income benefits early if there is any chance that you may decide to go back to work.
Leaving Your Spouse with a Smaller Amount for Survivor’s Benefits
According to the SSA, men’s monthly benefits tend to be higher than women’s benefits. However, men have a shorter life expectancy. Filing for benefits sooner rather than later can hurt your spouse in the end.
If Jim takes his SS benefits out at 62, and only gets 70% of his full benefit amount, then when he dies, his wife will only get half of that already reduced amount. If Jim would have waited until his full retirement age, then his wife’s survivor’s benefits would have been 50% of the higher full retirement age benefits.
Everyone’s situation is different. Some people may feel forced to file sooner rather than later simply so they will have some kind of income. Therefore, we aren’t saying that filing early isn’t the best option for everyone.
SSA’s website has calculators that can help you estimate your SS benefits. Use SSA’s website and review your situation and your estimated SS benefits before the time comes to decide. Also, talk to a Certified Public Accountant (CPA) or financial planner about your specific situation. That way, you can be well-informed prior to making this important life decision.
With thanks to contributing editor Danielle Kunkle.
Danielle is the co-founder of Boomer Benefits, a licensed insurance agency that helps baby boomers and seniors navigate Medicare.
Disclaimer: The material in this blog is for educational purposes only. It is not intended to replace, nor does it replace, consulting with a physician, lawyer, accountant, financial planner or other qualified professional.
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