Nobody knows exactly how long Social Security will last, but for the time being you’re still entitled to what the government has stashed on your behalf over the course of your life. So at least for now, the dilemma is not if you’ll receive the payout to which you’re entitled but rather when you should take it.
If you retire earlier than age 70, you may need the money to get by in your golden years. But is taking your Social Security early the best bet?
These pros and cons will help you decide what the right decision is for you:
Cons of Taking Social Security Early
You won’t receive the maximum amount to which your entitled. The major problem with taking your social security before full retirement age is that you’ll receive a smaller benefit based on the number of months you took it before reaching that milestone — and that can result in a significant cash reduction.
You’ll miss out on future opportunities to increase your Social Security benefits.By taking Social Security early, you’re locked into that decision and all future increases will be based on the initial lower amount.
You may inadvertently ‘cheat’ your spouse out of benefits. You may be giving up a decent sum of money for your spouse if your earnings are not maxed out — and you pass away first. “The surviving spouse receives the higher of their own benefit or their spouse’s benefit,” says Gary M. Shor, vice president of financial life planning at AEPG Wealth Strategies. “This would be especially painful if the surviving spouse with the lower benefit lives a long life.”
You may be taxed on your Social Security if you take it early and still earn a decent income. Social Security becomes taxable when your income reaches a certain threshold. Enrolled agent Jeffrey Schneider offers a quick way to determine if a taxpayer must pay taxes on those benefits. “Add one-half of the Social Security income to all other income, including tax-exempt interest,” he says. “Then compare that amount to the base amount for their filing status. If the total is more than the base amount, then some benefits may be taxable.”
The three base amounts are:
- $25,000 — if taxpayers are single, head of household, qualifying widow or widower with a dependent child, or married filing separately and lived apart from their spouse in the previous year.
- $32,000 — if they’re married filing jointly.
- $0 — if they’re married filing separately and lived with their spouse at any time during the year.
Schneider adds, “It must be noted that no more than 85% of the benefits received are ever taxable.”
Pros of Taking Social Security Early
You’ll avoid going into debt if you’re strapped for cash. The most obvious reason for taking Social Security early is that you need the money if you find yourself retired or otherwise out of work before you’ve reach your retirement savings goal or the maximum-benefit age of 70. It may not be the best-case scenario, but if these payments can help you stay out of debt, it’s a no-brainer. Of course, you can also lessen your debt burden by downsizing to cut as much fat as possible from your budget.
Married couples can live more comfortably with smart decision-making. If you’re married and one of you retires earlier than the other, you can supplement that lost income by taking that partner’s Social Security early — while holding out for the fuller benefits of the other’s. “It may be beneficial for the lower-income spouse to collect early, while growing the other spouse’s,” says Erin Ansalyish, director of financial services at he Prosperity Consulting Group in Baltimore. “Then once the other spouse collects theirs, the lower-income spouse can take the spousal benefit, assuming it’s higher than what they’re currently taking.”
If you don’t ‘need’ the money, you can use the additional income at your leisure. This scenario supposes that you have saved aggressively for retirement so that you don’t have to rely on Social Security once you call it quits at work. In that case, there’s no real downside to taking Social Security early. However, it will provide you with additional cash for discretionary expenditures such as vacations, charity donations, and gifting money to family or friends.
If longevity isn’t on your side, it may pay to take what you can get now. If you have no surviving spouse or children who qualify for Social Security survivors’ benefits when you die, your money reverts back to the Social Security trust fund. “One thing to keep in mind about Social Security is that it’s not an asset you can pass on to your beneficiaries,” explains financial planner Andy Yadro, of Googins Advisors. “If you’d like to leave a legacy and don’t have longevity on your side, it might make sense to take Social Security earlier, and hold off on tapping into your retirement savings until later on.”
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