Six reasons why you should delay Social Security benefits

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You can start drawing benefits from Social Security as soon as you turn 62, and no later than age 70. Here are six reasons why starting early is generally a bad idea:

It will permanently reduce your benefits..

Full Retirement Age (FRA) is the age at which you qualify for full Social Security benefits. It varies from 65 to 67, depending on the year you were born. For example, if your birthday falls between 1943 and and 1954, your FRA is 66. According to the current rules, if you start taking benefits at 62 you will lock in a permanent 25% discount relative to what you would get if you wait until 66.

It will permanently reduce the benefits for your spouse.

Regardless of the working status of your spouse, he(she) qualifies for benefits under your own work record. Those spousal benefits are generally about 50% of the benefits you receive when you reach FRA. However, starting early affects your spouse even worse than it affects you. For example, starting at 62 shaves off 30% off your spouse’s benefits, more than the 25% reduction that applies to you.

Waiting until after you reach your FRA permanently increases your benefits.

If your FRA is 66 and you wait until 70 (your last possible age) you will receive “Delayed Retirement Credits” that can add as much as 32% to your FRA benefits. This also increases the benefits paid to your widow(er). However, your spouse is only entitled to a maximum of 50% of your FRA benefits while you are alive. Since spousal benefits are not increased beyond the FRA, it is generally a good idea to “file and suspend” benefits for yourself, and allow your spouse to start taking the full amount of benefits under your work record as soon as you reach FRA.

It will likely increase your taxes.

While benefits are at least partially tax free for everyone, a percentage of those benefits (up to 85%) may be taxable according to your income. This depends on your particular situation, so ask your tax advisor. However, if you have more than $75,000 of earnings outside of Social Security, taking benefits early will almost certainly increase your taxes. Don’t take benefits early if you don’t need them for current living expenses.

You may be subject to earnings limitations.

If you have wage income and you take benefits before reaching FRA, your benefits will be reduced by as much as 50% over a certain earnings threshold ($15,480 for 2014). This is not a true loss, however, because the amounts withheld will be credited back to you once you reach FRA. On the other hand, if you wait until FRA to file for Social Security, you will be able to work and earn all you want and still get 100% of your benefits.

Retirement may be longer than you think.

There is a simple reason why benefit payments are reduced when you start early: you receive more of them. The tradeoff between later, higher benefits and earlier, smaller ones is based on average mortality tables. The idea is that the total amount you end up receiving is the same whether you take them early or late. For instance, 20 years of $1,000 monthly payments add up to the same as 25 years of $800 monthly payments. In practice, however, you may live longer than the average, especially as life expectancy continues to go up. If so, you may be better off waiting to file for benefits in order lock higher payments for the years ahead.

Finally, keep in mind that your benefits are calculated on the basis of your highest 35 years of wage earnings, subject to certain caps. If you continue to work while getting benefits, the Social Security Administration will check every year to see if your additional earnings will increase your monthly benefits. If they do, you will be notified of the increase. Working late in life is a personal decision that depends on your particular situation. But it may be a good idea to continue working after 70 if that's when you have your highest earnings - and still enjoy your work.

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