Deciding When To Take Social Security: Retirement Planning
Deciding when to take Social Security benefits is one of the most important decisions one will make for retirement. You may either base the decision strictly on monetary benefits, or your decision may be more personally based.
The important question is when to start taking benefits, at age 62 or postponing benefits until age 66, or even later. The answer is different for everyone, as it depends on various factors such as health, lifestyle, and marital status.
To determine how much you’ve earned, the Social Security Administration adds up the income subject to Social Security tax adjusted for inflation during your 35 highest-earning years. It then divides that total by 420, the number of months in 35 years. This figure arrives at your average indexed monthly earnings. The higher this is, the higher your benefits will be.
When it comes to deciding as to what age to start taking benefit payments, various strategies and philosophies come into play. The calculated benefit amount per the Social Security Administration is known as the “full benefit”, in essence providing 100% of the calculated benefit due.
The caveat is that you need to be at least 66 years of age to take the full benefit amount. For workers retiring in 2014, the full retirement age is currently 66. However, if you elect to receive them earlier, then your monthly benefit is reduced for each month short of your 66th birthday. If you begin receiving them at age 62 for example, then your benefit will be reduced by 25%.
Conversely, if you wait until turning 70, then you’re entitled to delayed retirement credits, which increase your benefits by 8% for each year of deferment, capping out at a total of 32%.
So how do you determine the optimal age to take benefits and whether or not waiting may be worthwhile? A break-even analysis can be done, thus calculating how much more in benefits you may get, either by waiting for a higher benefit say age 70, or taking a lower benefit at a younger age such as 62.
Sources: Social Security Administration, GAO
Changes Proposed For 401k Plans & IRAs: Retirement Planning
This past month the House of Representatives passed the SECURE Act, which will introduce various changes to retirement plans including IRAs and 401k plans. The act was approved by the House in May and is expected to be approved by the Senate and become law relatively soon.
One of the most significant revisions to IRAs introduced by the legislation is repealing the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1/2. The legislation doesn’t propose a revised maximum contribution age, yet states that more Americans continue working beyond traditional retirement age. So essentially, there will no longer be an age limit on IRA contributions.
A modification to 401k plans that will affect eligibility requirements for part-time workers is a major change. Longer term part-time employees will no longer be excluded from 401k plans, allowing part-time workers the ability to save and accumulate savings towards retirement.
Annuity payments will become an option for retirees when leaving their job and taking their retirement savings. In addition to opting for a rollover of retirement assets to an IRA or other qualified plan, retirees will be able to choose annuity payments as well.
The Required Minimum Distribution (RMD) age for IRAs will increase from age 70 1⁄2 to 72. This is beneficial for those retirees that don’t need the income from their IRAs or rollover IRAs until later, thus minimizing the tax liability on distributions that would have been required at age 70 1/2.
Safe Harbor provisions will be simplified for 401k employer plans in order to facilitate plan administration as well as allowing greater flexibility to employers and employees. Such changes will eventually increase participation in employer sponsored retirement plans, an objective of the SECURE Act.
Source: House Committee on Ways & Means; https://waysandmeans.house.gov