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Making Social Security work for you

By Randy Neumann

My recent columns told of the rich history of Social Security with references to ancient Greece, Otto von Bismarck and Franklin Delano Roosevelt (I am a history buff).  This column is about how Social Security can help you.
When devising a retirement plan for a client, I am often asked, “Should I take Social Security at 62 or wait until my full retirement age?”  The answer is, “It depends.”
In 1935, when the Social Security program was established, the “normal retirement age” was 65.  Interestingly, the mortality for men and women in those days was 61.7 years (that’s a whole other story).  These days, full retirement can run from 65 years and two months (if you were born in 1938) through age 67 (if you were born after 1960).  However, you can retire at 62 and take a discount.  How much of a discount?  Good question.
Let’s begin with what you contribute to the system and what you are eligible to collect.  What you put in is pretty straightforward.  You and your employer each contribute 6.2% of your income up to $106,800 (that’s not exactly chicken feed).  This number goes up every year.  As a reference point, it was $7,800 in 1968.  You are eligible for Social Security after working for at least 10 years in a Social Security-covered job.  Your payment is based on your highest 35 years of earnings.
As an example, let’s look at Bob the Boomer who was born between 1943 and 1954.  If he waits until age 66, his monthly payments will be $2,230.  If he takes payments when he first becomes eligible at age 62, he will get a 25% haircut and will receive $1,672. Bob has a third choice, as well.  He can postpone payments, and his benefits will increase by 8% per year until age 70.  At 70, his payment would be $2,943.  What should he do?
The $64,000 question is, “Should I take less money now or more money later?”  And, the answer is (long drum roll), “How long will you live?”  I feel like a politician answering a question with a question, but there is no definitive answer.  You could try using a calculator (to do the math) and a crystal ball (to see the future)!  I will come back to this topic, but first, let’s talk about something that you should never do.
Never, ever choose the  “early” (prior to your full retirement age) Social Security option and continue to work and earn some “decent” money.
Here’s an example. You are 62 years old, you apply for Social Security and you continue to work and earn $54,288 annually.  From a financial point of view, you have crucified yourself.  Here’s why.  You are Bob the Boomer mentioned above and you could have received $1,672 per month in Social Security.
However, because you earn more than $14,160, which is the limit of income that you can earn without reducing your Social Security payment, Uncle Sam will deduct one dollar from your benefit payments for every two dollars you earn above the annual limit ($14,160).
So, because you earned $54,288, which is $40,128 more than $14,160, the $40,128 will fully offset the $20,064 you would have received from Social Security.  What you have done is the following: 1) You have locked in a 25% discount of what you would have received at your normal retirement date, and 2) Because of the offsets from the income you earn, Uncle Sam doesn’t have to pay you a dime.
Let’s say that you file for Social Security at age 62 and continue to work for four years and receive sufficient pay increases to continue offsetting all your Social Security benefits.  At age 66, when there are no more offsets to your Social Security income, you would begin collecting your benefit.  However, because you applied at age 62, your benefit will be only $1,672 per month, instead of your normal retirement benefit of $2,230.
And, you never got a dime!
The good news is, “It is never too late.”  If you are in the situation mentioned above, i.e., you filed for early Social Security and are earning some “decent” money which is offsetting your payments, do yourself a favor, call your Uncle Sam and tell him to stop the payments.  This will “unfreeze” your benefits.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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