I want to begin this post by including an excerpt from the article “The Most Popular Ages to Claim Social Security” by Emily Brandon, which was published in September of 2013. The reason for this is because she states clearly some basic statistics about how the age at which to take Social Security has been growing in recent years. This is due, based on my experience, in large part because of the way people are overspending.
Brandon writes in her article:
“The age you begin to collect Social Security benefits affects the payments you will receive for the rest of your life. Checks are reduced if you sign up as soon as possible at age 62, but are increased if you delay claiming up until age 70. Here’s when most people sign up for Social Security:
“Age 62: A smaller proportion of people have been claiming Social Security at age 62 in recent years, but it continues to be the most popular age to begin receiving payments. Some 45 percent of men born in 1943 and 1944 signed up for retirement benefits at age 62, down from 50 percent of people born between 1938 and 1942, and a peak of 57 percent of men born between 1930 and 1934, according to a 2013 Urban Institute analysis of U.S. Census Bureau data. The share of women claiming Social Security benefits at age 62 has also declined over the past decade, but women continue to be more likely to claim early than men. Half of women born in 1943 or 1944 claimed at age 62, compared with 60 percent of those born between 1935 and 1937.
“Social Security benefits are reduced for workers who sign up at age 62, and the amount of the reduction has recently increased from 20 percent for people born in 1937 or earlier to 25 percent for baby boomers born between 1943 and 1954. ‘If you claim earlier you are getting more of a penalty now than you used to,’ says Richard Johnson, a senior fellow and director of the program on retirement policy at the Urban Institute, a nonpartisan research firm. The reduction in benefits for people claiming at age 62 will further increase to 30 percent for everyone born in 1960 or later under current law.”
Although it has been more popular to start claiming Social Security at age 62, with the reduction in benefits Ms. Brandon mentioned in her article and with Social Security now being the most critical source of income to a retired person, less and less people will be able to start claiming this early. In my experience this is because of the way most people have spent throughout their life — it is clear that a person’s spending habits will always determine when a person takes Social Security income.
For example, lets say a man we’ll call Brad has an attractive income from both a pension and 401(k) with an annual retirement sum of $120,000. If he starts taking Social Security benefits at age 62 he will add $21,800 more each year to this $120,000 in SS benefits. Because of the $120,000, the Social Security benefit will be included for tax purposes at 85 percent of the $21,800. Since Brad is in a 25 percent tax bracket, he will lose $4,632.50.
If Brad waits instead to claim Social Security benefits at age 67 he will receive a higher benefit, $10,231 per year higher. Obviously it would be better to wait because he receives a much better benefit, but the point is if he cannot control his spending before age 62 and needs all the money he can get, he will just decide to take the income at age 62 regardless of the numbers.
In addition, many people discover when they file for benefits that before age 67, if they are employed and are receiving income, every two dollars earned reduces one dollar of Social Security benefit. So even if a person desperately needs the additional income, they have to wait until full-retirement, or about age 67. But because they have over spent their income, they won’t be able to wait and will start claiming a reduced benefit before age 67.
These may seem like small points, but consider how bad spending habits also affect pensions and 401(k)s. Lack of control will force decisions on when to take pension incomes and and IRAs. Because of the need for income, it is not possible to defer benefits to allow time to convert from a standard IRA to a ROTH IRA for instance. If a person can convert, it will save them $85,000 in taxes over the same retirement period and then when the person dies, he could allow his beneficiaries to S-T-R-E-T-C-H this tax-free ROTH IRA over their entire life as well, saving an additional tax exceeding $150,000!
When a person is not in control of there spending, they will not be able to wait for much more income and wait until they can eliminate all future taxation, thereby losing as much as $230,000 over a 20- to 30-year period. The cost of uncontrolled spending, in this case, is $230,000 due to forced decision-making and increased tax costs!
I urge you to learn how four pieces of the financial puzzle, spending, debt, savings, and taxes, are all interconnected and must work together harmoniously if you are to have any hope of a decent retirement. The knowledge you need about this is not taught anywhere else but the Money Mastery program. I encourage you to learn about it today. It is worth its weight in gold.