When Should You Start Taking Your Social Security Benefits?

Social Security Benefits

Most advisors recommend waiting as long as possible to begin collecting Social Security benefits. Suze Orman, a contributor to AARP Magazine, makes a strong case for this approach. She argues that with people living longer than ever before, 70 is the new 65. What concerns her the most is not funding the first 10 to 15 years of retirement but rather the 10 to 15 years after that. You can read her entire article here: https://www.aarp.org/retirement/planning-for-retirement/info-2018/social-security-suze-orman.html?intcmp=AE-HP-TOT-POS3-REALPOSS-TODAY.

What do the numbers have to say?

Of course, every situation is unique. The best time to take Social Security benefits is not the same for everyone. You must consider your particular financial needs, health, post-retirement plans and more in deciding when to take your benefit. Here are some statistics to help you make an informed decision.

The first number you need to know is your full retirement age--the age at which you can collect 100 percent of your benefit. Your full retirement age depends on when you born. For people born in 1937 or earlier, full retirement age is 65. For those born in 1938 and beyond, full retirement age rises gradually to 67.

What happens if you begin taking Social Security before your full retirement age? You can start taking your benefit as early as age 62. According to the Social Security Administration, if your full retirement age is 67, your benefit will be reduced by approximately:

  • 30 percent if you start collecting at 62
  • 25 percent if you start collecting at 63
  • 20 percent if you start collecting at 64
  • 13.3 percent if you start collecting at 65
  • 6.7 percent if you start collecting at 66

Bottom line? If you start collecting early, your retirement benefit will be permanently reduced.

What if you don't start taking Social Security benefits until after your full retirement age? As you would expect, you'll be rewarded for this. For example, if your full retirement age is 66, you'll receive 108 percent of your monthly benefit by waiting until age 67. Wait until the age of 70 and your monthly benefit rises to 132 percent.

So, based purely on the numbers, you can see why many advisors recommend waiting. Your benefit is significantly reduced the earlier you start taking it and considerably higher the longer you wait.

Now, many people will say, understandably, that they worked long and hard to earn their benefit and want to start enjoying it as soon as possible. There are also certain situations where taking your benefit early makes financial sense.

An article on bankrate.com points out that if you are in poor health, with a lower than average life expectancy, and you are in need of income, taking your benefit early may be appropriate.

In addition, married women are often good candidates for claiming early benefits because they are likely to live longer, and to have earned less, than their husbands. If your husband's benefit will be larger than your own, you will receive this larger benefit when your husband passes away. It's important to note that if your husband claimed early benefits, this scenario does not apply.

The break-even point

The break-even point occurs when the total value of higher benefits (the result of waiting to take them) exceeds the total value of lower benefits (the result of taking them early).

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Consider the following example. Let's say Joe is eligible to collect a reduced $900 benefit at age 62 plus 1 month. Since his benefit would have increased to $1,251 if he had had waited until age 65 and 10 months to take it, Joe's estimated break-even age would be 75 years and 5 months. In this example, if Joe expected to live beyond the age of 75 years and 5 months, it could be a financially sound decision to delay taking benefits.

You can read the entire bankrate.com article here: https://www.bankrate.com/retirement/when-to-take-social-security/

The Benefits of Putting Your IRA Into a Trust

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An IRA Trust can help you control distributions after you pass away and restrict access to beneficiaries who might squander the funds of your IRA. How does an IRA Trust accomplish this? Let's say your IRA is left directly to your beneficiaries outside of a trust. In this situation, your beneficiaries can immediately cash out your IRA and spend the money however they choose. The trouble is, when the IRA is cashed out, not only is the ability to stretch the required minimum distributions (RMDs) over the beneficiary's lifetime lost, but all of the amount withdrawn will be taxable in the withdrawal year.

Or consider this scenario: If you name a minor grandchild as the direct beneficiary of your IRA, a guardianship or conservatorship will need to be established to manage the IRA until he or she reaches the age of 18. Then, when the grandchild reaches 18, he or she can withdraw all of what remains in the IRA.

An IRA Trust can put restrictions on how your IRA is spent, as well as when and how much a beneficiary can withdraw. This can provide important tax benefits if, for example, the beneficiary already has a taxable estate, since the IRA Trust can be drafted to minimize or even eliminate estate taxes in the beneficiary's own estate. In addition, the IRA Trust has the potential to create an ongoing legacy for your family, because the IRA assets not used during a beneficiary's lifetime can continue in trust for the beneficiary's descendants.

If you are in a second marriage, an IRA Trust can prove particularly valuable.

In a "typical" second marriage situation, you'll want to leave your spouse the annual IRA income, but after his or her death you may well want to make sure the IRA goes only to your children, not the children from the spouse's first marriage. An IRA Trust can help you accomplish this.

Or what about a situation in which you dislike or do not trust your son-in-law or daughter-in-law? If you leave your IRA outright to your child, his or her spouse may be able to talk them into liquidating it. However, if you name a trust as the IRA beneficiary, your child won't be able to liquidate the IRA. Similarly, if you fear that your son or daughter is not yet mature enough to handle the money in your IRA, but you hope that one day they will be, an IRA Trust can allow you to name them as beneficiaries but put restrictions on how and when they can utilize the money.

Finally, even though IRAs are protected from the claims of creditors in many states, when the IRA account owner dies and the assets go to an individual beneficiary, the IRA loses its protected status. By putting these assets into a subtrust created for an individual beneficiary under the terms of an IRA Trust, the assets will continue to be protected. The result? The IRA assets can remain intact for the benefit of the beneficiary in the event a lawsuit is filed against the beneficiary, if a married beneficiary later divorces, or if a single beneficiary gets married and later divorces.

To determine whether an IRA Trust is right for you, contact us for a consultation.