My friend, Diane, is going to Africa next summer. When I saw a talk and photo exhibit was in town, I thought she might want to go. “To be honest, I’m a little cash poor right now,” she mumbled, saying it was $30. I was surprised because I was usually the one low on funds.
“How old are you?” “Sixty-nine,” she replied. “You know you could be collecting Social Security,” I blurted. She, like so many others, was holding out until she turned age 70 to start her payments. Many financial planners recommend it, but is that the best thing to do? Let’s have a look.
Diane is 69. She has about ten months until her 70th birthday. According to the Social Security online benefits estimator, her payments as of today would be about $2,500 every month. If she waits until 70, it will be about $2,650. That’s an additional $150 each month. Many say that’s worth waiting for, but is it? What do you think?
If Diane applied now, in the ten months until her 70th birthday, at $2,500 a month, she would collect $25,000 in benefits. If she waived her payments until age 70 and got the additional $150 every month after that, it would take her 166 months to make up the $25,000 she passed up, or almost 14 years.
So, Diane would be 84 years old before she will benefit from waiting until age 70. She could have significant extra cash in her pocket now or a slightly higher benefit every month of her life, from age 70 onward.
Another twist is that since Diane has passed her Full Retirement Age (66+), she is eligible to receive six months retroactive benefits of $15,000 ($2,500 for each of 6 months) in one lump sum now in addition to her monthly payment. Her long-term benefit will be slightly lower as well but will give her some freedom right away.
In total, Diane could receive $25,000 in benefits over the next ten months and $15,000 in retroactive pay as soon as she applied. That’s $40,000 cash in hand. Remember, too, that once you reach your full retirement age, you can work and earn as much as you are able without penalty. No matter how much you make, it will not affect your Social Security payment amount at all. You could collect the $40,000 and still be working full-time.
Social Security benefits are taxable. If this is a low-income year for you, it may make sense to take benefits now. If you have high earnings, it may be smart to wait. A maximum of 85% of your benefits may be taxable. If it’s a high-income year for Diane, it may not be the best choice.
Another point to remember is that at age 70 ½ should you have a 401(k), you will have to begin taking a required minimum distribution, which is considered income, and also taxable. Diane will need to think about her full financial picture before deciding what is best for her.
$40,000 in hand now, or $150 additional per month from age 84 onward. Is it worth the wait? Diane decided it was. She would rather have more monthly income when she is older, which is wise. What would I do? Take the money and live a little easier. What should you do? Only you can decide.
