Social Security & Early Retirement - Avoiding a Very Expensive Mistake, Ep #4
The previous episode of the One for the Money podcast was all about strategies to generate income in retirement. Many might consider Social Security as part of an early retirement income strategy since you can begin receiving payments as early as age 62. In this episode, I’ll share with you why you most likely don’t want to try that approach. Listen to learn about how your Social Security benefit is calculated and how you can get a peek into what your projected benefit will be.
In this episode...
How is Social Security calculated? [01:15]
Reasons to wait to take Social Security [04:02]
When should you start SS benefits? [09:44]
Is investing early SS benefits a reliable strategy? [10:59]
Social Security strategies for married couples [13:05]
What could happen to Social Security? [14:43]
The role of Social Security
President Franklin Delano Roosevelt signed Social Security into law in 1935. Americans who paid into Social Security will receive a check each month from Uncle Sam to help pay for retirement expenses. Many might consider Social Security an integral part of an early retirement income strategy. However, there are thousands of reasons why you want to consider waiting to take this benefit.
It’s essential to make the best decision regarding your Social Security benefit because you only have one chance to make the right decision. Once you’ve made that decision, you’re stuck with it for life.
Determining when to start Social Security benefits
Social Security benefits are based on lifetime earnings. Your past income used by the Social Security Administration to determine benefits is adjusted to account for inflation. This process ensures you have a much higher benefit. Any dollar you earned in the 1990s is equivalent to the dollar you earned in the 2020s. While your benefit is based on the highest 35 years of earnings, you’re eligible for Social Security after working for just ten years. But of course, your benefit will be much smaller. The longer you wait, the higher your benefit will be.
The question is when you should take social security. The answer to that can be challenging to predict because it depends on one factor: life expectancy. If your family medical history and genetics are good, and you’re in relatively good health, it’s likely in your best interest to delay taking the benefit for as long as possible. When you take Social Security, Delaying maximizes your benefits and can significantly mitigate the effects of market fluctuations and general price increases. In other words, by delaying your benefit for later, you’re going to have a more guaranteed income.
What if the Social Security trust fund is exhausted?
As with all types of planning, it’s easier to make adjustments sooner rather than later. Unfortunately, the U.S. Congress doesn’t have an excellent track record of making timely adjustments. There are some options available, though, and it’s unlikely that benefits will be reduced. Older people vote, and politicians want to take care of active voters. Another option is to increase the amount of taxable income. That’s highly likely as taxing the “rich” isn’t as unpopular as the other options. Or, increasing taxes higher than the current 6.2% is possible. Raising the full retirement age would be fairly likely. With life expectancy increasing, it will mainly be the younger generations who that change would impact.
While a lot has changed since Social Security was introduced, it’s important to understand what your benefit is and how you can optimize it. No one builds wealth by accident.
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