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Think twice about early Social Security claim

Social Security benefits are a core component of retirement income for most Americans. Unfortunately, many who claim benefits early are unaware of the impact that decision has on lifelong financial security for themselves and their families.

Full retirement benefits are available at age 66 for those born after 1943. For those born in 1955 or later, the age gradually increases, and those born in 1960 or later reach full retirement age at 67.

Early Retirement. The earliest age to claim Social Security retirement benefits is age 62. If your full retirement age is 66 years and 8 months, then retiring at age 62 means you are 56 months early, which would reduce your benefit by 28.3 percent. If you retire 36 months early, your benefit will be reduced by 20 percent. If you retire only 5 months early, your benefit will be reduced by only 2.8 percent. The reduction in your monthly benefit is permanent.

Example: if your full retirement benefit would be $1300/month at age 67, then it would be only $910/month if you begin receiving it age 62.

Early retirement affects survivor’s benefits. If you claim social security prior to your full retirement age, your decision impacts your own income for life, and it also affects the survivor benefit available to your spouse and to any minor or disabled children after you die. In making your decision, it is wise to consider the income needs of your survivors.

Delayed Retirement. By contrast, those who claim retirement benefits after their full retirement age receive a higher monthly benefit due to “delayed retirement credit” (DRC). Delayed retirement credits continue until age 70; there is no benefit for waiting past 70 to claim Social Security. The DRC is 8 percent for each year you delay. If you delay one year, your monthly benefit will be 8 percent higher. If you delay three years, your benefit will be 24 percent higher. The exact DRC is based on the number of months you delay; even a delay of a few months will modestly increase your benefit.

Retire early, claim Social Security late? While common wisdom suggests waiting as long as possible to dip into 401k or IRA funds, that may not be the most financially advantageous strategy. The 8 percent annual increase in your Social Security income is guaranteed; if you leave your 401k or IRA untouched, can you guarantee it will provide an 8 percent annual return? Not likely. Therefore, if you retire at age 62, 64 or 67, it may be wise to use 401k or IRA funds to provide income during the years before age 70 so you can take advantage of the DRC to increase your Social Security income for life.

The Social Security Administration is the best source of information about your specific retirement benefit options. Contact SSA at 800-772-1213 or www.socialsecurity.gov. In addition, you are now able to access your personal Social Security record and projections by activating your account at http://socialsecurity.gov/myaccount/.

ISU Extension and Outreach offers retirement planning guidance through publications available at www.extension.iastate.edu/humansciences/retirement. A new publication on Social Security options will be available at that site in the next month. For information on personal finance topics, search www.extension.org or contact me, Barb Wollan, through your local office of ISU Extension (Story County: 515-382-6551) or directly (515-832-9597 or bwollan@iastate.edu). Subscribe to our blog at www.blogs.extension.iastate.edu/moneytips.

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