Money matters

by Dave Dupont
Wednesday, March 19, 2014

When is the right time to take social security benefits?

With Americans living longer, and oftentimes working longer, the question of when to take Social Security benefits is a major consideration. 

Americans can apply for monthly Social Security benefits when they reach the full retirement age of 66. People can also choose to take reduced Social Security benefits before they reach full retirement age.

Depending on an individualís situation, one might opt to take Social Security early and delay withdrawing from retirement accounts so the investment return will compound on a higher dollar amount. Using even a fairly conservative rate of return, early retirement gives the higher value. It is important to remember the money that has already been placed in a retirement account could keep growing tax deferred if one is living on Social Security benefits.  

On the other hand, with increased life expectancies, outliving assets is a distinct possibility for some retirees. Some people believe delaying Social Security benefits helps offset that risk.

Delaying these benefits could mean waiting until age 70, when beneficiaries collect the highest monthly benefit possible. One of the advantages of waiting until age 70 is that the starting monthly amount is the largest starting amount the government will ever pay. Every year of delay past the full retirement age, the benefit rises 6 to 8 percent. 

This can be tax efficient for a lot of people, and it also helps protect against the post-retirement risks they face because Social Security has the annual inflation adjustment ó itís going to be payable for life so thereís no longevity risk and thereís no investment risk.

Two important factors people should consider in their decision-making process are health and life expectancy. While one canít outlive Social Security benefits, taking them early can change from a smart move to a not-so-smart move if someone lives long enough. The better health someone is in, and the longer his or her life expectancy, the wiser it may be to delay benefits. 

Another consideration is how long someone wants to keep working. Work often provides health care coverage and other benefits that can otherwise cost plenty.
In deciding when to take Social Security benefits, it is important to remember that financial experts say every individual will need 70 to 80 percent of a pre-retirement income to have a comfortable retirement. Since Social Security replaces only about 40 percent of pre-retirement income for the average worker, it is important to have pensions, savings and investments.

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC

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