More workers plan to retire with less money by relying on social security early
Hammered by inflation, fears of a recession and doubts about the future of Social Security, a growing number of working Americans say they plan to claim their Social Security benefits early while staying in the workforce. Here are the factors driving this trend and the pros and cons of following it.
Consider working with a financial advisor to create a retirement plan that fits your goals, risk profile and timeline.
More people are claiming social security early
According to a 2022 survey from the Nationwide Retirement Institute, 42% of Americans say they plan to file for Social Security before full retirement age while continuing to work — up from 36% in 2021.
Workers who contributed to the retirement system can claim their Social Security benefits as early as age 62, but that decision can result in a monthly benefit that is as much as 30% less than the payment they would receive at full retirement age. that is between 66 and 67 years old, depending on the year you were born. By waiting longer to file, a retiree can increase his Social Security benefit by 8% each year beyond the full retirement age at which he waits to file, up to a maximum of 70.
According to the agency, as of February 2023, the average monthly Social Security check among all retirees is $1,693.88. Meanwhile, the average check for a 62-year-old retiring this year would be $1,247.40, while the average payment at full retirement age of 67 would be $1,782.
Over 20 years in retirement, the monthly difference of $534.6 would equate to more than $128,000 in retirement income, not including increases in the cost of living. These adjustments increase benefits by a fixed percentage calculated each year to keep retirement income in line with inflation.
Collecting benefits early isn’t always a bad thing, planners note. Many workers begin receiving Social Security benefits when they are forced to retire due to company downsizing, age discrimination in hiring, illness, or the need to care for a sick family member.
The break-even point
More workers plan to retire with less money by relying on social security early
Waiting to collect a higher benefit later means the recipient will miss out on some cash flow. The “break-even” point — where total benefits at full retirement are more than all the money that could have been accumulated by starting early — is usually somewhere around age 80, financial planners say.
Using this year’s average benefit amounts, someone who starts receiving benefits at age 62 would collect a total of more than $254,000 over 17 years before collecting anything more by waiting to claim the higher full pension benefit. By the year 2040, the higher benefit amount for waiting would provide just over $2,000 in additional cash (not adjusted for inflation).
Social Security benefits themselves are not taxable, but one disadvantage of receiving Social Security benefits early is that many of the beneficiaries will continue to work, which could make some or even a large portion of their benefits taxable. In fact, that tax could apply to anyone receiving benefits and receiving additional income.
A single tax filer receiving Social Security benefits who earns more than $25,000 in what the IRS calls “combined income” is taxed on 50% of his or her benefits, up to a limit of $34,000 in income. At that point, the tax applies to 85% of their benefits. The limits for joint tax filers are $32,000 and $44,000, respectively. Combined income is a taxpayer’s adjusted gross income, plus nontaxable interest income from bonds and half of their Social Security benefits.
Consider talking to a financial advisor who can help you assess your retirement income and tax plan.
In short
More workers plan to retire with less money by relying on social security early
The number of employees in their early sixties who rely on social security is increasing, which may have several reasons. Everyone’s retirement path is different, so it’s important to calculate your needs and apply your Social Security benefits accordingly. And if you continue to work while receiving benefits, don’t forget to estimate your tax penalty.
Retirement planning tips
Deciding when to claim Social Security is just one part of retirement planning. A financial advisor can help you see and understand all the variables involved in a retirement plan. If you don’t already have a financial advisor, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use our free retirement calculator to get a quick estimate of what your net worth will be when you retire.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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