Many people believe that the Social Security System is doomed, by saying “grab your money now while you can”.
The Current State of Social Security
The reason is on their current Social Security Statements, it talks about how the Social Security’s Reserve Fund will be gone by 2033. What is causing the Reserve Fund to go dry, is more dollars are going to be going out in benefits than received in taxes. The Social Security Administration has already has made several changes in the past. These changes have drastically changed the Social Security system.
The first change being was taxation of Social Security benefits back in 1983 with Ronald Regan Administration. When Social Security was established it was never supposed to be taxed. The taxation law that was created allowed for potentially half of your Social Security Benefits to be counted into your taxable income.
The second law change came from Bill Clinton’s Administration in 1993 which increased the taxable amount of Social Security benefits up to 85%.
The third law change was shifting the Full Retirement Age of Social Security recipients from age 66 to age 67 for younger workers. One problem that this change caused is it cuts down a year of delayed credits. A Delayed Credit is an increase in your monthly benefits, the increased amount is 8% per year. How you get these extra benefits is by waiting to take your Social Security, until your Full Retirement Age or later. In addition to missing a year of delayed credits, it also adds a year of penalized benefits.
This happens when you take your Social Security Benefits before your Full Retirement Age, between age 62 and the year before your Full Retirement Age. These Social Security penalties include reductions in benefits and limits to working and collecting at the same time. The reason these penalties were established was to discourage those from taking benefits early, by doing so this helps slow down the depletion of the Social Security fund.
The last Social Security change is still yet to come, it is when the Social Security Reserve Fund goes dry in the year 2033. The Social Security Administration states that they will only be able to pay out $0.77 on the dollar. Something they do not mention is if this applies to those who are currently receiving benefits or not.
What you Need to think about Now
If you are not receiving Social Security Benefits you have time to prepare your retirement plan for this change. On the other hand, for those collecting this could be a concern but only if these future changes go into effect. The Social Security Administration could possibly grandfather those in who are currently receiving them so they wouldn’t have any changes. Right now about 90% of the average American’s retirement income is based on Social Security. The reduction in benefits is scary, but there are ways to strategize now to help offset the possible change.
There are upsides of getting your Social Security benefits now.
Getting the most Benefits??
The first upside being if they change the Social Security System by the year 2033, you will get the most out of your benefits.
Another upside is controlling the money once you receive it. When you receive your benefits then you have to control to spend it, save it or invest.
Fits your PLAN
And lastly, if it fits your uniques situation in your retirement plan.
The downsides are critical for you to know if you are deciding to take Social Security early.
The reason is it could be defeating the purpose of you even receive them in the first place.
Reduction in Benefits
The first downside is you are receiving a reduced benefit which is a 25% reduction at age 62. I don’t know many people who are willing to take a 25% hit on their investments. By collecting it early, that’s what ultimately they are doing.
The next downside, if you’re working there’s an earnings limit which is currently $17,040 in 2018 and is usually engaged for inflation every year. For every $2 you make over that limit, you give a dollar back to the system. If your plan is to work and collect you have to be aware of this, you could be giving it all back. There are two exceptions to that earning limit. The year before your full retirement age the earning limit goes to $44,880 and is also engaged in inflation every year. For every $3 you make over that you forfeit a dollar back. When you reach your Full Retirement Age your benefits will not have the earning limit.
The last downside is the taxation of these benefits, which can be up to 85% of the amount received. If you are considering collecting early if not thought out all of these factors could be in play.
Are you making the right choice?
As an example, if you elected early and continued to work. You would be locking in a lower lifetime benefit giving potentially all your benefits back and getting taxed.
All options should be thought of when someone is deciding when to take your Social Security Benefits early and shouldn’t be done just for no reason. Don’t fall into the trap of what friends, family or word on the street is. There is a chance that they could delay or minimize the damage of the reserve is depleted. There’s a chance they grandfathered benefits. For younger generations, there is a good chance they are going to change things. No one politically wants to get there hands in it. The reason the consequences outweigh the reward, unfortunately. They have to look at things like lowering the amount paid out and moving the retirement ages up. This piece is designed to show the big picture of the advantages and consequences of taking benefits early, but there are many variables involved. All we can do is get educated. We have to prepare for the worst case and get the probabilities in our favor.