Electing early Social Security retirement benefits – Part 2

You can invest your Social Security retirement benefit

Investing your Social Security retirement benefit is an option if you don’t need to use all of it for living expenses. If you are able to invest all or part of your Social Security benefit, receiving early retirement benefits might be advantageous. Not only would you receive more benefit payments, but also you would earn money on those payments when you invest them. The rate of return you would receive would depend upon your investment. (The following examples are hypothetical and do not reflect the returns of any specific investments.

Tradeoffs: Your retirement benefit is permanently reduced

You will receive less per month if you retire early rather than at normal retirement age. This gives you less money to meet your expenses each month, even though your total lifetime benefit may be more than if you waited until normal retirement age to retire. Since some people underestimate how much income they will need when they retire, the reduced benefit may cause them financial hardship.

You will have less chance to increase your average indexed monthly earnings (AIME)

In general, if you were born after 1928, your benefit is calculated by averaging your 35 highest years of indexed earnings to determine your AIME, then applying a formula to that amount. If you made little or nothing in one or more of those 35 years, waiting to retire until normal retirement age might increase your benefit because each year you wait to retire gives you a chance to earn enough to replace a lower year of earnings in the calculation.

You may live longer than you expect (is that really a tradeoff?)

When you’re planning your retirement, consider your life expectancy. Although you can’t know for sure how long you might live, you can make an educated guess based on your current health, your family’s history of longevity, and the average life expectancy for someone your age.

Your surviving spouse’s benefits may be reduced

If you die after beginning retirement benefits at normal retirement age, your surviving spouse’s benefit at normal retirement age will be 100 percent of your primary insurance amount (PIA). However, if you elect early retirement benefits, then die, the highest benefit your spouse can receive based on your earnings will equal the reduced benefit you were receiving (but not less than 82.5 percent of your PIA). This tradeoff is mitigated somewhat for a working surviving spouse, because at normal retirement age he or she can choose to receive benefits based on his or her own earnings record if that benefit would be greater.

Your family’s benefits may be limited by the family maximum

When you retire, your spouse and dependent children may be entitled to benefits based on your earnings record. If eligible, they can each receive a monthly benefit equal to 50 percent of your unreduced PIA. However, the benefit paid to each family member will be reduced if your combined family benefit exceeds the family maximum (150 percent to 180 percent of a worker’s PIA). Therefore, if you retire early, you will be penalized twice. First, your benefit will be reduced for each month you retire early, and secondly, your family members will each receive a reduced benefit if the family maximum has been exceeded.

An earned income limit applies to earnings before normal retirement age

If you retire early (prior to normal retirement age), money you earn after you retire may reduce your Social Security benefit. However, if you wait to retire until your normal retirement age, you can earn as much as you like without reducing your Social Security benefit. This means that if you plan on earning a lot of money after you retire, it might be advantageous for you to retire at normal retirement age rather than earlier.

Article courtesy of Forefield.Securities offered through NPB Financial Group, LLC. A Registered Investment Advisor/Broker-Dealer Member FINRA, MSRB, and SIPC