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Social Security Calculations Cannot Be Ignored

despair-513529_640There are too many people reaching retirement age without having made adequate provision for the day when they stop work. Once the monthly pay check is no longer coming in the question is how to finance life, not even comfortable life. Far too many people in the USA are having to rely on the Social Security System which was never designed for the job. It is a system in trouble anyway and without a significant injection of extra funds current benefits will have to fall by up to 25% in the early 2030s based on current payroll tax figures. ‘’Extra funds’’ can only come from taxation which is currently unpopular in Congress, in the Senate and House of Representatives, as well as with much of the working population as a whole.

Even the System itself and the benefits it offers need some thought. It is possible to start to take benefits at 62, at normal retirement age around 66 or delay them until 70. The question is what are the arguments for and against taking benefits at a particular age?

How Much and When?

The amount that a person receives in benefits is dependent upon their earnings, the number of years they have worked and the age at which they claim. It is a matter of judgement as to when to claim. After all if you start to claim at 62 you will have already received 8 years of benefits before reaching 70 when others decide to start claiming. Clearly the difference in monthly payment is considerable but if you were to die in your early 70s your decision to delay benefits until 70 turns out to be a poor one.

Current calculations suggest that someone collecting from the age of 62 will receive the same amount as someone starting at 70 by the age of 78 or 79. That means the benefit first paid at 62 is only half of that paid at 70. If both people then live another 10 years the later claimant will then receive far more money overall. Of course some have little choice than to start claiming at 62 because of their financial circumstances. It is usually those that can wait that have the real judgement call.

“Everyone obviously wants to receive the benefits that they are due but the question of when to start taking them is a matter of judgement. Those who have not planned properly may have little choice in the decision”

People with just 10 years of contributions qualify for something under the System. The calculation of benefits due actually take the best 35 earning years of an individual. The maximum available is defined by your date of birth. It is gradually creeping up from 66 to 67.  Those claiming early are penalized for doing so while those delaying until 70 are effectively paid a bonus. In actual figures you will receive 75% of the maximum at 62 but 132% of the maximum at 70. In both cases the monthly figure will then continue for the rest of your life.

The break-even analysis is not the whole story. Some can take their benefits and invest to produce a return better than the amount that they would get by deferring until a later date. Compound interest certainly provides good growth so taking benefits early in order to invest rather than spend can make sense.

Financial Management

Those who have been good at financial management throughout their lives will probably have a choice about when to take benefits. The problem really comes for those who have struggled with finance and not necessarily because they have not had a decent regular income. It is easier than you think to spend everything you earn each month without setting anything aside for the future. It is easy even to build up credit card debt without noticing it. If they want something they take out their piece of plastic. Some receive their monthly statement, look for the minimum amount required by the card company and simply pay it. It is only when they reach their credit limit that it strikes home they have a problem.

Credit card debt is often difficult to clear without decisive action. It is important to realize how expensive and wasteful it is. A just right installment loans can be used as a means of clearing such debt and the interest rate applied is much lower than card companies charge. The point is that people carrying such debts through their working lives are rarely able to build up a good retirement fund and are often forced to take Social Security benefits at the first opportunity because they are short of money.

Time

Time can be a major enemy when it comes the financial planning. Everyone needs to consider their years of retirement and how they are going to fund a comfortable lifestyle once they stop receiving a regular pay check. The average benefits from Social Security are only just over $1,000 a month when taken at the specified retirement age. If people take benefits at 62 then they face their future years, however many they have, with reduced benefits at a level that clearly cannot possibly provide comfort on their own.  The older you are before you plan for your future the less chance you have of being able to do it at the level you would wish or indeed require. You need to act if you have nothing set aside and certainly clear any expensive debt such as that on credit cards if you are not to be forced to take Social Security benefits when it is not in your long term interests to do so.

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James

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