I just got my annual notice from the Social Security Administrationyou know, the statement that estimates your future retirement benefits based on past earnings.
Like most people, I want retirement to come sooner than later. Yet, for baby boomers like me the question of when to retire, and how to finance retirement, is quickly becoming a much more difficult question than it was for our parents generation. One reason is that the full retirement benefit eligibility age for my generation is now 66.
The new level of planning complexity partly stems from Social Securitys permanent de-linking of retirement from the magical age of 65. The eligibility for full retirement benefits is moving up, which means pre-retireesanyone born after 1937will have tougher decisions to make about when and how to retire.
For workers born between 1943 and 1954, the full retirement eligibility age is now 66 and gradually moves up to age 67 for those born in 1960 or later. For the former age group, the maximum reduction in benefits for early retirement at age 62 is 25%.
What follows are 3 dilemmas facing todays pre-retirees.
No. 1: Math Blues
For those whose earnings power has increased historically with age, retiring at age 62 could have a deeper impact on benefits than the obvious 25% “penalty” for collecting early.
The retirement benefit calculated at age 62 is actually an average of the 35 highest-wage years from age 22 through age 61, or to one year before the benefit year. For those who make less than $87,900 per yearthe maximum annual salary considered in the calculationthe year they begin drawing Social Security could impact the size of the benefit.
In other words, the benefit formula drops a workers 5 lowest earnings years over a 40-year period. Each additional year of work bumps a lower-wage or no-wage year from the final calculation. This can be especially important for women who dropped out of the workforce for several years to raise a family or for those who had low-paying jobs or sporadic employment at some point in their work history.
No. 2: Snap Decision Regrets
Once a retiree applies for Social Security benefits, the decision is irrevocable. If a worker takes early retirement at age 62 and later wants to return to work, the law requires a “payback” of future benefits equivalent to $1 of every $2 above the annual earnings limit of $11,640 per year. Once the normal retirement age is reached, the Senior Citizens Freedom to Work Act of 2000 permits an unlimited amount of FICA wages without penalty.
Another consideration is that, while the eligibility for full Social Security benefits is inching upward, Medicare eligibility still kicks in at age 65. Seniors must remember to enroll in Medicare at 65 even if theyre still working.