It would seem like a simple proposition: When you reach retirement age, you start collecting Social Security plus any other retirement benefits to which you are you are entitled.
But Curvin E. Miller IV, vice president of Russell & Company, a firm based near Dayton, Ohio, that specializes in pre-retiree and retiree financial planning, will tell you it is definitely not that simple.
"The question of when to take Social Security should be a big part of your retirement planning and many financial advisors overlook some of the complicated aspects of this," Miller says. "In order to protect the client, the financial advisor needs to know the benefits of waiting to take Social Security or taking it early."
First, a person should consider some personal factors, such as his or her health status and whether longevity runs in the family. If there are serious health issues, it probably does not pay to wait to full retirement age, he says.
"However, taking Social Security early, at age 62, can mean a loss of up to 20% of benefits," Miller adds.
In addition, if the person continues working while collecting, Social Security benefits are reduced $1 for every $2 earned over $14,160. The penalty for earning other income disappears after a person reaches full retirement age. A person starts collecting full benefits on the January 1 after he or she reaches their full retirement age.
Baby boomers born between 1943 and 1954 reach full retirement age at 66. Full retirement age then advances by months until it reaches 67 for those born in 1960 or later. A person can delay collecting by any amount of time until age 70, and benefits increase the longer the recipient delays.
"It is critical for a person's financial advisor to know all of these details and to know the client's personal goals as well," Miller says.
Any retirement planning also has to consider that 85% of Social Security payments is taxable.
Meanwhile, many beneficiaries don't realize there is a way to get full benefits later even if one starts collecting earlier. "A lot of people and some advisors do not know you can take Social Security at 62 (or any age up to the full retirement age) and then pay it back at full retirement age without interest and begin collecting the full retirement amount, Miller says.
"It is an interest free loan," he adds, "and, if you get a tax refund from the taxes you paid on the Social Security during those first years, you can use those proceeds to pay the taxes for a Roth conversion."
Until recently, anyone making more than $100,000 could not convert to a Roth IRA, which does not have the mandatory withdrawal requirements that a traditional IRA has, but that income limit has been removed.
"Despite some people's fears, Social Security is not going away, but it may not look the same in the future," Miller says. "Fewer people are paying into the system this year than are receiving benefits, and we reached that tipping point seven years before it was predicted."
Also for the second year in a row, Social Security beneficiaries will not get a cost-of-living increase, the first time that has happened since the payments have been automatically adjusted.
Advisors need to know all these details and consider them when making financial plans for their clients, Miller says. A benefits calculator is available on the Social Security Web site to help people make informed decisions.
"At Russell and Company we tend to be conservative, because a mistake in planning at or near retirement age can be catastrophic," Miller warns.